Juneau, Alaska

(907) 699-6788 ed.king@kingecon.com

What Will the New Decade Bring for Alaska?

If you were on social media at all last week, you probably got your fill of reflections, resolutions, and predictions. Everyone wants to talk about what happened in 2019 and what 2020 will bring. But, we didn’t just turn the calendar this year – we changed decades. So, just for fun, here are some predictions about what the 2020s will look like (with an Alaska focus).

Please remember that none of these are things I necessarily think are desirable, its just how I see the dominos falling. Also remember that the further into the distance you try to peer, the fuzzier the picture becomes. So, I promise you that I’ll be wrong about some of this. But that’s ok.

Overall Trends

There are three underlying trends that will drive the overall direction we are headed. Let’s start with those and then turn to some of the implications.

The population will keep aging

We’ve been hearing about the Baby Boomer bubble for almost two decades now. And whether you’ve realized in or not, it is here.

The number of retirement age Alaskans is 731% what it was in 1980. And, over the next 10 years it will nearly double again.

This trend of an aging population is a mix of the Baby Boomers getting older and their parents living longer. Advances in healthcare have multiplied the foreseeable problems that were identified back in the ’90s.

People are outliving their retirement, pension programs are underfunded, and social security is not going to last. Would-be retirees are working longer and living with their children more often. Grandparents are replacing daycare providers in many homes across the country.

This trend is changing the housing market, the job market, the financial markets, the economy, and our family dynamics. And as people age, their spending habits change, their need for healthcare increases, and they become more involved in their community as well as their government.

This trend of an aging population is going to keep moving in the same direction for the next decade. And, all of the changes we’ve seen so far will multiply.

Technology will keep advancing

It is inevitable that we will keep finding better ways to do things. Just think about how much things have changed in the last 10 years.

Many things that are just a seed of an idea today will blossom by 2030. We will have improved communication systems, a more integrated internet of things, and new ways to live even longer. Artificial intelligence, biotechnology, and improved energy systems will shift many of our current expectations further than we realize.

This trend will lead to lower wages for low-skilled workers (from automation and from extreme customization), higher healthcare costs (as the new procedures and treatments won’t be free), and cheaper transportation (through reduced battery costs and automated systems).

The world ten years from now won’t be unrecognizable from what we see today (it won’t be full of autonomous electric cars connected to an internet of things with deep learning systems predicting everything you want before you ask), but it will change in these directions by more than we think.

Climate change concerns will keep growing

The issue of climate change has become among the most important issues to many people around the world. With the growing attention comes ever more concern. And, with the continued urbanization of China and India, carbon emissions will certainly continue to rise. The decade may even begin adding even more new sources of greenhouse gases as extreme poverty is alleviated in other parts of the world.

Over the next decade, many of today’s young activists will become politicians. The cries for action will intensify as the data does not improve. The next U.S. president, whether that happens in 2020 or in 2024, will almost certainly rejoin the Paris accord. Government policies regarding carbon will change – either by restricting the development of hydrocarbons, by imposing a tax on carbon dioxide release, or both.

Prediction 1: Alaska’s Population will cross 800,000 people by the end of 2030

Alaska’s population has been flat for the last two years. We have seen more people leave the state than move in for eight years now. So, it might be tempting to think Alaska is on the downswing.

But, I don’t think so. I see the population beginning to grow again starting in the next two or three years. One of the big reasons we’ve been losing the migration battle is that the rest of the country has been experiencing a record economic expansion. When opportunities are so good elsewhere, only the most dedicated Alaskans stick around.

But, all good things come to an end. And, when that day arrives for the lower 48 states, Alaska will attract talent again. This is especially true if the development of some significant resource opportunities come to pass. The combination of retirements and economic expansion will lead to a tight labor market, which will require in-migration to satisfy.

Additionally, advances in healthcare will keep people alive even longer. And, those Millennials that have been delaying the start of their family will realize that they are running out of time. The combination of increased longevity, improved work opportunities, and baby fever will push Alaska’s population up.

Prediction 2: Healthcare spending will double by 2030

The cost of healthcare has been increasing much faster than inflation for several years. The cause is a combination of factors. Two important ones are new treatments and higher usage.

As the population has been aging, medical science has invented new and better ways to treat disease and prevent death. While the treatment for a bad knee might have been a $0.50 ibuprofen a few decades ago, it’s a $50,000 surgery today.

