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Document Number

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DOCUMENT CONTROL

ALASKA'S ECONOMIC POTENTIAL:

SOME BACKGROUND

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Document Number

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W ALASKA ECONOMICS, JNC. (J4Sj KfMBERl:f ST. • JUNEAUI ·ALASKA 99801 • (907) 586~9677

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r ALASKA'S ECONOMIC POTENTIAL:

SOPill BACKGROUND

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March 11, 1983

ALASKA ECONOMICS\, INC. .·. a4s3 KIMBERlY sr .• JUNEAu, AlAsKA ·99ao1 • (9o7fsae-9677

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CONTENTS

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SECTION PAGE

I. INTRODUCTION. ..• ,. . • . .. . . • • . . . . . • • . . .. . • . • . . • • • • . • . . • .. • . .. • • 1

Ranking AlasKa's Basic Industries .......... 4 ••• - .......... 1

Alaska's High Labor Costs ... ~························ 4

Alaska's High Construction Costs ......••••.••••.•• e •• 5

The Five Facts of Life ...•.• $••••••o•···•············ 6

t..,1ly Emphasize Public Invo1 vement. • • . . • . • . . . . • .. • .. . ... .• • . 7

II.. INDUSTRY SPECIFICS .............................. w •••••••• 13

Oil and Gas ............................................. 13

Fishing and Fish Processing .•.•....•••.•...••......•• l6·

Tourism .......................................... ~ ..••••• l7

Lumber and Wood Products ... ~·························l9

Petroleum Products .................................... 2 0

Nonmetal Mining Except Coal ........................... 21

Coal Mining ....................... ~ ....................... 22 .

Metal Miningo .......... eo ••• a ••• o e •••••••••••• ~ ••••••• , •• 24

Agriculture .............................. o .............. 2 7

Appendix A- Pipeline Cost Estimate .••.•.••.••••...•.•. 31

Appendix B- Reprinted Article (Bottomfish} .............. 35

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I. INTRODUCTION

Economic development in Alaska is severely hingered by high lab~r

costs, high capital costs., hfgh transportation costs within the

St;.:ate, and in many cases, disproportionately long distances to tar-

get markets.. Given a choice, industry will take root or expand in

those! places around the globe where the potentie1:l profit: is the

greatest. For a competitive industr:y~ faced with product ·prices it

can do little to change, the desire to locate where profits are

greatE~st translates into a desire to locate where production costs

are lowest. In recent years decisions not to locate in Alaska be­

cause other locations offered lower production costs have been made

by the Alaska oil company (Alpetco) and by the DOW-SHELL consortium.

High production costs have deterred Placer-Amex from developing the

Beluga coal field, have caused the demise of Prinz-Bran brewing com-

pany, the New England Fish Company, Salamotof Seafoods; and possibly

the Schnabel Lumber Company, and have kept hundreds of mining pros-

pects on the drawing boards~ Alaska's growth over the past thirteen

years has been sparked by growth in tourism, by the enormous economic

impetus provided by North Slope oil, and by significant growth in

seafood harvesting.

RANKING ALASKA'S BASIC INDUSTRIES

People often ask about the relative size of Alaska's basic industries.

As it happens, some work we recently began for the Alaska Department

of Commerce and Economic Development required the making of detailed

f:') industry estimates of Alaska value added for calendar year 1980. The r·, :: k.:.i,;~

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data are part of a new input-output model that was intended for use

by the State but which others can use since there are no plans to take

it out of the public domain. The model's definition of value added

is the same as that used by the u.s. Department of Commerce in the

making of estimates of gross national product. As such, value added

equals the sum of payrolls; proprietors' and partners' income, rents,

interest, dividends, and corporate profits before tax. The numbers

given below have been compiled from a variety of sources. Complete

docu.nentation is available upon request.

.Alaska's total gross State product in 1980 (value added) came to an

estimated $16.6 billion. Of this total, $10.3 billion or 62 percent

is attributed to the petroleum extraction industry, including pipe-

lines.. The State's remaining basic industries were all much smaller

by comparison. For these industries estimated·l980 .value added in

~illions of 1980 dollars and as a percent of the $16.6 billion total f

came to:

VALUE ADDED (Millions of $}

FISHING AND FISH PROCESSING •...... e.$725 LUMBER AND WOOD PRODUCTS ...••......• $148 PETROLEUM PRODS. INCL. FERTILIZER ... $137 NON METAL MINING EXCEPT COAL ......... $ 52 METAL AND COAL MINING ......•....••.. $ 27 AGRICULTURE ............................... $ 5 COMMERCIAL FUR TRAPPING .............. $ 5 CLOTHING MANUFACTURE (FURS ETC.) .... $ 1

% OF TOTAL

4.4% 0.9% 0.8% 0 .. 3% 0.2%

The construction industry, which is not listed as a basic in d.·, Jtry,

added another $800 million to the total (4.8%), with the remaining

support sector industries and government contributing $4.5 billion

(36.7 percent).

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Although no formal estimate has been made for tourism because our

data sources do not classify it as a separate industry, we estimated

that tourism contributed some $270 milliDn to gross State product in

1980, by defining its value added to equal one-third of the combined

total for the trade and lodging industries. The one-third is a guess

based on previous research and is not held \-:ith much confidence.

However, if the figure is not too high (it could as well be too low) ,

tourism ranks third behind the petroJ.eum extraction industry and the

fishing industry in overall economic importance ..

These numbers do not tell the entire story. Of considerable value

to Alaskans are the meat and fish which we extract for subsistence

purposes. Guessing the value of Alaska subsistence income is tricky

and fraught with possible measurement error beyond the usual. Even

so, if as little as $50 per capita was consumed in 1980, the total

would have exceeded $20 million, rank.i.ng subsistence at AT LEAST the

level of combined metal and coal mining. Ivory carving and other

handicraft industries would raise the subsistence total even further.

If these numbers told us nothing there would be no point in putting

them together. What they have to say is not new but bears repeating.

The oil in,~stry is responsible far over sixty percent of Alaska's

gross State product. Such extremt! dependence on a single industry

is both politically and economically dangerous. Oil prices have

declined and. public revenue with them. The Sheffield Administration

bas inherited a problem of the first magnitude that for some reason

is not well understood by enough people. State government acting

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as a conduit for oil money has been the. proximate source of economic

growth in Alaska for thirteen years. As the oil money dwindles,

State government may become a huge fiscal drag on the economy.

