Crude Realities

Amid oil price plunge, Alaska's economy braces for losers and survivors

A salmon fisherman. Over half of the nation’s commercially harvested fish comes from Alaska.
Jean-Erick Paswuier | Gamma-Rapho | Getty Images

Alaska's $3.5 billion deficit — roughly two-thirds of its budget — reads like a classic boom-bust tale. With the collapse in crude prices, lower oil revenues are hitting Alaska hard. Roughly 90 percent of the state government and one-third of all state jobs comes from oil money.

But weaning Alaska off oil revenues won't be a straight shot. And the pain won't be uniform.

The effects of budget solutions will vary among Alaska's diverse population. In many ways, the Last Frontier State is a collection of regions and micro economies — each with its own constellation of employers and local price swings for everything, from a gallon a milk to a gallon of fuel.

With most of the money used to pay for state government gone in just fours years, according to regional economists, the state is considering a personal income tax proposal for the first time in 35 years. There's talk of reducing annual dividend checks from a state savings fund, when oil money was flush.

"Dividend cuts would take more from poor people than rich people because rich people would pay less taxes if their dividend was cut," said Gunnar Knapp, a top economist on the region at the Institute of Social and Economic Research at the University of Alaska Anchorage. On the other hand, "an income tax would put the burden of paying for new revenue on the highest income Alaskans."

Alaska's budget battle

Beyond oil and gas, the engine of Alaska's economy runs on other major industries, including tourism, fisheries, mining, forestry and corporations led by Alaska Native populations. But those sector drivers might not be enough in the face of lower oil revenues.

Existing industries and regional economies are spread across a state that's massive in geographic scale. Imagine superimposing a map of Alaska over a map of the U.S. If Alaska's westernmost point were in San Francisco, its easternmost edge would stretch like a vast web, all the way to Florida. Alaska is twice as large as Texas.

The state population of 730,000 residents is varied, too. Anchorage houses about 41 percent of the state's residents, leaving the majority of Alaskans in towns, villages and clustered settlements.

Some areas are extremely remote, reachable only by small planes and boats. They operate in a near-cashless, subsistence economy, anchored by fishing and hunting. This is a vastly different quality of life than a worker at Costco in Anchorage, or an employee at one of the city's malls that feature big brands like Sephora, Starbucks andMichael Kors.

So while the prospects of budget cutbacks may trigger smaller class sizes in schools in the capital, Juneau, less money to fund state government can mean closing entire schools or hospitals for more remote communities.

Alaska economist Gunnar Knapp, director of the Institute of Social and Economic Research, talks about a wheel with several potential prices for oil and its effects on the state's budget .
Rashah McChesney | AP

"The state is huge. Huge," said Knapp. "And the economies are very much regionalized."

Originally from Maryland, Knapp, then 27, moved to Alaska for economics. Some 35 years later and 62, he has raised a family and has seen the shifts that came with the last big downturn in the 1980s. Residents moved and uprooted families for access to jobs and services.

"A lot of people remember the '80s and wonder if we'll see the same thing," he said.

Long-time Alaskans remember many feast-famine periods. The boom in the mid-1970s with the construction of the trans-Alaska oil pipeline. Then came a recession, followed by a government-spending and construction-fueled boom in the 1980s.

Like an actor promoting a movie release, Knapp has a busy schedule of appearances. Repeatedly and with patience, he objectively explains the state's fiscal options. His audience is diverse: the state legislature, chambers of commerce, economic development groups, the Alaska Federation of Natives, churches.

"The first question I got was, 'When should I sell my house?'" said Knapp, recalling a gathering a few weeks ago. "There's a lot of concern," he said. "Most people are not economists, and all they know is there's a real serious fiscal problem."

Beyond the pie charts and bar graphs of fallen oil prices and oil production that's leaving the state, there's a wariness among Alaskans. Many of them are independent and risk takers. You have to survive and thrive in a terrain where chores like getting food and fuel can take hours if not days. The cost of living is high as goods are shipped from the Lower 48 states. Every task seems difficult. And that's a fair bargain, say residents who prefer sparse populations and the region's beauty.

Read MorePainful transition for energy states as oil revenues evaporate

Now the state's unique regional diversity — the very essence of what lured and anchors them to Alaska — threatens to make the unraveling of oil money a painful and uneven experience.