That’s not inflation, it’s not overpaid doctors, it’s not greedy insurance executives, and it’s not price gouging (although those things and other inefficiencies in the US healthcare system contribute to the problem). It’s a better life due to better options. But, it isn’t cheap.

Treatments for previously untreatable diseases, better diagnostic equipment, and improved facilities all improve our quality of life and allow us more time with our loved ones. But, those new procedures cost money. Once they are available, it is difficult to go back to that ibuprofen treatment. That point is even more salient with life saving procedures.

And second, we are all more likely to need medical attention as we age. On average, a person 65 or older requires almost three times as much healthcare (by annual cost) than someone 18-64 years old. As the population continues to age, we will see the amount of money spent on healthcare increase.

By 2030, the amount we spend will probably double or more from what we spend today. This trend will most likely result in some form of government intervention. Expect healthcare costs to be a big part of the political dialogue going forward.

Prediction 3: North Slope oil production will be higher in 2030 than in 2020

With a few exceptions, Alaska’s oil production has been declining for over 30 years. That’s the nature of oil development – as you remove hydrocarbons, you remove reservoir pressure. Lower pressure equals lower extraction rates.

Our giant oil fields will continue this decline process for the next few decades (although probably at a slower pace). Therefore, it is tempting to extrapolate that trend and conclude that the Last Frontier is on its last leg.

But, that’s probably not the case. With two very large oil fields in the early development stage, Alaska should see a sizable increase in production within the next three years (unless something derails those projects). As it takes time to drill out these types of plays, we should see a new peak production of just under 700,000 barrels per day right around 2030.

Prediction 4: ANS Oil Prices will be consistently above $100 per barrel by 2030

This prediction might sound a little counter-intuitive at first. After all, if the cost of transportation is falling and climate change concerns grow, wouldn’t that imply downward pressure on oil prices? Here’s why I think the price will actually go up.

At some point in the next decade, the US government will pass legislation that will significantly alter the energy market. This action will stem from growing climate change concerns. When the calls for action coincide with an environmentally conscious White House and Congress, something will change. I suspect that will happen in 2024, but it may not be until 2028.

It might be a moratorium on production from federal land and waters. It could be a ban on hydraulic fracturing. Maybe it will be something like what’s in the Green New Deal. I really don’t know. But, I foresee some type of federal action upending the incredible growth in US oil production.

Regardless, the world runs on oil. And, it will be much more difficult to quit using fossil fuels than to stop producing them. As a result, I suspect that we will see the volume of production fall (although OPEC will replace most of the reductions) and the price of oil increase by more than inflation.

It won’t happen right away – probably not within the next 5 years – but I think there’s a good chance it happens this decade.

Note: the current tension is the Middle East could create a near-term spike over $100 if things escalate. That is different than what this prediction is talking about, but it could shift the timing of it happening.

Prediction 5: ANWR will not be developed by 2030

Something the majority of Alaskans have been pushing for years is opening up the coastal plain of the Arctic National Wildlife Refuge (ANWR) for oil development. In 2017, our federal delegation took a major step in that direction by inserting lease sale language into a budget bill.

The first lease sale will very likely happen at some point in 2020. But, it will be slowed down by litigation. One possible strategy of opponents is to stall the lease sale until the November election, hoping there is a change in the White House that will kill the effort.

But, even if a lease sale really does get certified, there are a lot of ways that ANWR remains undeveloped this decade. Assuming exploration efforts are successful, the permitting phase could easily stretch ten years. Especially when you consider that each stage in the process can be challenged in court. And that is if federal policy changes don’t shut the whole thing down before then.

Further, even if exploration happens quickly and permits are issued timely, the logistics are complicated. Look at Pikka for example. The leases sale for the lands containing that prospect was held in 2008; the discovery was announced in 2017; and, first oil is expected in 2022. That’s 14 years from lease sale to production in a much less contentious area that is much closer to infrastructure.

I wouldn’t start spending that ANWR money quite yet.

Prediction 6: A global recession will wreak havoc before 2030

The United States has experienced at least one recession in every decade in its history. The only exception is the 2010s, which was primary due to the slow nature of recovery from a deep recession. Only once before the current growth phase has the country gone 10 years without a recession (they happen every six years on average).

In the 1990s, the economy grew for 10 straight years (due to the movement into the internet age) before the dot com bubble burst in 2001. The recovery from that recession proved unsustainable and lead to the global financial meltdown in 2007. From June of 2009 to about 2016, the US economy was painstakingly pulling itself back to its feet.

