The Weekly Top 3
The Weekly Top 3
The Weekly Top 3 (6.23.2025)
Welcome to The Weekly Top 3 - our look at the top 3 things on our mind here at Alaskans for Sustainable Budgets - for the week of June 23, 2025.
This week, our top 3 issues are these: 1) we discuss what's driving oil prices and where they appear to be headed now in the wake of the Israel/Iran ceasefire (2:15); 2) we explain how, like the #akleg before them, the US Senate is now resorting to accounting tracks to create fiscal space for continued deficit spending without raising revenues (17:32); and 3) we expplain why, if we don't fix Alaska oil taxes first, "drill baby drill" will only serve to increase our state budget shortfalls (37:39).
The Weekly Top 3 is a regular weekly segment on The Michael Dukes Show. The Show broadcasts on Facebook and YouTubeLive as well as via streaming audio from the Show’s website weekdays from 6–8am. We join Michael weekly in the first hour of Tuesday’s show, from 6:25–7am, for a discussion between the two of us about our three issues.
Hi, this is Brad Keithley, managing Director of Alaskans for Sustainable Budgets. Welcome to the weekly top three the top three things on our mind here at Alaskans for Sustainable Budgets for the week of June 23rd 2025. The weekly top three is a regular segment on the Michael Dukes Show. The show broadcasts on both Facebook Live and YouTube Live as well as via streaming audio from the show's website. Weekdays from 6 to 8 am.
Speaker 1:I join Michael weekly in the first hour of Tuesday's show from 6.10 to 7 am for a discussion between the two of us about our three issues. We post the podcast of our discussion following the show on the Alaskans for Sustainable Budgets Facebook, youtube, soundcloud, spotify and Substack pages. Also on the Alaskans for Sustainable Budgets website, as well as the projects page on national blog site mediumcom. You can find past episodes of the weekly top three also at the same locations. Keep in mind that, in addition to these podcasts during the week, you can also follow and participate in the discussion with us of these and other issues affecting Alaska's fiscal and economic condition by following us on the Alaskans for Sustainable Budgets Facebook page and through our posts on Twitter.
Speaker 1:This week, our top three issues are these First, we discuss what's driving oil prices and where they appear to be headed now in the wake of the Israel-Iran ceasefire. Second, we explain how, like the Alaska legislature before them, the US Senate is now resorting to accounting tricks to create additional fiscal space for continued spending without raising revenues. And third, we explain why, if we don't fix Alaska oil taxes first, drill, baby drill will only serve to increase our state budget problems. And now let's join Michael.
Speaker 2:All right, brad. Well, let's let's get into the, let's get in today's weekly top three. We're going to start off, of course, with the big headlines. You know the Iran, the Iran-Israel fight. You know there was a ceasefire yesterday and then late last night they didn't break it, but they bent it significantly. And now who knows what's going to happen, but the effects of this on Alaska oil is going to be kind of profound. Give us the highs and the lows here.
Speaker 1:Well, this is sort of a follow-up to last week's discussion about what controls oil prices supply and demand. If we need a rehash, it's supply and demand, Right, and to sort of take that through the week a bit, I was just before the show opened. I was checking what the oil prices were. Right now, you know I can say something during this segment and be contradicted during the segment itself. So keep a broader, broader perspective in mind. But last week we were talking about the fact look, yes, there is a war. Yes, there is. They are firing bombs at each other, but it's all about supply and demand. Look at whether anything is actually happening to supply and look whether anything is actually happening to demand significant demand in trying to gauge where oil prices are going. And the discussion last week was look, you know they're throwing bombs at each other. There's a risk premium building in, but they haven't thrown bombs yet at supply sources, Iran supply sources and they haven't thrown bombs yet at major areas that would affect significant demand. There's a risk that they will, and so there's a risk premium of a percent built into the price to take into account that risk. But they haven't. If they did, if the Israelis had bomb supply, or did bomb supply, or if the Iranians did shut down the Gulf of or the Strait of Hormuz, which has been talked about from time to time, which would affect all Gulf supplies, Persian Gulf supplies, which is about 25% of world supplies. If those things happen, then oil prices would take off through the roof because supply would be impacted significantly. But they hadn't at that point.
