Blinded by Riches: The Prudhoe Bay Effect

Abstract

Alaska has repeatedly been saved by surprise developments or events. Prudhoe Bay oil was by far the largest such development—worth seven times more than all previous Alaska resource value combined. But the enormous value of Prudhoe Bay oil—the “Prudhoe Bay effect”—has blinded Alaskans to the perennial dilemma created by relying on temporary resource revenues. Now, with oil revenues declining, Alaska once again has a budget crisis. But today there’s a crucial difference that can be summed up in two words: Permanent Fund. Figure 1 shows why Prudhoe Bay oil gave Alaska an opportunity unlike any previous development.