November 2020 was a month of resolving uncertainty and moving back toward normal. Alaska’s economy still faces significant headwinds, but recovery is in sight. Here are some of the highlights.
Alaska’s labor market improved, but is still hurting
The Alaska Department of Labor reports that Alaska’s official unemployment rate is back to pre-pandemic levels. The preliminary number is 5.9% in October 2020, compared to 6.1% last October. However, take this news with a grain of salt. These figures will almost certainly be revised once better data is available.
Job counts have not recovered by nearly as much as the estimated unemployment rate suggests. The department of labor estimates that only 298,800 Alaskans were employed in October 2020, compared to 327,700 a year ago. In other words, our economy is still down about 29,000 jobs from were it should be. That is better than the 37,000 jobs losses last month, but still a long way from normal.
The November numbers should show another reduction in lost jobs — Likely down to around 18,000. But, the upcoming third round of business closures in Anchorage will probably throw a wrench in the trend for December.
The stock market set a new record high, pushing the Permanent Fund assets over $70 billion
While the labor markets are still reeling from small business closures, investors are feeling more confident about the future of publicly trading companies. Despite the deep correction that occurred in March, the S&P 500 is currently up 16% from one year ago.
Since about 40% of the Permanent Fund’s portfolio is in the stock market, the Fund’s balance likely grew by over $2.6 billion in November (unless it suffered losses elsewhere). That brings the value of Fund assets to over $70 billion. Subtracting liabilities — including $1.7 billion scheduled to be transferred to the treasury before July — the Fund’s balance sits at an estimated $68 billion.
In other words, the Fund has earned over $5 billion so far this fiscal year, with seven months remaining. That covers the $3 billion transfer to pay the PFD and support general fund spending, plus another $2 billion of fund growth. Or, put another way, the incoming legislature could use another $2 billion of earnings to support the economy and provide economic relief (or balance the budget) — Without touching any of the money that sat in the earnings reserve at the beginning of the year. I’ll say it again, things aren’t as bad as you think.
Oil prices broke through the $45 resistance
After trading in a fairly narrow channel for the past six months, oil prices broke to the upside at the end of November. It’s still unclear if this momentum will hold or retreat, but there is a spark of hope that transportation demand will fully recover this summer following a successful vaccine program.
Despite the rise at the end of the month, the oil price in November averaged $42.89 per barrel. That brings the year-to-date average up to $42.05 with 153 trading days remaining in the fiscal year.
So far, this has unfolded almost exactly as we predicted in the Spring. Now it’s time to watch what OPEC+ does and how many of those idle shale resources get turned back on. As of today, there are more ways for prices to rise than to fall over the next six months.
The North Slope oil production outlook has improved
A rising oil price and more certainty around Alaska’s oil tax system has already improved the outlook for North Slope production.
ConocoPhillips recently announced that it will resume drilling operations this winter. Going from zero to four active rigs will add thousands of barrels per day to the pipeline and put up to 1,000 Alaskans that lost jobs in the oil industry back to work.
Major development prospects, like Willow and Pikka, are firmly back above their breakeven prices. Those projects now look like they will get positive final investment decisions in 2021. While it was starting to look like producers would enter harvest mode and stop investing in Alaska, November provided some hope that our renaissance will continue.
An ANWR lease sale could happen in January
After decades of fighting with the Federal government, Alaska might finally see its dreams come true. President Trump’s administration is moving forward with the first lease sale in the Arctic National Wildlife Refuge (ANWR). The Bureau of Land Management (BLM) is taking nominations for which leases to offer in a sale until December 17. Once complete, a 30-day notice of sale can begin. In theory, the BLM could hold a lease sale as early as January 18th — Just two days before inauguration day.
The question in everyone’s mind is “how much money would a lease sale generate?” When it was approved, the Congressional Budget Office (CBO) estimated bonus bids of $1.4 billion in the first lease sale (half of which would go to the State of Alaska). Many spectators have since tried to downplay the interest in these leases as a way to justify canceling the sale. “After all,” they argue, “the world is moving away from oil just like it did coal. Besides, it’s too expensive to develop ANWR.”
Here’s what we do know. If oil goes the way of coal, there’s going to be demand for a long time:
According to data by the International Energy Agency (IEA), coal consumption has increased 62% over the last 20 years. While other energy sources grew much faster than coal did, demand for the resource hasn’t gone anywhere. Most forecasts for oil use are similar. While oil demand growth will slow dramatically, it will be a long, long time before oil goes away.
The problem is that the world has already located enough oil to satisfy that future demand. So, new discoveries are only interesting if they can crowd out higher cost resources. That brings us to the second point — Arctic oil is expensive to develop.
But, ANWR is expected to hold a very large accumulation of conventional oil — Perhaps as big as Prudhoe Bay. Big oil fields make big investments work. Even if the development cost is high, the production cost per barrel is low when there’s a lot of crude running through the facilities. It’s a simple mathematical reality that spreading fixed costs over a large volume results in a low average cost.
Despite the headlines we see today, the bottom line is that there will be people willing to gamble on ANWR. Investors are not going to leave an opportunity like this on the table. Even with the regulatory and legal challenges that add risk to buying exclusive mineral rights, the risk-adjusted value is far from zero.
Sure, it wouldn’t be as lucrative as the 1969 Prudhoe Bay lease sale that raised $6.4 billion in inflation-adjusted bonus bids. Maybe it wouldn’t even be the $1.4 billion CBO estimate. But, there would almost certainly be interest in ANWR. We might find out in about six weeks.
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