Speaker 1:And I kept saying look at supply and demand. Well, what's happened during the week? At one point, this segment was called so we bombed Iran with nukes, or not with nukes? We bombed their nuclear facilities, but prices didn't move. In fact, at one point over the weekend, prices started coming down. Even though we bombed the Iranian nuclear facilities or the nuclear enrichment facilities, prices started coming down. And then, when Iran, Iran's response was to throw some missiles toward Qatar that were intercepted along the way, prices really started taking off.
Speaker 1:And what it was was the market's assessment was that supply was not being impacted. The Iranians did not do anything in the, in the Persian Gulf, Israel did not do anything to Iran's production facilities, supply wasn't impacted. And so the market? Yes, there's a, there's a war going on, but to the market it's all about, but to the market. It's all about supply, particularly in this region. It's all about supply and do we see anything affecting supply? And the market kept saying no, we don't, no, we don't, no, we don't, no, we don't.
Speaker 1:So I was checking prices before we went on this morning and the Brent price for December, which is sort of the gauge of what our FY26 price looks like, the Brent price for December is now $65,000, $67,000. So we're in the $65,000, $66,000 range, Back to where we were basically before we got into, before Israel started throwing bombs over in Iran. We're back to the level we were Because the market sees this war over there and sees all the shooting going on. The market's not seeing anything going on on the supply. Last night we were down. Well, last night we were down at 65. Were down. Well, last night we were down at 65. And so we're a tick back up from that, as I think the market tries to figure out what's going on with the ceasefire Do we have one or do we not?
Speaker 1:But again the market is saying look, supply is not being impacted and so price is going to soften. So all those people, including to some degree me, because I thought, well, this may get us a little bit through FY26. All those people who said you know, the risk premium that's being built into price is going to save Alaska. There was an Andy Holloman post that said, yeah, see, price is going back up. We didn't need to do all these school vetoes, school spending vetoes, All these people who were saying, oh, we're going to be saved again.
Speaker 1:You know prices are going to go back up, and all this stuff about being concerned about low prices. All that's gone already in the span of one week. Now next week, you know, if there are violations to the ceasefire, if they do go back to shooting, if Iran does start threatening to close the Strait of Hormuz again, if Israel does target some of Iran's production facilities, we may be somewhere back up in the price range. But right now the market's saying, nope, yeah, there's a war, yeah, good for that. But right now the market's saying, nope, yeah, there's a war, yeah, good for that, but it's not affecting supplier demand, so we're not going to factor that in a big way into price.
Speaker 2:And of course we have that love-hate relationship with the oil prices. I mean, we as citizens hate it when oil prices rise, but the state loves it, and vice versa. We, you know, we can really shine when we have a lower oil price because you know we pay less for heating oil and for gasoline et cetera. But the state then struggles. And, like you said, I think people were really, you know, macabrely kind of hopeful that a Iran and Israel extended war would help bolster that price. But the needle really hasn't moved that much.
Speaker 1:One of the professions I never want to be is a crude oil day trader, because with the markets open 23 hours, they take a break. With the markets open 23 hours, they take a break. For Alaska the break's between four and that the markets are open and it's just a horrible life, particularly during a time like this, because on the flick of a switch, prices can go up dramatically and positions that you thought you'd settled in for good value, those positions, can be destroyed and if prices are up, you think you settled in on a good set of values. You go to sleep, you wake up and they're all gone. And so crude oil day traders just really have a horrible life. They make money, but they have a horrible life.