ALASKA'S HIGH LABOR COSTS

In 1981, average hourly earnings in Alaska exceeded the national

average for all private nonagricultural industries by .45 percent. For

manufacturing, construction, and trade the respective dif£erent1als

were 46.7 percent, 96.7 percent, and 60 .. 3 percent. l/

According to the 1980 Census of .Population, in 1979 per capita in-

come in Alaska was 39.1 percent above the national average. The

state with the second highest .per capita income, Connecticut, was

only 15.7 percent of the national average.

These labor cost differentials are only an average fqr ·±.he State, and

are heavily weighted by Anchorage labor costs, a city where th~ work-

force lives a·t home. In the remote Northern portions of the State

labor costs are much higher because of the need to provide transpor-

tation, housing, food, ~nd recreation to isolated workers. As the

following table shows, however, wage rates per se are not generally

higher in remote areas than the Statewide average.

1/Alaska Department of Labor and U~S. Department of Labor.

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1982 WAGE RATES FOR SELECTED OCCUPATIONS

($ Per Hour, Union, Entry Level)

IND. TRUCK OPERATOR LABORERS, UNSKILLED 1-'T..AINT • REPAIRER WELDER HEAVY EQUIP. OPERATOR

STATEWIDE

17 .. 42 16.82 16.29 19 .. 56 20.40

ALASKA'S HIGH CONSTRUCTION COSTS

REGION III NOME-KOBUK

15 .. 11 8.35

18 .. 10 20.94 16.62

RECION XI BARROW, ~ORTH SLOPE

16.50 17 .. 20 20.79 15.64 20.56

Appendix A details the calculation of .the multiple by which constuc-

tion of the Trans-Alaska oil pipeljne exceeded the cost of construe-

ting a similar pipeline in the Lower-48 states. The result, 7.986

times, dramatizes the severity and isolation of the Alaska environ-

ment and the effect this can have on certain types of construction

costs.

The DOW-SHELL consortium recently concluded that construction costs

associated with a Southcentral Alaska tidewater petrochemical facil-.

ity would be between 1.7 and 2.1 times the cost of the same facility

built on the Gulf of Mexico coast. (DOW-SHELL Report, Volmne 1 of

lO, p. 10) .

With wage rates in construction running nearly twice the national

average, with the need to design agains.t seismiu shocks, and with the

added burden of harsh weath~r, construction costs in Alaska typically

run between 1.5 and 2.5 times the costs of building competitive

facilities elsewhere in the United States and can be even higher

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multiples of c~nstruction costs in competing foreign countries.

THE FIVE FACTS OF LIFE

Fact 1: Alaska is very much unlike the typical less developed

country. We do not have a large labor surplus avai.l-

able for work at low wages. Furthermore, we have

neither a foreign exchange rate to manipulate, nor

the ability to structure trade laws in our favor.

Fihally, we cannot expect to receive large infusions

of .foreign capital for East-West geopoli tic~l reasons.

Our economic structure is tailored to meet national

goals, not to meet the goals of Alaska economic ~evel-

opment.

Fact 2: An Alaska export venture (be tha destination a foreign

country or elsewhere in the United States} must be pro-

fitable at World or National product prices that are

dictated by the generally lower production costs that

prevail elsewhere. In order i0r an export venture to

succeed in Alaska, it mu~t have an nangle." Either it

must be subsidized (petrochemicals) , or it must be in

great demand (oil) , or it must be in short supply out-

side Alaska (salmon) , or, finally, it mus.t qualify for

special treatment at the national level (laws dictating

that most Alaska timber be partially processed in State) ..

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Fact 3: Prudhoe Bay output will begin to decline in f~ur years.

Unless the loss of economic stimulus from ?rudhoe Bay

is made up elsewhere, literally thousands of Alaskans

"tvill- be forced to leave the State over the ne:x:t ten to

fifteen years.

Fact 4: The number of ventures that can be expected to succeed

without subsidy won't get the job done. It' would take

fifteen to twenty mines the size-of the u.s. Borax's

$20 billion World class molybdenum operation to offset

the pending loss of Prudhoe Bay oil.

Fact 5: Alaska's oil revenue is not being. set aside in amounts

that allow the State to pursue a rational economic de-

velopment plan.

·~mY EMPHASIZE PUBLIC INVOL\~MENT?

As should be clear from the lack of new economJ.c initiative outside

the oil industry, there are precious few economic ventures in Alaska

that will succeed withou+. public support (i.e. subsidies).

There are two types of subsidy of interest here: permanent and

temporary. Permanent subsidies do little to help wean the Alaska

economy from its extreme dependence on the oil industry. When the

flow of oil declines, the source of subsidy dries up and the sub~

sidized industry is placed in jeopardy. Temporary subsidies, on

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the other hand, could play a role in generating growth in industries

which are not heavily oil or gas depende~t~ They could also play a

role in generating growth in industries which are heavily oil or gas

dependent, but someone will have to explain why we would want to do

L. that.

In principal, temporary subsidies can create permanent job gains in

at least. six ways.

1. Increased'Market Share

If an initial subsidy leads to the establishment of a significant

part of an industry in Alaska (on a national or international

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scale) , the Alaska operators rnay gain enough market power to

enable them to pass their higher costs onto their customers. A

case in point is bottomfish. If Alaska processors eventually

handle all or virtually all of the bottomfish caught in Alaska

waters, as a group they would control an important segment of

the \vorld' s food supply. Under such circumstances, they could L

act as price setters rather than as price takers. Removal of the

subsidy could then lead to higher product price and not simply

to lower profits.

2. Scarce Materials, Multi-Price Markets

Alaska has been called a storehouse of raw materials. At the

present time, the United States imports a high percentage of

its strategically important raw materials from potenti,ally un-

stable or unfriendly nations. Examples include chromium,

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manganese, tin, and zince Just as the U.S. Congress has

C'.etermined that farm price supports are in the national in-

terest, so, could it determine that the purchase of (possibly)

high priced lilaskan metal is in the national interest, even if

lower cost foreign supplies were available. If this were to

happen, temporary State subsidies necessary to initially cap-

ture certain processing activities may be removab~e. In essence,

the function of subsidizing the venture would either be passed

onto the Federal government., or to purchasers in the form of

higher prices.

