Alaska’s Vulnerable Economy

By October 1, 2015Blog

Last week Royal Dutch Shell announced that it will cease its explorations and drilling in the Arctic for the “foreseeable future.” The move is being hailed as a victory by environmental activists, who forced delays via maritime blockades in Portland and Seattle. Shell, however, contends that the move is driven by market forces: with $7 billion already sunk and another $1.4 billion in planned expenses, the endeavor was just too expensive to justify the lackluster results.  In short, the relatively low oil prices of today’s global economy can no longer justify the myriad hassles that characterize Arctic drilling.

While Shell’s $8.4 billion hit certainly hurts, it’s just a drop in the barrel compared to the company’s $400 billion-plus revenue in 2014. Less resilient to the drawback will likely be Alaska itself. The state is poised to shed up to 1,600 jobs as a result of the moratorium, and the Alaska Oil and Gas Association is worried about additional labor cuts in industries that support drilling. Considering mining and oil accounts for over one-fourth of the state’s Gross Domestic Product, this turn of events is cause for legitimate concern. Governor Bill Walker is already pushing for drilling in the Arctic National Wildlife Refuge in an effort to ensure the fiscal health of his State.

Alaska’s oil woes are a textbook case of why industry diversification is vital to long-term economic health and success. Granted, the state faces some unique obstacles given its geographic location and climate, among other factors. However, the inescapable fact is that Alaska has pigeonholed itself into a significant reliance on one industry. States, regions and communities that have diversified economies are more resilient when downturns hit and tend to bounce back from recession more quickly. Conversely, like Atlantic City or the Rust Belt, with their dependencies on gambling and manufacturing respectively Alaska’s current economy is extremely vulnerable to economic downturns in the oil industry. Future economic success will depend on finding innovative ways to diversify; or facing an inevitable decline in GDP, jobs, and ultimately, residents. Shell’s exit from Arctic exploration is a great catalyst for Alaska to begin facing this hard truth. If the federal export ban on oil is lifted, the state could be delivered a temporary reprieve from its current downturn. However, this should not be used as an excuse to kick the can of economic diversification further down the road. The timeline might shift, but the reality will not: the long-term health of the Alaskan economy depends on greater diversification.


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