Speaker 1:Alaska, basically, is a crude oil day trader. I mean, we live, as we discussed last week and as we discussed before, on the show, because we set our budgets at a price projection, not even the current price. We set it at a price projection, Because we set our budgets at a price projection going forward. We're a crude oil day trader. We're we're constantly checking to see where the price is compared to where we set the budget at, and it's, and it's I mean it's we've adopted all of the characteristics of of of my friends that are crude oil day traders, which is they have shakes and they don't sleep well.
Speaker 2:Yeah, I picked the wrong day to stop sniffing glue, kind of thing. Yeah, no, look, I got that. I got that. Well, and again, tomorrow things could change. I mean, ceasefires announced, they immediately start lobbing bombs at each other. And tomorrow, you know, somebody could strike one of the production facilities for oil, or the pipeline, or the, or the Iranians could just stop exporting for a bit, or you know, there's a, there's a handful of things that could happen, that tomorrow the oil price could be back up to 75. We don't know. That's what makes it so tough in Alaska to you know, that's what makes it so tough to see where we're going.
Speaker 1:Alaska to you know, that's what makes it so tough to see where we're going and that's we've talked about this on the show several times, michael we set our budget in a way so that we guarantee we are at the tip of the tail on the OPEC and on the oil market dog, that we're just flapping around all over the place because we're trying to follow the forward price. We've set our budget on where that forward price is. If, like we do with the POMV, draw and like we do with the PFD, if we set it at an average of a historical price run five-year price run in the case of POMV and PFD, maybe 10 years in the case of oil but if we set it based on a historical average, we wouldn't go flipping around like this. We wouldn't take on the characteristics of a crude oil day trader. We would have a price. We would know if it was up from that. If the price ended up being up from that, we'd have some to put into the CBR or into a stabilization reserve or whatever we wanted to call it. We know if the price was down from that, okay, we'd have to draw from the CBR or from the stabilization reserve.
Speaker 1:But we don't do that we do this to ourselves and we do this to ourselves because maybe price is up and maybe we can budget a lot better this coming year. We can give away a lot of money we don't have, but we think we're going to have because price is up and we're doing this to ourselves. We shouldn't. We had an opportunity a couple of years to get off that roller coaster. It turned out that the price we were using for budgeting purpose was very close to the historical price and if we would have said, okay, we're going to flip over and start using the historical price, we wouldn't have noticed much difference from the previous year, because the previous year was very close to the historical price. But oh no, prices went back up. So let's budget, let's spend more, because prices are back up and we think we're going to get all this additional money in. It leads to situations where you're sitting there with the price the oil price, market, futures market just sitting there in your face and you're trying to figure out what's going on.
Speaker 2:Something that Harold and I agree on. My God, the clock must have stopped. How about zero-based budgets? Only spend what you need to meet your constitutional mandates? Yeah, that's the ultimate goal, right? The problem is, we're never going to get there. Are you kidding me? Government is way too easy with what did we spend last year Now? What do we need to add to it?
Speaker 1:That's government's, I mean, that's what they've been doing Well and one other thing on top of that, which is, how much revenue are we going to get? How much revenue are we going to get from from oil, additional revenue from oil, so I can go out and satisfy my my constituents and tell them I'm catching up with past underinvestment? That's, that's always the catchphrase that that makes me, makes my head. Head for my hands.
Speaker 2:I'm catching up. Well, we'll see. We'll see what happens here. I'm catching up, but how big a swing do you think it could be if the you know, let's just say hypothetically, one of the major export facilities there, or the Hormuz Straits, gets closed down? I mean, what are we talking? A $5 swing? A $10 swing? What?
Speaker 1:do you think? Well, it depends. It depends on the degree, it depends on whether people think it was an accident or permanent or on purpose, and it depends on how long they expect it going. So if Iran did something that just to take an extreme case if Iran sunk a bunch of tankers in the Strait of Hormuz in a way that made navigation extremely difficult, so we're talking about a semi-permanent, semi, a fairly long-term condition until they can get those tankers out of there. Plus, you know Iran wouldn't do that. I mean, iran's on its deathbed at that point because it's killing itself by choking off its exit point for oil. But if something like that happened, we're easily talking 100, 125 in terms of oil. So it depends on the degree.