The Bootstrap Effect

This effect should be viewed as operable only in conjunction

with gains in overall Alaska economic activity. In effect, it

says that the total may be larger than the sum of the parts.

As one result of an. overall development effort, certain pro-

ducts which might initially need to be subsized may eventually

be producibl~ without subsidy to an enlarged Alaska

market at prices below that of imports from out-of-State. The

effect could be realized either through economies of scale or

simply because a small percentage of larger market is enough

to insure profitability. Examples include food and beverages

(reindeer products, beer), cement, and coal. In-State producers

would be partly shielded from outside competition by the cost

of shipping consumer ox bulk goods to Alaska.

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4. Induced Growth

In addition to normal support jobs which would be generated

in response to subsidized basic sector growth, C'lther jobs in

industries not strictly of a support nature could come into

existence as the Alaska market grew largero If the ratio of

induced government revenue to induced government spending

eventually rises above unity (eventually it must, or else there

would be no balanced government budgets, anywhere), the extra

revenue could be used to help to maintain the initial subsidies

on the basic growth that started the process. The initial

subsidy may stay in place. However, taken as a whole, the new

economic activi·ty receives a reduced net subsidy.. In principal,

t:.he ne\'l subsidy could ultimately go to zero.

5. Uniquely Alaskan Product~

With proper marketing, furs, carvings, conceivably even macho

Alaskan beer could be sold at a premium price on national and

world markets. If marketing efforts were successful, initial ('

subsidies could be phased out.

Lower Cost of Doing Business

Between 1~67 and 1973, the Anchorage Consumer Price Index rose

only 98.4 percent as fast as the corresponding national index.

After a brief reversal du~inq the 1974-1977 construction period

of the Trans-Alaska C1il pipeline, this trend has reasserted

itself.

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In the long run, the cost of doing business in Alaska will

decline relative to the cost elsewhere as economies of P":!ale

take effect, and as in-State competition increases. To the

extent new subsidized development increases the size of the

Alaska market, it can be effective in lowering the relative

cost of doing business in Alaska, and therefore, it can be

effective in removing part of the need for subsidy.

In addition, lower costs of doing ·business in Alaska can contri-

bute to secondary economic growth of the sort discussed in (4)

above. To the extent i::?-\is happens, net subsidies can decline,

possibly to zero.

It would be a step ahead if these six effects had already been

quantified for a range of development projects. Because the needed

quantification has yet to be done for even one specific project, one

cannot conclude that temporary subsidies \vill indeed work. The

strength of the six effects listed above may be insuffici'-_·.,t. One

should, however, be prepared to conclude that the question is open . and deserving of future research.

In 1981, Suneel Alaska, a subsidiary of Sun Eel of Korea, decided

against building a coal loading facility at the Port of Anchorage

because municipal officials were not prepared to spend $3.5 million

in city money to stabilize land needed for coal stockpiling. Korean

firms take government financial. participation for granted. Sut'l.eel

must have been truly surprised to learn of Anchorage's hangups along

these lines.

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Suneel's action illustrates the fundamental point we have been

trying to make~ With few exceptions, export oriented ventures are ...

financially un;attracti ve in Alaska. The WorJ..d prices which these

ventures must meet if they are to compete are set by firms doing

business in pl.:tces with much lov1er production and backhaul shipping

costs than are to be found in Alaska. For the most part, if an

Alaskan venture is to succeed despite substantially higher costs of

production and shipping, it must be subsidized by somebody.

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II. INDUSTRY SPECIFICS

In this section information is focused on the potential for economic

expansion in each of Alaska's eight largest basic industries (oil

and gas, fishing and fish processing, tourism, lumber and wood pro-

ducts, petroleum products, nonmetal mining except coal, coal mining,

metal mining, and agriculture.

OIL AND GAS

When one speaks of Alaska oil and gas, one speaks of Prudhoe Bay.

Since 1969 Prudhoe Bay has been the most important stimulus to eco-

nomic growth in Alaska, first via State government's spending of the

bonus bids received (1969-1973) 1 then via construction of the Trans-

Alaska oil pipeline (1974-1977), and now via both producer di~ect

expenditure for production, and the respending of severance taxes,

corporation income taxes and royalties by the State of Alaska. In

addition, local jurisdictions (in particular the North Slope Borough)

collect and respend the proceeds of property taxes levied on oil

field and pipeline equipment. 1 /

Just as Prudhoe Bay can be identif.ied as having been the principal

source of Alaska economic growth over the past thirteen years, ~o too

can it now be identified as a principal source of economic drag in

1/In fiscal 1982 the North Slope Borough received $126.8 million in property tax revenue from oil and gas facilities. This was 91 .. 4 percent of the Borough's total property and sales tax revenue. (Source: Alaska Department of Comrr.uni ty and Rl:giona.l Affairs, Alaska Taxable 1982.)

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the near future. Ignoring for the moment the precipititous drop in

World crude oil prices which has .recently occurred, the reason why

Prudhoe Bay will become an economic drag in the future is that its

rate of oil production will begin to decline by the end of the 1980's.

The Alaska Department of Revenue projects total North Slope oil pro-

duction to peak in 198° at 1.89 million barrels per day (MMB/d) and

to decline to 0. 76 MMB/d by 1999, despite projected new production £rom

the Milne Point field, and projected new dis~overies in the Canning

River, Flaxman Island and Point Thompson area. In September 1982 Nortn

Slope oil production was 1.63 MMB/d.l/ ·

What these flgures mean is that on average over the rest of _the cen-

tury oil production from Alaska's North Slope can reasonably be ex-

pected to decline by 4.4 percent per year, every year. In order to

keep State government oil revenue flowing at the same real dollar

rate as it did in 1982, either crude oil wellhead prices must escal-

ate on average by 4.4 percent per year more than the rate of escala-

tion of the prices of things which government buys, or tax rates

will need to be increased on the oil industry, or substantia-lly

greater finds v..1ill have to occur than those projected by the Alaska

Department of Revenue.

