Mining News

U.S. Energy Boom: Shifting energy supply

Posted by Cheryl Rutledge on 8/15/2014 4:51:55 PM

by Joshua Allsop and Kenneth P. Green

A recent article by the Wall Street Journal reported that “In U.S. Energy Boom, Alaska is Unlikely Loser” explains that the booming industry in other parts of the country explains the decline in Alaskan Oil production.

Many commentators forecast that the oil industry in Alaska to continue at high levels for decades; however Alaska has in fact been in a steady decline since the initial oil boom of the 1980s. Debate has surrounded the land use in Alaska and if federally protected land should be used for their oil reserves.

As the article states:

“To put things into perspective, oil production in Alaska has dropped nearly 75% since its peak in the 1980s. As a result, economic activity here has slowed. Gross domestic product decreased by 2.5% in 2013, while all the other 49 states increased, according to Commerce Department data. At 6.4%, Alaska's unemployment rate in June was higher than the national average, in a trend not seen since 2008. The unemployment rate in North Dakota was 2.6%.”

Alaska Field Production of Crude Oil graph

What happened to cause this shift? Simply oil became cheaper to produce elsewhere. Workers across the industry shifted their focus to the lower-48 state's midsection, where oil and gas production is experiencing an all-time high.

Not only has Alaska slipped down the ladder to become the fourth-largest oil-producing state, but things could get even worse over the next few years. The reason is due to the fact that oil from the North Slope is transported south via the Trans-Alaska Pipeline System (TAPS). This 800-mile pipeline system is the only way for Alaskan energy companies to ship its crude from Prudhoe Bay to Valdez. Production has been in decline since the early 1990s, to the point now that the TransAlaska Pipeline (which carries it to port) is at risk of not maintaining minimum throughput to remain operational.

Crude oil production from North Dakota and Bakken Counties

The second troubling issue for Alaska is that over half the state’s total budget (56% in FY2012) and 90% of its discretionary spending (known as the general fund) comes from oil revenue. Oil revenue includes production taxes, petroleum property taxes, corporate income taxes, and royalties generated from the huge oil fields on state-owned land in and around Prudhoe Bay.

Energy prices, especially petroleum or oil prices tend to be an important component of the total cost of producing the economy's aggregate supply of real production. Economic issues of supply come down to the following determinants:

1) Resource quantity, the amounts of labor, capital, land, and entrepreneurship available,

2) Productivity through production, and

3) Resource price (including transport costs).

The article goes on to state that:

“Refineries in California and Washington, the chief market for Alaskan oil, are embracing the cheaper domestic crude. California officials predict that more than 376,000 barrels of oil a day could be arriving by rail by 2016, up from about 17,000 barrels in 2013.”

Thus, the cost of producing outside of Alaska has dropped significantly below the cost of producing and transporting from Alaska to the other states.

Significant policy changes may, of course, affect this situation. For example, the introduction of more stringent environmental regulations can adversely affect mineral development. Likewise relaxed resources tax legislation could see a surge of investment into the state.

Sustainability and sustainable development, and their implications for resources, have become mainstream concepts, topics and goals – aimed at elevating the role that environmental and social considerations play in decisions about whether and how resources will be recovered. Oil sands are certainly a hot topic and any policy changes made will have an impact on the overall extraction cost. Changes in the policy in other states could bring in a shift back to Alaskan oil production.

It is clear that energy production brings social benefits. Significant improvements to the quality of life can be attributed to the production of oil in Alaska. This is made more evident by the recent decline in the industry. How this issue will play out in years to come will be partly at the hands of the Alaskan residents, and partly at the mercy of the U.S. Federal Government and its control over some of Alaska’s most promising areas for petroleum exploration.

Alaska offers a somewhat cautionary tale for Alberta. Alaskan oil was demonized in earlier decades, just as Canada’s oil sands have been called a number of things ranging from “dirty oil” or “carbon bombs.” But the environmental questions must be balanced against the impact of the industry on employment and growth. Without these important sectors states like Alberta could become more like Alaska.

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