"It's one of the things that really hasn't been discussed a lot," says Mouhcine Guettabi, assistant professor of economics at the institute. "We're not just one, homogeneous place."

Regions with job and industry diversity are poised to better withstand the coming budget cuts. Says Guettabi: "The diversity of the sources of money and the reliance on government will determine the winners and losers."

Besides oil and gas, Alaska runs on other major industries, including tourism that continues to grow. Nearly a million visitors arrived in Alaska by cruise ship in 2014, according to the Resource Development Council for Alaska, a statewide business association.

Tourism is the second-largest private sector employer, and accounts for 1 in 8 Alaskan jobs. Direct visitor spending is more than $1.8 billion annually, excluding fares paid to travel. And 1 in 3 Alaska visitors are repeat visitors.

Downtown tourist shopping in Juneau, Alaska
John Greim | LightRocket | Getty Images

A higher sales tax could deter visitors and local spending and place the burden of filling the budget gap on nonresidents. That's in contrast to dividend cuts that would come out of Alaskans' pocketbooks, said Knapp.

As the budget gets hammered out in Juneau, small business owner Erica Pryzmont is as busy as ever.

She's the owner and operator of Pingo Bakery-Seafood House in Nome that's located on the western edge of the state. Nome's population of around 3,800 expands three fold for the end to the annual Iditarod sled dog race finish line in March. "For our business, it's like having another month of summer-like business but packed into a week and a half," she said.

Erica Pryzmont, Pingo Bakery-Seafood House in Nome, Alaska
Source: Michael Dinneen

Is Pryzmont worried about the state budget? "I still get up and go to work. It's not going to change my daily schedule."

She's too busy baking apricot, pistachio white chocolate chip cookies and coconut cinnamon rolls.

Pryzmont's savory specialties include roasted halibut pizza and a Norton Sound Red King Crab Leg section, when crab is in season. For now, Pryzmont says local seafood prices have been holding steady. She sources her food through local fisherman and fisheries.

"Fishermen have been getting good prices for crab," she said.

A big exposure to fishing and mining

Juneau, Alaska.
Cheap oil creates a new frontier in Alaska—making ends meet

Many in Alaska have a deep connection to fishing given the state's abundance of lakes, rivers and coastline. Alaska is the only state to have coastlines on three different seas: the Arctic and Pacific oceans and Bering Sea. More than half of the nation's commercially harvested fish come from Alaska.

The state also benefits from what's known as "back haul" for shippers that primarily bring goods and supplies north to Alaska. One major shipping company estimates freight rates to the state would be 10 percent higher without the back haul of seafood shipped out of Alaska, according to Resource Development Council.

More than $3 billion in fish and shellfish was harvested in state waters in 2011, as a reference point. Seafood is also a top export commodity. And in some pockets of the state, fish harvesting and processing are the only sources of private sector jobs, especially in coastal communities.

Bigger picture, Knapp stresses prices for seafood like salmon ultimately are set in the global markets. But in the near term, budget cuts could lead to more conservative management of fisheries, which receive state funding. "We could potentially have less, well managed fisheries," he said. In the fiscal year 2016 general fund budget, about $66 million is earmarked for fish and game spending, according to institute data.

Beyond income and sales taxes, state leaders are discussing other potential new sources of state revenue, including raising taxes on the fisheries and mining industries.

Many of Alaska's roads and docks were originally constructed to serve mining. The sector produces zinc, lead, copper, gold, silver, coal, as well as construction minerals such as sand, gravel and rock. Direct and indirect jobs total about 9,100, generating $630 million in payroll, according to the Resource Development Council.

Running a small business, just in case

Based in Sitka, Robert Miller makes one-of-a-kind hats and gloves from local animal furs. Also a fisheries biologist for the government, Miller hopes his business will offset any potential budget cutbacks.
Source: Michael Penn

As lawmakers hash out budget details, oil price fluctuations already are being felt in local economies.

Alaska Native artist Robert Miller owns and operates Sea Fur Sewing, based in Sitka.

He produces handmade, custom items including hats and gloves made from sea otters' dense fur and seals' skin for waterproof qualities.

As a Tlingit Indian from the Kiksadi clan, Miller is legally allowed to produce and sell finished products made of marine mammal fur under federal laws. He learned the craft from his grandmother. Miller can boast that four-time Iditarod champion Lance Mackey has worn hat and gloves he has made.