Speaker 1:If, on the other hand, israel launches a, has a weapon, go stray, and happens to hit an oil supply depot, a tank in a tank farm in one of Iran's export facilities, people go oops, it's starting to spread to the export uh facilities, um, and, and you know you would see a price spike the day traders would go crazy, you know, trying to figure out where that price was going to go, you'd see a, you'd see a price spike. But if Israel then said, oh, accident. We're not intending to extend the war to the export facilities. Our bad, forget it. We're not going to be doing that anymore. Then you'd see prices come back down fairly quickly. So it really depends on severity, extent of time and what exactly has been hit.
Speaker 2:So basically, what we're all saying is it's a guessing game. I mean, that's the thing and that's like you said you wouldn't want to be a day trader for crude, because you just never know. I mean, one stray missile can change the whole outlook in a few minutes and then change it back 12, 15 hours later. It's definitely an iffy proposition.
Speaker 1:Some of the big crude trading shops I've come to learn have a bunch of military experts on staff to figure out exactly that sort of thing. Military and crude logistics experts to figure out exactly that sort of thing. Are they targeting export facilities? Are they significant? Are they important military moves against those export facilities? And so you know they're constantly trying to figure that out and price it in. But it's, you know, for the common day trader it's just, it's like worse than Vegas.
Speaker 2:And here we are trying to live on this and trying to decide what our budget's going to be next year and instead of, you know, getting some steadiness in there and getting a rolling average of what we're doing, we're constantly playing, we're constantly behind the power curve on this, which is just insane. All right, brad Keithley. Alaskans for Sustainable Budgets continues with us. We're on the weekly top three. On to number two of the weekly top three this week, which is the US Senate is following the Alaska legislature in its accounting tactics. I mean, I don't know if this is, it might be one or the other, I don't know if it's chicken and egg money and follow. This is just seems like this is a constant thing. But, brad, you're talking about the new bill which uses a whole new accounting method to show you how much money it's saving or not spending or et cetera, et cetera. Give me the rundown on this?
Speaker 1:So the worst thing that's ever happened in Alaska fiscal approach, alaska fiscal accounting, was in 2017, when LB&A they didn't even change the statute. When not LB&A when Ledge Finance, david Thiel did this accounting trick where he moved the permanent fund dividend from designated general funds where it belongs, because designated general funds are funds designated by statute for a specific purpose. There's nothing more that more fits that definition than permanent fund dividends. But anyway, thiel moved the permanent fund dividend from designated general funds to unrestricted general funds, and unrestricted general funds are not restricted to a purpose. They're there for spending on whatever you want to spend it on. So you suddenly move multiple billion dollars out of designated general funds over to unrestricted general funds. And then the second step of that that we saw in the next budget cycle was to calculate the deficit without regard to the obligation for permanent fund dividends, because you had moved the dividends from designated general funds to unrestricted general funds. And so, all of a sudden, you had these additional revenues that showed showing up on the books for book purposes, all these additional revenues in unrestricted general funds, and so the deficits you were showing were much smaller. Unrestricted general funds went from here if I can do this right went from way down here before the redesignation to way up here, because all of a sudden you move all these permanent fund dividends.
Speaker 1:It was an accounting trick and so the legislature started talking about deficits that were in or surpluses they even could talk about surpluses that were taking into account. Moving all of the permanent fund dividend over to unrestricted general funds. That move, that single move, freed up $2 billion. Whatever the permanent fund dividend otherwise would have been freed up $2 billion. Additional revenue or additional fiscal space is how the people in DC talk about it. Additional fiscal space in terms of what they could spend, because they had all these additional revenues and the deficit went down very small. If we still accounted for the permanent fund dividends as designated general funds, the deficits that we'd be talking about would be huge a billion and a half instead of 500 million or 400 million or 300 million, whatever.