Although ·the outlook is for declining real {inflation adjusted) re-

venue to State government from Alaska's North Slope, the situation

is by no means as bleak as some have pointed out. If real crude oil

prices do no more than keep pace with inflation, real State pe1troleum

1/Alaska Department of Revenue, Petroleum Production Revenue Forecast, December 1982, pp. 8-9. (Division of Petroleum revenue)

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revenue will decline by approximately 5.0 percent per year (com-

pound average) over the next sixteen years. This contrasts sharply

with the Department of Revenue's "reported" (i.e .. 30th percentile)

revenues which decline 9.2 percent per year in real terms over this

period. 11 When one recognizes how prone oil prices forecasters have

been in recent year? to simple extrapolative forecasting (projecting

today's conditions long into the future), and when one remembers that

ultimately crude oil is in limited supply, a "reasonable" long term

price projection would certainly seem to be no worse than steady

real crude oil prices (on a long term trend). As it happens, con-

stant real crude oil prices over the next sixteen years is roughly

the Alaska Department of Revenue's median forecast. An appropriate

"optimistic" forecast would then seem to be the Department's December

1982 70th percentile forecast which corresponds to an annual average

increase in real oil prices of about 3.0 percent per year.

The degree to which declining oil revenues may exert a fiscal drag

can then be summarized by the following LOW, MIDDLE, and HIGH pro-

jections of State oil revenue

LOW- Real State of Alaska oil revenue declines 9~2 percent per year (compound aVP"~-~age 1983-1999) •

MIDDLE - Real State of Alaska oil revenue declines 4.4 percent per year (compound ave~age 1983-1999) •

HIGH - Real State of Alaska oil revenue declines 1.6 percent per year (compound average, 1983-1999).

These correspond, roughly, to the Alaska Department of Revenue's 30th

percentile, median, and 70 percentile projections of December 1982.

1/The Department of Revenue's nX'eported" forecast, that upon which budgetin;J is to be based, is their 30th percentile projection, not their 50th percentile projection~ (IBID)

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Stated differently, they correspond to 1983-1999 annual average in-

creases in real cru0e oil prices of approximately -5 percent, 0.0

percent, and +3GO percent~

FISHING AND FISH PROCESSING

Alaska salmon catches approached all time highs in 1981 and 1982,

while shellfish production dropped precipitously. With the 20-year

long Canadian-United States treaty negotia·tions looking as though

they could go on £or another twenty years, one must be very optimistic

indeed to projec.t the combined shellfish--salmon fishery to improve

greatly in the future. Although hatchery runs could build salmon

catches in some areas, natural runs could also recede back to his-

torical averages. At the present time the consensus opinion within

the Alaska Department of Fish and Game continues to favor natural

inhancement practices over hatchery operations (per personal con-

t . ) l/ versa ~ons •

Significant increases in the economic impact of fishing and fish

processing on Alaska's economy could come from an expansion of the

bottomfish harvesting and processing sectors. While such progress

is possible, there are two major impediments, at least one of which

must first be overcome: (1) Japanese control of markets for bottom-

fish caught in the Alaska Fisheries Conservation Zone (FCZ) and (2)

1/Private nonprofit or for-profit hatcheries can be expected to be closely regulated by the Alaska Department of Fish and Game. J;f ADF&G continues to favor natural enhancement, one should not ex­pect the Department to encourage private hatcheries any more than it encourages State run hatcheries.

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the financial capital requirements that must be met before U.S.

shore based or at-sea processors can claim the right to process the

bulk eof the bottomfish caught in the FCZ. Under terms of the Mag-

nuson Act (200 mile limit law) , foreign processors are assigned a

quota defined to equal optimal catch from the FCZ less the portion

whic~ can be domestically processed.

Appendix B is an article reprinted from the March 14, 1981 Anchorage

Daily NEWS, discussingthis issue in light of the structural problems

faced by potential domestic processors. The conclusion reached is

that Alaska's goal of domestically processing all or most of the

bottomfish catch from the FCZ is unattainable without amendments to

the Magnuson Act simply excluding foreign fleets, or massive loans

from the public sector. What is not said in the article is that a

compromise position may work its way out - joint ventures in which

the fish are caught by U.S. fishermen and processed by foreign float-

ing processors. It is our opinion that such joint venturing is a

likely source of growth over the next twenty to thirty years in the

economic impact the bottomfish industry has on Alaska.

TOURISM

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Fishing 1 hunting, skiing, rafting, hiking, riding the Inside Passage

via cruises~hip, exploring, prospecting 1 and sightseeing 1 are the

activities of tourists. These activities attracted c.:pproximately

6501000 visi-t-ors to Alaska in 1982. 1 / Since 1970 the estimated num-

1/Alaska Division of Tourimn.

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ber of persons visiting the State of Alaska each year has climbed at

a compound annual average rate of 14.5 percent. Conservatively es-

timat.ed, tourism :ranks third in importance among Alaska's basic in-

dustries, placing behind only oil and gas and fishing vlith an esti-

mated (see above) 1980 value added of $270 million.

Despite twelve years of rapid growth Alaska's tourist industry is

still an infant. The 650,000 vis:i,tors of 1982 amouht to fewer than

twenty percent of the number who saw Yellowstone National Park last

year, or who visited Hawaii. Alaska vi.S'~ tor traffic would need to

grow at a compound annual average rate of growth of 9 percent. for

twenty years in order for the Alaska visitor count to reach Hawaii's

1982 level.

Natior1al and international advertising campaigns financed by the

Alaska Divisior: of Tourism have helped to dispel Alaska's "icebox"

image. Even so, some important demographic groups remain hevvily

under-represented in the Alaska visitor count. Chief among th~se

are the Japanese. Fewer than 10,000 Japanese visited Alaska in 1982,

while over 300,000 visited British Columbia, a neighboring Canadian

Province. 1 / As the economies of the Far East become more affluent,

one should expect to see a substantial rate of g·rowth in the number

of visitors from that region.

Given Alaska 1 s attractions, the still small number of yearly visitors,

and increasing awareness of Alaska as a possible tourist destination,

1/Alaska Division of Tourism. u .. s. Department of Commerce.

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there is little reason to project growth rates for the industry

below 8 percent to 10 percent per year for the forseeable future.

