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Let's get real 'maximum benefit' from royalty oil

Posted: Sunday, January 23, 2011

It's good news the Governor and legislature are re-evaluating how the state is taxing oil. Alaska must balance its equitable share with market realities; after all, no business is going to invest when their costs are too high. It's time to extend that conversation to the pricing of royalty oil.

In 1979, Superior Court Judge Allen T. Compton affirmed in the Amerada Hess case that Alaska's "Constitutional provisions require that the legislature set the terms of oil and gas leases in such a manner as to provide the maximum benefit for its people." He said, "the State may not take royalty 'in kind' unless ... it will be in the best interests of the State to do so, which presumably means that it will be receiving an amount at least as great as it would if the royalty was taken 'in value'."

Since that decision, state officials have intractably concluded that the state must make maximum dollar on the sale of royalty oil within the state. In my opinion, the conclusion is wrong -- it's based on it being easier to hand out dollar bills than it is to develop the infrastructure that will allow a person to earn a buck on their own.

The court didn't rule that the state must sell for an amount equal to or greater than "in value" sales, that is, the amount it would receive if it allows the oil producers to sell the state's portion; that part of the statement was the "presumably." The court ruled that the state must demonstrate that "in kind" sales are in the state's best interest. And what is "best interest"? Providing for the maximum benefit of its people -- us.

What is maximum benefit? It never has been maximum dollars into the state coffers that can be doled out a buck at a time while the size of government grows just because it can. Maximum benefit is considering first the maximum opportunity to be employed in Alaska. Maximum benefit is finding ways to make life affordable for the citizens who live in Alaska -- not making life more difficult using our own resources against us by charging us in a manner that makes our refined product more expensive than anywhere else in the country!

One old timer put it this way, "What farmer buys milk from a store when he can get it for cheap from his own cows?"

I'm optimistic this Governor gets it. In his State of the State address, Governor Parnell put an emphasis on making sure we grow our economy, citing the need to lower corporate taxes and, he said, "While we're at it, let's work together to keep more dollars in Alaskans' pockets." One way to keep money in our pockets is to pay less for gasoline and heating oil. These days, some people are blaming the refineries in Alaska for charging too much. Maybe true. More true is the high cost of refining in Alaska. In the case of royalty oil sales, the state maximizes the cost per barrel of oil, then charges additional maximum fees -- on top of the high cost of refining cold oil.

Consider, when the state prices royalty oil "in kind" (which is a small fraction of total state revenues) in such a way that a refinery can make money, that refinery is going to employ people to make the product, be it gasoline, heating oil, jet fuel, diesel, or whatever. The refinery employee is going to spend money at the grocery store, the restaurant, buy a house, pay utility bills, buy a car. One refinery job can make it possible for up to seven other people to be employed. Pricing royalty oil to encourage maximum employment reduces the price of refined products throughout the state, whether in Anchorage or the Bush.

Conversely, when the state prices royalty oil at the maximum dollar amount, the price of refined products is high, people are laid off -- over 100 real railroad jobs so far! The economy suffers, people don't have money in their pockets, and broke people act out, many times in hurtful ways, which increases the need for public assistance, public safety officers, courts, jails, and the like.

Urge your legislator during this session to restructure the fees and taxes related to the sale of oil "in kind." "Maximum dollars" serve only to grow the state's savings account. Restructure before penalizing the pricing of fuel or building storage tanks for non-Alaskan jet fuel. Putting Alaskans back to work because we can afford to refine oil in Alaska helps create "maximum employment," which in turn helps create "maximum benefit" for all Alaskans.

Douglas Isaacson is Mayor of the City of North Pole, home to two of the four active oil refineries in the State of Alaska.



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