In and around Sitka, Miller can see the impact of oil price swings first-hand as he interacts with local hunters. Some hunters can spend hours on 16-foot skiff boats that can require lots of fuel. Alaska has some of the most expensive gasoline prices in the country, along with California.

The average fuel price in Alaska is around $2.33 a gallon compared with a high of $4.70 in July 2008, according to AAA. But Miller and other business owners say fuel prices can fluctuate depending on where you live.

"The hunters in state I pay to hunt for me are from rural communities in southeast Alaska," Miller said. "And finding a job in rural Alaska is difficult unless you work seasonal jobs."

Beyond exposure to local fuel prices, Miller for the most part is buffered from oil shocks and the possibility of a higher sales tax. His goods essentially are luxury items. The majority of his online customers are from the Lower 48 and are willing to pay $500 to $850 for custom hats and gloves, with specialty items fetching more.

"The product I sell, if they want it, they're going to buy it anyway," he said. "It's a handcrafted, high-end product."

Beyond his one-man online fur business, Miller has a daytime government job as a fisheries biologist for the U.S. Forest Service. And if for some reason that government job disappeared, Sea Fur Sewing could offer a cushion.

"I feel a sense of relief that I have my own business and I can fall back on it full time if I have to," Miller said.

Population shifts

Others residents face all-or-nothing scenarios, with little sector diversity and most job prospects pegged to the government.

Fourteen of the state's 29 boroughs have at least 40 percent of their employment coming from state and local government, said institute economist Guettabi.

"There are communities or boroughs that are heavily, heavily dependent on government," he said. "So if we are to go through with some of the cuts that we are currently discussing, then those communities that don't have a basic industry that's driving them, that's generating jobs, that's retaining qualified individuals, then those communities are going to be considerably more vulnerable," Guettabi said.

And if there's no industry diversity and government jobs disappear, moving for work and services might not be so easy for some Alaskans.

A key difference from the '80s downturn is expanding households. Alaskan families have grown to three generations from two. More Alaskans are 65 and older and are considering staying.

"Grandparents staying in state after retirement is fairly new," said Guettabi. The average Alaska household size is 2.7 people, according to state figures. "There's more stickiness."

Compare this with North Dakota, where young oil workers have left "man camps" vacant, as shale oil work has fallen. Workers have already moved on to the next hot commodity play.

Read More How cheap oil has hit one shale boomtown

Uprooting a few kids is easier than relocating a three-generation household. So the choices for some Alaskan families, if and when spending cuts are implemented, will be difficult.

Difficult choices ahead for state

ConocoPhilips in Anchorage, Alaska
Brad Quick | CNBC

Alaska did set up a fund that was intended to outlast the cash-flow erosion that inevitably follows natural resource depletion. The plan might have even worked — if oil prices hadn't collapsed by two-thirds in months, and stayed there. So after some 30 years of mailing out an annual dividend check that recently was around $2,000 for each resident, the oil party is over. In a fresh script, Alaskans are being asked to reverse course and pay for the state's gaping budget hole.

This is a big request for Alaskans, who are used to paying much lower broad-based state taxes (including individual income and general sales taxes) than residents of any other state. Connecticut and Hawaii have the highest broad-based state tax revenues per capita.

"In just four years, most of the money we had been using to pay for state government evaporated," Knapp said in a January presentation. "It's gone. That's why we have a big problem."

Longer term, the development of an LNG (liquefied natural gas) export project could lift the economy. If built, the related LNG projects would be huge, with a combined total cost estimated at $45 billion to $65 billion.

If the project proceeds on the currently planned schedule, construction employment might peak in 2024 and 2025 at about 6,500 jobs, according to Knapp and Guettabi. Subsequent revenues to the state from its project ownership share and LNG sales could approach $2 billion, further stimulating the economy over the longer haul.

Back in Sitka, all fur designer Miller can do is work and hope for the best.

"I work two jobs, nights and weekends. I don't know what the next two, three years will hold. You live day by day and pay your bills," said Miller, a husband and father of three.

"You take your wife and kids to a restaurant once a week, if you're lucky," he said. "But if it comes to a point you can't afford to live here, you've got to make those tough choices."

With data visualization by CNBC Senior Economics Writer John Schoen.