LUMBER AND WOOD PRODUCTS

The Alaska timber industry exists today because (a) stumpage prices

are 13vl enough to offset Alaska • s otherwise high cost of doing busi­

ness;11 and (b) Alaska Natives are exempt from the federal prohibi-

tion against export of unprocessed timber. The two major companies

operating in the Alas~:a market, Louisiana Pacific-Ketchikan (LPK) and

Alaska Lumber and Pulp {ALP) each have long term (50 year) federal con-

tracts guaranteeing them, respectively .192.5 million board feet per

year (MMBF) and 104.2 l1MBF per year through the year 2004 (LPK) and

2011 (ALP) . Alaska Lumber and Pulp saw a second long term federal

contract expire in December 1982 (the Pacific Northern timber con-

tract).

Supplementing the timber harvested from federal lands under the two

long term contracts are annual sales averaging 154 MMBF. Of this

volume approximately 69 ~~BF per year is targeted for small business

under a U.S. Forest Service - SBA program.

In all, provisions of the Alaska National Interest Lands Conservation

Act of 1980 allow an average of 450 MMBF of timber to be harvested

from federal lands each year in the Tongass National Forest.

1/For example, average 1981 stumpage prices paid to the U.S.F.S per 1000 board feet for Sitka Spruce were:

Washington/Oregon - $238.00 Tongass Small Sales - $ 45.96 Tongass Long Term

Contracts - $2.26 (ALP); $2.87 (LPK)

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FuturE~ grcwth of the Alaska. timber industry will occur either if

Alaska Native Corporations increase their exports of round logs or

if a market for Chugach National Forest timber develops.

At the present time, Alaska Native Corporations have selected 200,000

acres of forest lands from the Tongass Forest under terms of the

Alaska Native Claims Settlement Act. According to the U.S. Fore.st

Service Timber Supply and Demand, 1982, the Native Corporations plan

to harvest the existing o·ld growth timber over a 25 to 30 year period.

At a yield of approximately 1 ,~, 500 board feet per acre (U.S. Forest

Service Timber Supply and Demand, 1982), these plans suggest an

annual average harvest volume of about: 100 MMBF. If a similar an-

nual harvest is taken from Native lands selected from the Chugach

National Forest, total export of round logs cut on Native lands can

be expected to reach 200 MMBF per year.

Total annual harvest. from Native lands and National Forest lands can

be expected to reach a maximum of 650 .MMBF per year (450 MMBF Tongass,

200 ~~F Native) . Harvest from the Chugach National forest (federal

lands) and from other State and private lands is not expected to

greatly alter this figure unless very low stumpage prices are accepted.

In 1980 and 1981 an average of 554 MMBF were harvested from all Alaska

lands.

PETROLEUM PRODUCTS

Given the general downward trend in Alaska oil produc·t:Lon over the

next twenty years there is little reason to project significant gains

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in in-State refining. As of the middle of 1982 these were three com­

mercial refineries in Alaska. Chevronrs Nikiski plant \26,000 BPD),

Tesoro's Nikiski plant (70,000 BPD), and Mapco's North Pole Re~

fining near Fairbanks (46,000 BPD). Alaska imports approximately

40 percent of its refined products from Washington and Oregon. The

1/ reillaining 60 percent is produced in State.

Urea and ammonia production at ·the Union Oil Company'.s. Nikiski plant,

and LNG production at the Phillips-Marathon Nikiski plant have been

made possible by long term contracts for Cook Inlet natural gas

that have priced the gas at approximately 20¢ per N.CF.. Expansion of

this industry is unlikely at current market prices for natural gas.

NONMETAL MINING EXCEPT COAL

In 1980, the most £ecent year for which data are available, there

were fewer than 200 year round full time jobs in this industry in

Alaska. The principal product is sand and gravel for construction.

Because of the low value per ton of construction aggregates and

their general availability, there are no prospects for an export

market. Growth in this industry is tied directly to overall growth

in the Alaska construction industry. (Some potential for gypsum,

barite, and asbestos exists in Alaska.)

1/State of Alaska Long Term Enel:'gy Plan-:-· Appendix IIB, 1982, Depart.­ment of Commerce and Economic Development, Division of Energy and Power Davelopment ..

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COAIJ MINING

Alaska's coal mining prospects are varied •. Potential exists for

the export of soft (sub-bituminous) coal from the Beluga field near

Tyonek. A trial export program is underway from the Usibelli mines

at Healy. In 1980 approximately 100 year =ound full time jobs

existed in the coal industry.

Export of Alaska coal must compete with other u.s. coal

from Wyoming and Montana on the West Coast and with other Pacific

Rim suppliers in the Orient. Although Beluga coal is near tide-

water (Western Cook Inlet) and is low in sulphur (0.15 percent), it

is sub-bituminous (7550 BTU per ton) and very wet (28 percent mois-

ture). Placer Amex, the principal holder of leases in the Beluga

field, estimates that in order for a Beluga export operation

to recapture initial capital outlays, at least 6,000,000 tons per

year would need to be marketed.

At the present time and for the forseeable future there is little

chance that Beluga coal can compete in Western U.S. markets with

Montana and Wyoming c0al because of its generally lower quality,

greater distance to market, and higher costs of production.. With

respect to Asian markets the prosp~cts turn on investor expectations

of two critical variables: (1) the future performance of crude oil

prices, and (2) the future mineral taxation policy of the state of

Alaska ..

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If one expects crude oil prices to remain depressed, one has little

reason ·to be optimistic about the future Japanese or Tai"tvanese de-

mand for Beluga coal. According to studies surveyed by Battelle

Memorial Institute in a December 1980 report to the Alaska Governor's

Office, Beluga coal could be delivered to utilities in Japan for

something between $1.50 and $1.75 per million BTU (MMBTU) 1 1980

dollars. 11 According to the same study, existing suppliers were

then selling steam coal in Taiwan and Japan for between $1.39 and

$2.12 per MMBTU, 1980 dollars. This would place Beluga coal in the

marginally economic category, ce:.tainly not attractive enough to

induce the Japanese or Taiw&nese to abandon their existing suppliers

and switch to Beluga coal. If there is to be a market for Beluga

coal in the 0rient it would seem that its role would be that of

·satisfying incremental demand~ However, if relative crude oil prices

remain low, the incremental demand for coal is

likely to be relatively slight. Furthermore, in this case one must

rel oer that depressed oil prices would translate into depressed

Alaska State government oil revenue. Should this occur the potential

for the State of Alaska to seek new revenue sources would b~ very

high, indeed, high enough that investo:~-s are likely to factor a

substantial coal severance tax into their cost calculations. To

and investor making such a calculation, the relevant Japan-delivered

price of Beluga coal couid be substantially higher than the $1.50

to $1.75 guoted by Battelle.

