How Norway and Alaska took different paths when it came to investing windfalls from oil development

OPINION: Norway and Alaska are both oil-producing Arctic regions that set out to re-invest oil income. Their different choices led to very different outcomes — and prospects for the future.

By Dermot Cole - March 10, 2018
The Oslo headquarters of Norges Bank, Norway’s central bank, which manages the nation’s $1 trillion sovereign wealth fund. (Norges Bank)

In the past half century, Norway and Alaska each developed an extensive oil and gas industry — and each took steps to preserve part of an unimaginable windfall that development generated.

But there is one big difference in the way that the Norwegians and Alaskans have handled their great wealth — and it’s clearer now than ever that the different approaches have placed Norway in a stronger position than its North American neighbor.

Alaska, home of the largest oil field ever found in North America, has focused much of its political attention on satisfying immediate desires, while Norway decided to save as much oil money as possible from drilling in the North Sea and Norwegian Sea.

The consequences of that approach have pushed Alaska toward a crucial decision about whether the Alaska Permanent Fund, now worth $65 billion, will be a permanent fixture or a fleeting memory.

With oil revenue down, Alaska is spending about $300,000 an hour from savings to keep the doors open and provide public services within a state twice the size of Texas.

It has the lowest taxes in the United States and its elected officials are bitterly divided over whether it should enact taxes now or continue to draw down savings.

The choice is to either inflict pain now or postpone it until the current crop of politicians have departed from the scene, with state savings dwindling by the day. The easiest alternative is to postpone.

But the longer the state delays, the more it tips the balance against the future and puts a priority on the present.

The state has all but abandoned the hope of taking steps now to allow the fund to grow in the decades ahead.

When the oil began flowing, Alaska decided to eliminate taxes and focus on responding to the political wishes of the current generation, while after some early excesses, Norway opted to be far more aggressive about saving for the future.

Alaska promoted policies to become more dependent on the rise and fall of oil prices, while Norway took steps to limit volatility.

When Norway looked abroad for examples of how to save oil funds, they concluded that the systems tried in Alberta and Alaska had flaws they wanted to avoid.
Alberta invested locally in capital projects and the fund suffered, while the Alaska model of paying out half of its annual earnings didn’t make sense, Martin Skancke, an economist in the Norwegian government, once said.

“I think we felt from a macro point of view that Alaska was inappropriate, where the fund distributes cash to the citizens and then is forced to raise more tax revenue. That seemed inefficient and inappropriate,” he said.

Norway has some of the highest taxes in the world, while Alaska decided to get rid of most taxes and depend on whatever it could get from petroleum.

For the past few years, the central issue in Alaska politics has been whether it is time to resurrect some taxes or use more of its accumulated savings to pay for public services—with tax opponents arguing for policies that would erode the fund over the long term.

A related question is how much of the earnings from the Alaska Permanent Fund will continue to be paid to residents each year. The fund has paid $24 billion in earnings to residents, while saving $31 billion in earnings.

Each Alaskan received $1,100 in 2017, a compromise that was about half of what it would have been under the formula in state law.

Gov. Bill Walker and the Alaska Legislature settled on the lower number because of the financial crunch, but the size of the annual check will be a key issue in the 2018 elections.

It is easy for challengers to run for office, promising to send people more money.

But how much each person receives from the state is only a small element in the overall financial picture.

Some Alaska politicians are insistent there should be no income tax as long as the state is sending checks to every resident. Others argue that the checks can keep flowing if an income tax is added.

Oil production began to decline nearly 30 years ago and the state has reached a decision point where it either must ask Alaskans alive today to pay more to support public services or draw more from savings, further reducing the benefits for future generations from the oil bonanza of the past.

Alaska has saved nearly $100,000 per person, which is an immense sum—except when compared to Norway, which has seven times as many people the largest sovereign wealth fund in the world, a $1 trillion account worth nearly $200,000 per capita.

Norway has taken a more frugal approach, which may sound like an odd comment regarding a country with one of the highest tax burdens in the world.

After an early oil and gas boom slipped away in the 1980s, Norway committed to save as much as it could from nonrenewable resources.
The Norway Government Pension Fund earned 13.7 percent in 2017, while the Alaska Permanent Fund earned 12.9 percent.

Norway has about two-thirds of its assets in equities and wants to increase that to 70 percent, creating an economic powerhouse that provides the country with options and untapped potential.

The  Norwegian central bank never expected to manage a $1 trillion fund, but it is a problem that every other jurisdiction in the world would love to have.

In Alaska, no one expected that the fund would grow to $65 billion, any yet that is still not large enough to be all things to all people.

Faced with the option of either increasing taxes or drawing more from the Permanent Fund for the current generation, the wise course for Alaska would be to enact taxes now and save more for the future.

But politicians are short-term thinkers and the easiest thing to do is to postpone the pain and force those who follow to get by with whatever’s left.

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