This editorial first appeared in the Alaska Journal of Commerce:
Dating back to before statehood, Alaskans know that overfishing is a bad thing.
Stopping overfishing of salmon and regaining control of the resource was in fact one of the driving forces in the effort to become a state.
What we know about sustainability of our vast fisheries resources is worth applying to yet another debate over another immense asset — our oil — and the means by which that resource is taxed.
Get ready for more proclamations from Democrats, soft Republicans and the friends of Gov. Bill Walker about receiving “our fair share” of the resource through taxation and the debunked claims that the 2013 oil tax reform was a “giveaway” to industry.
The “Alaska model,” as it has come to be known, holds an overarching policy to prevent overfishing and though the enshrinement of sustained yield in the state constitution it has largely been a success.
The reason is simple: while there may be short-term economic benefits to harvesting nearly every fish in the sea, the long-term effect will be to destroy the resource. Some of the fish must be allowed to reproduce to sustain populations in perpetuity.
It isn’t a difficult concept to understand, but when it comes to the oil industry there is a large segment of the population and their politicians who don’t get it.
True, oil, unlike fish, is not a renewable resource. But capital is.
Certainly it is tempting to want to collect every dollar possible from the oil business through taxation, but doing so robs the companies of the investment capital they require to expand existing fields and to discover new ones. In the long run, overtaxing will wreck the economic engine of Alaska in the same way that overfishing decimated the salmon resource.
The cashable tax credits whose origin in policy date back to the 2006 Petroleum Profits Tax have received the bulk of the attention for the deficit-stricken state budget as the tab is running to nearly $1 billion by the end of next fiscal year.
Dealing with the credits is a cash flow problem, however, and the more troubling effort is what is likely to come from either the governor or the new House majority to increase the tax on production.
The leaders of the new House majority and the governor opposed the 2013 production tax reforms and campaigned for the repeal and return to the previous system known as ACES in 2014.
Those critics of the current policy keep pointing to the low production tax revenue at current prices as proof that the regime is a “disaster,” as Senate gadfly Bill Wielechowski endlessly repeats.
Yet according to Walker’s Revenue Department, under ACES the state would have received zero — yes, zero — production tax revenue in fiscal years 2016 through 2018 and the current policy took in more than ACES would have in fiscal year 2015.
In fact, under ACES the state would receive no production tax revenue until the price climbs north of $63 per barrel.
ACES does collect more revenue at higher prices, but returning to the parallel of overfishing, at what cost?
There is no disputing that production declined by an average of 6 percent per year under ACES while the state share averaged 41 percent.
There is no disputing that ConocoPhillips, the most active explorer on the North Slope since 2000, did not look for oil from 2010-12 despite sky-high prices.
There is no dispute that under oil tax reform, we’ve seen no decline in fiscal year 2014, a slight dip in 2015 amid a record amount of drilling and workovers, followed by the first increase in 14 years in 2016.
What’s amazing about the results of the 2013 reform is that oil companies haven’t even seen the upside of it yet.
They have seen prices collapse to the point where losses have amounted to billions in the upstream segment — ConocoPhillips lost more than $4 billion in 2015 and another $1 billion in the first quarter of 2016 — and they are paying more in taxes at these prices than they would have under ACES.
What the 2013 oil tax reform proved is that allowing companies just the prospect of keeping more of their capital to reinvest is enough of an incentive to spur development and discovery even during a brutal price environment.
Not many would have thought when 2016 began with prices bottoming out at $26 per barrel that the year would end with a production increase and hugely successful North Slope lease sale.
The supporters of oil tax reform were proven right, but the fight isn’t yet over against those who would crush the North Slope through overtaxing the way the canneries nearly did to salmon by overfishing.