1/Policy Analysis Paper NO. 80-20, "Beluga Coal Export Market Study," Office of the Governor, Division of Policy Development and :Planning, December 15, 1980, p. 8-12.

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Only if crude oil prices ·get back on a growth path that rises

rapidly enough to encour2.ge substantial incremental demand fqr steam

coal in Japan or Taiwan would one be justified in expecting the

Beluga coal field to be developed before 1990. ("Justified" on the

basis of information available to date.)

For similar reasons we would not expect to see much of .an increase

in Usibelli 1 s export operation from Healy until at least 1990 .unless

crude oil prices surge upward once again.

METAL MINING

In November 1982, Charles River Associates in conjunction with C.C.

Hawley and Associates of Anchorage submitted an evaluation of the

economic potential of five metal mining operations in· Alaska. The

five were: platinum (Goodnews Bay), tin (Lost River), copper-

cobalt (Ruby Creek), chromite (Red Mountain) , and nickel-cobolt­

copper (Brady Glacier). The reached the following conclusion.

"The prospects for development of any of the deposits analyzed

in this report appear thin in the immediate future. The Lost

River deposit may be developed by the 1990's if tin prices in­

crease as expected.. A Goodnews Bay type placer deposit would

probably be developed if it wer~ discovered and if the platinum

market recovers as anticipated. The Ruby Creek copper-cobalt

deposit would not be developed, even given higher-than-expected

prices, unless transportation infrastructure to the Southern

Brooks Range were developed. Such infrastructure could not be

justified by the Ruby Creek deposit alone, or even by several

deposits of this size."l/

I'Policy Analysis Paper 82-12, "Strategic Mineral Markets and Alaska Development Potentials," Volume I, p. S-4.

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There are three mining ventures in Alaska that appear .~lose to

entering production - the u.s .. Borax molybdenum deposit at Quartz

Hill near Ketchikan, the Noranda copper-lead~zinc-gold deposit at

Greens Creek near Juneau, and the NANA-Cominco lead-zinc-silver

deposit in the Western Brooks Range (Red Dog) • The quality and quantity

'Of each of these deposits helps each to overcome the high production

and environmental cost factors facing industry in Alaska. The

Noranda prospect shows 2.1 million tons of ore grading 10 percent

combined copper, lead: and zinc, approximately 9 troy ounces per

ton of silver, and 0.10 ounces per ton of gold. The Red Dog pros-

pect shows 85 million tons of ore grading 17.1 percent zinc, 5.0

percent lead, and 2.4 troy ounces per ton of silver. The Quartz

Hill prospect shows '100 million tons of ore grading 0.2 percent

molybdenum.. The in place molybdenum at Quartz Hill is valued at

approximately $20 billion. By comparison, Dome Petroleum's Cyprus

Anvil mine in the Yukon near Faro originally sl~owed approxirnatr~ly

60 u.s. tons of ore grading 5 percent lead, 6.8 percent zinc, and

1.0 troy ounces of silver per u.s. ton. The Cyprus Anvil mine

operated throughout the 1970's, closing in 1982 because of depressed

mineral prices.

The text table dramatizes the relative richness of the Noranda and

Red Dog prospects.

Millions of Tons Ore % Lead %Zinc Silver/Ton Gold/Ton

Noranda

Red Dog Cyprus Anvil

2.1

85 60

10% combined lead, zinc, copper

5.1 5.0

17.8 £ .. 8

9 oz.

2.4 oz. 1.0 oz

0.1 oz.

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This comparison makes it clear why the Noranda and Red Dog pros-

pects have kindled some excitement. Each is substantially richer

than lfiines that have been operating in Northern conditions for a

number of years. However, their very richness coupled with their

statu~3 as the only Alas~<: a prospects {other than Quartz Hill) nearing

deveJ.c>pment dramatizes a second point. It takes a rich prospec.t

to ove~rcome the high labor and capital costs found in Alaska and,

in ·the~ case of the Red Dog, the extremely harsh conditions under

which mining must proceed and the long distnnces to market ..

In ·terms of metal ntining activity today, Alaska operations consist

entirely of placer mining for gold and silver, and of delineation and

exploration. 'This situation will change over ·time at a rate dictated

by the rate at which World metal prices climb from their 1982 reces-

sionary lows. In ·turn this will be a function of Wc,rld economic re-

covery, of the cohesiveness of foreign metals cartels, and of the rate at

which new deposits are discovered in places that compete with Alaska.

According to the U.S. Bu:r:-eau of Mines 1 demand for most metals should

1' increase moderately throughout the century. ' Projections made in

1980 {admittedly a little graying but still "representative") called

for the following rates of growth in u.s. demand (1978-2000).

Chromi\:tm 3.2 percent

Copper 3.0 percent

Lead 2.2 percent

Molybdenum 3.5 percent to 5.0 percent

1/Miner~,!.Jracts and Probllimis, 1980 Edition, U.s. Bureau of Mines 1

Washingct)n, D.c., (publ:lLshed every five years).

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Platinum Group 2.6 percent (composite)

Silver 3.1 percent

Zinc 1 .. 8 percent

To put these growth rates in perspective (since they were forecasted

by the Bureau of Mines in 1980), Data Resources1 Incorporated. contem-

poraneously projected a "best guess" average rate of growth of real

GNP of 2 .. 7 percent per year over the 1978-1990 period.l/ The Bureau

of Mines forecasts are roughly in line with this rate, indicating

expected growth in U.S. metals demand of approximately the expec-ted

rate of growth of real GNP. (Bumines reads DRI!)

In light of these considerations, a reasonable forecast of metal

mining activity in Alaska should include production at Greens Creek,

Quartz Hill and Red Dog by no later than the middle 1990 1 s, and

quite possibly, by the late 198C 1 s. Continued gairs in exploration

and the announcement of other similarly rich finds would also seem

) ikel.y. The precise rate of such announcements and the location

of the prospects is, of course, very uncertain.

AGRICULTURE

In its June 1982 annual sta·c:istical report the Alaska Crop and

Livestock Reporting Service summarized the present status of Alaska

1/Data Resollrces, Incorporai:.ed, U.S. Long Term Review, Summer 1980, p. I-21.