Speaker 1:Whatever Senate finance talks about, we'd be talking about these huge deficits and the and the pressure to reduce spending would be great because, because we weren't counting the, the PFDs, as government revenue, we would have a lot more downward pressure on spending as a result of putting those revenues back where they belong. Taking PFDs back where they belong. We'd have a lot more downward pressure on spending. But what they did, by bringing the PFDs over into unrestricted general funds, is create a lot more fiscal space because they increased the revenues. There was no legislation, there was no executive order. There was nothing other than a change in which column David Thiel and Ledge Finance put permanent fund dividends. That's a big source of the problems we've had since.
Speaker 2:And the function was essentially it made the PFD now compete with every other government program, service or agency, instead of just being a simple pass-through. Now it had to fight for everything, and that's how we lost the PFD.
Speaker 1:Yeah, and some people will say well, that's what the Supreme Court said in the Wilkowski ruling, that it was supposed to compete with all this stuff. Well, stuff in designated general funds do compete, because we have no dedicated funds in this state and so we have designated funds. But designated funds can be drawn out at any time to meet any sort of spending obligation. We saw a little bit of that in this last session. We saw a little bit of that in this last session. The Wilikowski case didn't say you had to stop treating them as designated funds. The Wilikowski case didn't void the PFD statute. It merely said the PFD funds, like any other designated fund has to compete with, can be pulled out, can be appropriated by the legislature if the legislature chooses to do so. But from an accounting perspective it was not required by the court, not required by the decision. It was pulling the PFDs from designated general funds, dgf, over to UGF.
Speaker 1:That had the big impact on creating fiscal space. And so since then Alaska has budgeted what's called the current policy budget. The current policy budget is to say well, we know that there's that PFD statute over there, but we budget based upon current policy, which the Senate says is 25-75, says is 25-75, 25 PFDs 75% to government and so we will assume current policy when we look at the budget and formulated the budget and preserve this fiscal space, this increased fiscal space that we created in 2017, current policy versus current law. Well, the Congress has always, since the early 1970s, when the Congressional Budget Office has always budgeted according to current law, they've always looked at the impact of changes in the budget or any budgeting cycle. They've looked at current law and they've said, okay, current law says this, and so we're going to look at our deficits or we're going to look at it at if we're doing a reconciliation package or whatever we're doing. We're going to look at the deficit being created against current law and the taxes the Trump taxes that were passed in 2017 are greatly impacted. That because the Trump taxes taxes that were passed in 2017, trump tax changes that were passed in 2017 were temporary. They were set for nine years. Let's see what is this the end of the year is 25, so eight years. They were set for eight years or maybe nine years, and then they expire and then they come off, and so all of the calculations that have been done from a budget perspective since that time have been done with the expectation that Trump taxes come off in 2019.
Speaker 1:If you want to renew them, you can, but you've got to recognize it's going to increase deficits going forward because current is calculated, or the current deficits being calculated, based on current law. Well, lo and behold, in the middle of all of this reconciliation fight that's going on in the Senate, senate Republicans all of a sudden have decided that they're going to account for the Trump taxes and they're going to account for the budget using the Trump taxes as current policy. They're going to count it on a current policy basis, as opposed to current law, and the effect is to create this huge amount of additional fiscal space when you look going forward in the budget, because, all of a sudden, you don't have to take into account the re-up or the renewal of the Trump tax credits at the end of 2025. You don't have to account for them as being additional deficit creating under current law. All of a sudden you can say, yeah, they've always been there, we've treated them as current policy and so the deficits in the Senate Republicans' calculations all of a sudden fall because they've created all this additional fiscal space by all of a sudden changing off a current law approach which we'd had since the 1970s, changing off a current law approach to a current policy approach.
