Implications of Oil Supply Uncertainty on a Small Oil-Producing Regional Economy

Abstract

The state of Alaska has an economic and fiscal structure that is unique among the states. The petroleum industry, including exploration and development, production, transportation, and refining, accounts for nearly half of gross state product (the state equivalent of gross domestic product). In theory it is a simple matter to devise a rule that has the dual effects of neutralizing cycles in economic activity associated with the life cycle of petroleum exploitation and maximizing the benefits to residents from the expenditure of the petroleum wealth. Of the many complicating factors that make it difficult to devise and apply such a rule is the uncertainty regarding the size of the endowment, which is also one of the most interesting. How much it is appropriate to spend today depends directly on the size of the endowment not yet collected. This paper reviews a model for answering the public policy question of when to spend, with a special focus on how uncertainty complicates the debate. It also looks at the process of developing a plan for implementing the model within the context of the Alaska political and fiscal structure. Presented at the Second OPEC/Alaska Energy Conference in Anchorage, Alaska on May 7, 1994.