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agriculture in these words1 /

"The total land area of Alaska is approximately 375 million

acres, of which 1.3 reillion acre~ were listed as land in farms

in the 1~79 U.S. Census of Agriculturer Agriculture production

is still confined to relatively small areas of the State's total

acreage ( •..••• ). Most land in farms consists of grazing land

leased from the State·, the 11. S. Government and Native Corpor­ations ..

Excluding acreage from the large grazing leases, approximately

138,000 acres are included in land in fa~ms. Crops utilized

nearly 38,000 acres in 1981, the balance was in pasture and

uncleared lands. Very few farms have been entirely cleared

of brush and trees. State land lotteries and sales since 1978

have placed over 125,000 acres of potential agriculture land

into private owenrship. Only a small percent of t;hese acres

will be in production in 1982. Most of this acreage is in the

Delta Junction area with tracts of land ranging up to 3,200

acres. Alaska has over 20 million acres of potential tillable

farmland, plus another 18 million suitable for potential live­

stock grazing. The number of farms in Alaska increased from

12 farms in 1900 to .623 in 1939, and declined to 290 farms on

January 1, 1978. The number of farms in Alaska is once again

starting to increase with an estimated 410 farms on JLu~ary 1, 1982."

Modern agriculture is extremely capital intensive. Indeed, Lower-48

agricultural production is the archetype indust.ry realizing large

economies of scale. The economies are so significant that u.s~

farmers in Washington and California can incur the costs. of trans-

porting their product to Alaska and still undercut local producers.

1/"Alaska Agricultural Statistics," June 1982, Alaska Crop and Livestock Reporting S~rvice, p. 3.

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An inability on the part o£ ::he Alaska farmer to take advantage

of economies of scale becausf! the Alaska market is small, and rel-

atively high prices for labor and machinery, combine to more than

offset the transportation cost disadvantage faced by the Lower-48

producer. For this reason Alaska agricultural production for the

local market will continue for the foreseeable future to be small,

high cost, and responsive primarily to those consumers willing to

pay high prices for very fresh produce, dairy products, eggs, and

meat.

Talk of significant economic impacts on Alaska rrom agriculture

centers on Alaska's potential as a grain exporter to the Orient

(barley and rapeseed, principally). Some of the considerations that

would seem to favor the development of such an industry are:

- a growing World demand for protein and good quality grain

(barley is both an animal feed and a human staple)

shrinking agricultural acreage elsewhere in the United States

the potential for improved trading relations with the People's

Republic of China

Alaska's relative proximity to the Orient (Anchorage is over

1,000 miles closer to Tokyo than is Seattle)

the Anchorage Railroad running from Fairbanks, through the

Matanuska-Susitna Valley, and on to tidev1ater at both the

Port of Anchorage and at Seward

-Alaska's lang summer days which effectively lengthen the

growing season for grasses

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Factors tending to restrain the development of an Alaska grain

export industry are (1) the enormous financial investment required

to cut, clear, plan·t, and harvest enough land to bring significant

economies of scale into play, (2) relatively few farmers and trained

farm workers, and (3) the need to co~vince foreign markets of the

re1i.abil.ity of Alaska sg}Jplies anJ of their generally high quality.

The highest of these hurdles is the capital requirement. For at

least the next twenty to thirty years it may prove to be insur­

mountable unless.some government chooses to subsidize the initial

expense of bringing an economically sized industry into being •

• We can think of no circumstance under which private capital could

or would finance such a large risky venture. Although we have seen

no recent estimates of the amount of capital involved, at a capital

output ratio of just 3:1, .an ind'C.stry capable of producing $500

million of exportable grain annually would require an investment

of $1.5 billion. Given infrastructure and land clearing costs,

twice this figure may be conservative. 1 / In our opinion, unless

one is willing to assume such governmental involvement, one is not

justif.Led in projecting the birth of a grain exporting industry

in Alaska for the foreseeable future.

1/A $500 million agr.J.cultural export industry would still rank below the fishing/processing industry and the oil industry in importance.

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APPENDIX A

PIPELINE COST ESTIMATE (January 10, 1979)

The method used here makes use of historical construction cost in-

formation published in the August 14, 1978 Oil and Gas Journal to

develop an historical Alaska markup factor. This factor is then

applied to the average per mile cost of constructing an 18 inch

onshore pipeline in the nLower-48" in 1978 to obtain· an estimate

in 1978 dollars of the per mile ~ost of constructin~ an 18 inch on-

shore pipeline in Alaska. Multiplication by .800 (800 .miles) yields

an estimate of the lotal cost of the Prudhoe Bay to Kenai natural

gas pipeline -- $1.053 billion in 1978 dollars or $1.453 billion

in J_982 dollars ..

ALASKA MARKUP FACTOR

The largest diameter pipeline for which cost figures are given in

the Aug·ust 14, 1978 Oil and Gas Journal survey are two 42 inch

crude oil pipelines laid in Michigan in 1974. Their respective

per mile costs were $487,782 and $558 1 569 for an average of $5231 16(1.

To account for cost increases for large diameter pipe the average

per mile cost of a 48 inch pipeline constructed in the "Lower-48"

in 1974 is taken to be $600,000~

The Oil and Gas Journal's pipeline construction cost index rose

sixteen percent between 1974 and the .middle of _thf" TAPS construction

period. Therefore 1 w.e take $600,000 X 1.16, or $696,. 000 to be the

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average per mile cost of a 48 inch pipeline in the "Lower-48" laid

on. 11 flat" land during the TAPS construction periodo

The Journal estimates that TAPS cost $8.7 billion, excluding interest

on borrowed capital. Subtracting {1) the capital cost of delivery

facilities ($1.444 billion primarily for Valdez), (2) pumping station

equipment ($617.7 million), (3) the haul road ($200 million), (4) all

other buildings ($243.6 million), and (5) thirty percent of the cost

of laying the pipe to account for excessive overtime ($1.749 billion)

leaves an adjusted TAPS ccst of $4.446 billion. It should be noted

that this figure includes the $165.3 million cost of line pipe, an

item priced considerably below the average 1975--1977 cost because

of prepurchases.

Given the $4.446 billion total adjusted TAPS cost, the per mile cost

in millions is then $4.446/800, or $5.558 million.