Over the last few years, economic growth began to accelerate. But, with the economy now setting records, the federal government is still using expansionary fiscal policy (tax cuts and deficit spending) along with expansionary monetary policy (near zero interest rates).

Historically, this implies that the current debt fueled growth is artificial and a correction will occur. While it is impossible to say when it will happen, the business cycle is inevitable. There is virtually no chance that we go another decade without a recession. We just can’t know if it will start today or in 3,641 days.

This fact is important because most people seem to look past it. And, it will have ramifications. We can learn from aftermath of the Great Recession what to expect. Companies will tighten their belts, people will lose their jobs, and automation will replace them. The economy will grow following the crash, but jobs won’t recover. The gap between rich and poor will widen and social unrest will accelerate.

People will look to the government for help, which will significantly shift the election dynamics in favor of whomever is pushing for social and economic reform. Whether that puts them in the driver seat in 2020, 2024, or in 2028, some of those party agenda items will become law. Taxes will be raised and new social programs will be created.

While economic relief will be the driving force of change, environmental efforts will probably ride on the coattails. Consequently, oil production from the US will be curtailed.

Prediction 7: The Permanent Fund balance will hit $100 billion before the end of 2030

Despite a market crash at some point in the next decade, Alaska’s Permanent Fund will grow overall. By 2030, the fund should approach $100 billion. Over $3 billion of new royalty deposits will be added to the principal and over $20 billion of growth will result from inflation.

The rest of the growth in the fund rests on the assumption that businesses will leverage new technology to increase productivity. Consequently, the value of financial assets will grow (despite economic difficulty among the population).

This prediction is the most likely to fall short. It is possible that higher corporate taxes will make it difficult for stocks to recover (resulting in lower investment returns). And, it is possible that the state budget will eat into the reinvestment of earnings further than the current POMV structure allows. But, increasing oil revenues after 2022 should alleviate some of that temptation (especially if a spending limit is passed).

Regardless, there is a reasonable chance that the Fund balance will break the $100 billion mark this decade. (FYI, the current projection from the Alaska Permanent Fund Corporation is a balance of $84.6 billion at the end of FY29).

Prediction 8: There will still not be a statewide income or sales tax in 2030

If a new tax is to pass, it would most likely occur within the next three years – after that, increasing revenues should temper the calls for one. I don’t expect one to pass this year. It is possible, but it would be difficult. It is much more likely that the PFD is reduced and some creative solutions are found to make the budget balance.

After the 2020 election, political winds will probably shift. Seeing as presidential elections tend to draw more people to the polls, and seeing as infrequent voters in Alaska tend to lean Republican, I foresee the House flipping back to the GOP.

If that occurs, it is hard to imagine a tax being passed with the Republican party in charge of both bodies and the veto pen. I would expect more attention to focus on budget cuts than statewide taxes (although it could indirectly increase local taxes).

But, let’s say I’m wrong about that and the House remains a bipartisan coalition. A tax would still need to overcome the Senate and override the Governor. So long as there are any other options, it is hard to see where those votes would come from.

This is especially true when considering the taxes themselves. I highly doubt an income tax will pass while the PFD is paid. It just feels too much like income redistribution for Republicans to put their name on.

And, a statewide sales tax would be met with objection from the municipalities that already charge their own. Not to mention the regressive nature of a sales tax has a similar distributional impact as a PFD cut – which might undermine the intent of passing the tax rather than cutting the PFD. That said, my guess is that a sales tax is more likely to pass than an income tax, but I don’t think either will get the votes.

Then there is the oil tax initiative. Should that effort pass at the ballot box, there would be no need for a income or sales tax in the near-term (although it would create a greater need for one in the future). At that point, the push for income and sales taxes would be delayed for the decade.

Regardless of whether the “Fair Share Act” passes or not, state oil revenues should increase as new oil developments advance. So, the perceived need for a broad-based tax will probably be diminished when the next legislature gavels in for the 2021 session.

In short, I just don’t see the legislature passing an income or sales tax in the next few years. Not with well over $10 billion of accessible cash in the bank and a PFD being distributed. Then, I think the “fiscal crisis” will shrink as new oil revenues enter the picture.

When I look deeply into my crystal ball, I just don’t see a statewide income or sales tax coming this decade.

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