As the New Year begins, we will have to wait another month for the official data on how the last one ended. But, we can take some time to look at the information we already have to gain some insight into how the year wrapped up.
The Labor Market Continues to Suffer
It’s hard to overstate how difficult 2020 has been on Alaska’s labor market. At its worst, we were down over 44,000 jobs from the previous year. Over the last four months, that lost job total has been cut nearly in half. While encouraging, it’s important to recognize the extent that seasonality plays a role in this.
Alaska’s economy typically expands and contracts by over 40,000 jobs between summer and winter seasons. It’s primarily because of the tourism, construction, and fishing industries. In 2020, the pandemic cancelled our summer season. Therefore, those seasonal jobs never materialized. Consequently, the winter time layoffs are also not occurring at the normal rate.
In a normal year, October and November see the largest decreases in jobs numbers. With the November numbers in hand, the remaining 23,500 lost jobs are not good news. While that number might get cut in half again over the next few months, there are significant jobs that are simply lost. They are spread across every industry in the state and many are likely to be long-lasting impacts of the pandemic.
Even if we do get a summer season next year, many businesses that closed will not reopen. Some of the structural shifts we’ve seen over the past year will not reverse course over the next one. Consequently, our economy may be permanently crippled. Still, it does appear that the worst is behind us. 2021 should be a year of exceptional job growth in Alaska (but only because the bar is set so low).
Oil Prices Broke the $50 Threshold
Alaska North Slope (ANS) crude oil averaged $50.32 a barrel in December. That’s the first month over the $50 mark since the February collapse. With the first half of FY21 in the books, Alaska’s oil has now averaged $43.53 on the year. Barring some negative shock dragging prices back down, ANS is now on pace to average $48.08 on the year.
It’s still unclear what will happen next. Oil rig counts in the shale patch have started to recover and OPEC+ is hoping to relax its production cuts soon. Both of these factors put downward pressure on prices. On the demand side, recovery from the pandemic should increase the need for fuel going into the summer season. If so, prices would rise back toward the $60 mark (barring supply increases).
Right now, we assume these forces will offset over the next few months. That should leave prices relatively unchanged. But, another round of pandemic induced travel reductions would upend the price recovery. Meanwhile, the new president could push prices higher with aggressive policy changes that reduce supply.
Permanent Fund Earnings are Far Ahead of Projections
The Alaska Permanent Fund Corporation’s financial statements for November 2020 show a mind-blowing $4.7 billion gain during the month alone. For context, the projection for the entire fiscal year was $4 billion. Most of these gains occurred in the stock market and private equity holdings.
Preliminary data suggests that the fund may have earned another $1 billion or more in December. In other words, during the first six months of FY21, the fund has now earned over $8.5 billion. If these earnings hold, the State of Alaska will grow its balance sheet by over $4 billion during the worst economic collapse of our lifetimes.
It’s important to note that the fund now holds $7.1 billion of uncommitted realized earnings plus $12.8 billion of unrealized gains — On top of the $3.1 billion already set aside for the FY22 budget. These are unprecedented levels of funds in our holding account.
A Budget Might be Easier to Pass than Feared
As the legislature gavels in later this month, there has been a lot of speculation about how they will balance the budget. If they attempted to follow the current laws, they were looking at a $2.5 billion gap just a few months ago. With rising oil prices, that gap has shrunk by a few hundred million dollars. And, with a smaller than anticipated draw on the Constitutional Budget Reserve (CBR) in FY21, it appears that there will be a little more money available to fund the FY22 budget than previously believed.
Layer two more factors on top of these ones. First, as previously discussed, the Permanent Fund has far exceeded projections this year. These excess earnings might provide some comfort in exceeding the draw limit rather than saving those dollars for later. Second, we will get the result of the first ANWR lease sale in just a couple of days. One half of whatever the bids turn out to be (including half of whatever the State of Alaska bids itself) go straight to the State’s bank accounts.
In other words, with the way things are unfolding so far, the incoming legislature might get another year to kick the can. If the past few years provide any insight into how this budget cycle will unfold, expect another ~$1,000 PFD, another big CBR draw, and no meaningful tax discussions.