The Alaska markup factor is then AMU where

AMU - TAPS cost per mile/Lower-48 cost per mile

l - 5.558/.696

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- 7.986

~OST OF 18 INCH PIPELINE '

The average per mile cost of an 18 inch pipeline in the Lower-48 is

calculated as the average of the Journal's reported 1978 costs for

16 inch and 20 inch pipelines, since thare were no numbers repo+:ted

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for 18 inch pipelines, per se. This procedure yields $164,777 as

the average 1978 per mile cost of an 18 inch pipeline laid onshore

in the 11Lower-48." MultiFlying this by the Alaska markup factor of

7.986 yields $1,315,909 as the per mile cost of an 18 inch pipeline

laid onshore in Alaska in 1978. The estimated total cost of an 18

inch Prudhoe to Kenai natural gas line in 1978 dollars is then

$1,315,909 X 800, or $1 .. 053 billion. In 1982 dollars this comes to

$1.453 billion.

POINT OF NOTE

The higher the estimated cost of building a 48 inch pipeline in the

"Lower-48, ~e the lo~ver AMU and, thus, the lower the extima ted cost of

the gas pipeline. We have taken $696,000 to be the "Lower-48" per

mile cost of a 48 inch pipeline constructed during the TAPS periodu

If we multiply the original {1970-1971) cost estimates g~7en for TAPS

(approximately $1.2 million per mile) by the ratio· of our adjusted

TAPS cost, $4.446 billion, to the total cost, $8.70C billion, we get

$612"000, as the original {adjusted) per mile estimate for TAPS.

The original cost estimates for TAPS were too low for a number of

reasons. One reason was unexpected inflation. In 1971 inflation

was widely expected to proceed at~ about a two to three percent long­

term average rate. Between 1971 and 1976 the actual average in­

crease in the GNP deflator was about seven percent. A five percent­

age point per year excess of actual inflation over 1971 expections

yields a five year cumulative compounded excess of 27.6 percent.

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If the $612,000 original (adjusted) per mile TAPS cost is increased

by 27.6 percent, we get a figure of $780,912. Adjusting for the

£u11 annual seven percent inflation from 1971 to 1976 yields an es-

t±mate of $858r326 per mile.

Since $780 61 912 is only 12.2 percent. greater than our $696,000 "Lower-

48" cost per mi.le, and $858,362 only 23o3 percent greater, our $696,000

estimate may not be too small. The suggestion is that $1.053 billion

may not be an unreasonable estimate of the cost of the Prudhoe-Kenai

gas pipeline (1978 $).

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APPENDIX Bl/

Alaska's fish processing industry has hit upon hard times. New \

England Fish Company and Salamotof Seafoods have both shut down

or sold out in the past year, despite the widely publicized efforts

of State officials to make Alaskan processors a major force in

World seafood markets. Other Alaskan processors are scraping along

hoping for an improvement in 1981 •

. Three years ago the Governor announced that the State of Alaska was

launching a bottomfish development prograrn aimed at replacing for­

eign floating processors and foreign fishe~rmen, with an Alaska

based industry. Is it a coincidence that since its inception the

bottomfish prog:r·am has been stymied by sharp declines in fish

prices relative to the costs of doing business in the industry, or

is there a cause-effect relationship between Alaska's announcement

of its bottomfish development intentions and the subsE:quent weak­

ness of fresh and frozen seafood prices?

A good case can be made for the latter. Does anyone seriously be­

lieve that foreign processors and fishermen working within Alaska's

200 mile limit will simply bow out meekly because Alaska would like

to do big things in their industry? On the contrary, at least in

principle the more reasonable assumption is that foreign concerns

will do whatever thay can to discourage an Alaska takeover.

One weapon at the disposal of say, the Japanese, is their ability

to manipulate product prices, to depress them to the point where

individual domestic processors cannot make a reasonable profit on

their investments.

As measured by the percent change in the respeQtive u.s. producer

price indexes, the three year period from January 1978 through

January 1981 saw the price of fresh cod fillets rise 1.6 percent

1/Reprin:ted from the Anchorage Dai.ly NEWS, Sunday March l4, 1981.

35

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per year, that of ocean perch fillets rise 2.6 percent per year,

the price uf frozen fish blocks rise only 4.0 peloent per year,

and the price of fresh salmon decline an average of 1.6 percent

per year. During the same period the overall u.s. producer price

index advanced approximately 12.7 percent per year and the all

urban u.s. consumer price index 11.8 percent per year.

Although these data do no more than suggest the need to explore

the issue further, it is a fact that foreign fleets would prefer

that they be allowed to continue processing large quantities of

salmon and bottomfish pulled from Alaska waters. Certainly for­

eign interests are aware that depressed product prices discourage

American entry into what has long been a foreign fishery.

Let us suppose for the moment that fish prices have indeed been

held down in order to convince American investors that fish pro­

cessing is a poor investment. What are some of the implications?

First, under the present conditions and agreements governing the

200 mile Alaska fishery, American processors are not likely to

invest the capital needed to cRpture the processing industry, be­

cause, individually, each American processor is a price taker.

Most potential investors who examine the prospects are likely to

conclude that their expected rate of profit is too low. Foreign

competition is too tough. Price takers do not drive out price

setters.

Second, if Alaska is to become a force in the bottomfish industryr

either somebody (the State?) must subsidize the takeove~ of the

industry, or foreign fleets must simply be banned by the federal

government from fishing within Alaska's 200 mile limit. In either

case, assuming Alaskan firms were then willing to harvest and pro­

cess the stocks now allocated to foreign fleets, an important posi­

bility might arise. The Alaskan firms might no longer be forced

to accept prices set by lower cost foreign processors. They might

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find that co~trol of an important part of the World's protein

supply made it ?ossible for them to pass their higher costs of

production along to consumers (in the u.s. and elsewhere).

Without a good deal more information no reasonable person would

advocate massive State S.)ubsidies or the federal banning of foreign

fleets from Alaska waters. But as the World turns, such informa­

tion will never become available unless we are willing to accept

the posslbility that the depression in fish prices is no accident.

Predatory price manipulation by foreign fish processors is not

merely a plausible hypothesis, it cries out to be t.ested. If the

hypothesis is correct, it implies either the abandonment of the

Statews bottomfish program or a major redirection of effort. Bus­

iness as usual may be a long road to nowhere, travelled at great expense.

.. 0

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