Speaker 1:We've seen what it's done in Alaska. It's increased spending dramatically, frankly, because the legislature has told itself and the executive branch has told itself ooh, we got all this additional fiscal space because we don't have to account for PFDs as designated general funds. We can account for them as unrestricted general funds. We're going to see the same thing at Congress. What they're doing is, through this accounting trick, they're all of a sudden going to tell themselves hey, we have all this additional fiscal space. We thought we were going to create billions in additional deficits 4 trillion in additional deficits over the 10-year period that we're looking at in doing the budget. Well, that all of a sudden came down to 400 billion or something, because we created this additional fiscal space by beginning to look at things on a current policy basis as opposed to a current law basis.
Speaker 1:The problem with the current policy basis is you can, it's whatever you want to say. It is. The Congress doesn't have to do anything. Just like the Alaska legislature didn't have to do anything when we shifted off treating PFDs as DGF over to UGF. Just like the legislature didn't have to do anything. The executive branch didn't have to do anything, it was David Thiel's spreadsheet, the change in David Thiel's spreadsheet, where it is all they did to create that impact.
Speaker 1:That impact, well, congress is saying, well, current policies, currently the Trump tax credits, and so we're not going to account the additional deficits we create by by by renewing those they're going to. They're going to be doing the same thing and then the next day they're going to say, well, current policies, this as opposed to that, as opposed to current law. We don't care what current law says, it's what current policy is, and current policy is what we say it is at any given point in time. We're just, we are creating the same sort of problem. This accounting trick at the federal level is going to create the same sort of problem, additional problem, as if we don't have enough problems on the deficit side. Additional problems at the federal level, as changing the PFD did, changing the PFD from DGF to UGF did, has done in Alaska.
Speaker 2:And this is not an insignificant amount. I mean, it's the difference between $440 billion and almost $4 trillion, right, I mean, this is not a little tiny bit, this is a lot. And again it'll give them that much more headroom to then say, oh well, we can spend even more Again. That's the problem. I mean, I've come to the conclusion, brad, that the people in Congress just don't give two craps about what's going to happen to the economy in the long run. As long as they can get whatever program and money's out that they can right now, they're just not going to slow down. They're not going to slow down at this point.
Speaker 1:And Thune, majority leader Thune is already spending that additional fiscal space they create through this policy switch. He's already spending in terms of okay, well, I can give you some extension on the renewables, right on the renewable credits, or I can give you this, or I can give you that, or I can keep these farm programs, or I can keep SNAP, or I can keep Medicaid. I mean, he's already created additional money, just like the legislature did in 2017 with David Thiel's switch, of which column he put it in on his spreadsheet. They're already giving away this additional fiscal space and, believe me, when you spend more money, the deficit's going to be bigger. Extending the Trump tax credits isn't going to bring more money in. It isn't going to reduce the budget deficits we got, it's going to keep revenues fairly depressed and we're going to continue to run these huge deficits. But it creates more fiscal space paper fiscal space and Thune's already spending it, just like the legislature did after 2017 in Alaska. It's horrible. These accounting tricks are just horrible.
Speaker 2:Brad Keithley, alaska's for sustainable. But we just, we can't learn. We just, you know, we're like monkeys who keep putting their hands on the hot stove. I mean, over and over and over again, it just, oh, it's hot, oh, it's hot. I don't understand why this hurts, oh, it's hot. I mean we just can't stop doing it. It is, uh, it's, it's madness for sure. You just can't stop doing it. It is, uh, it's, it's madness for sure. You just can't win, brad. I mean we just, you know, they just, they get cheap, keep changing the goalpost, right, I mean they just keep changing the goalpost. Oh, we're not, we're, we're over, we're this much in debt? No, no, we're not, really not. It'll be this much and we can keep spending up to that point. I mean it's just, it's, it's just total fantasy at this point that you know we could continue to do what we're doing and it's all going to be okay, yeah, rather than.
Speaker 1:I mean. What it leads to is this Rather than creating additional fiscal space or maintaining your fiscal space by reducing spending or increasing revenues, which otherwise you'd have to do, or increasing revenues, which otherwise you'd have to do, rather than doing it the old-fashioned way, you know, we earned the fiscal space by taking the hard maneuvers. They just go in with a sharp pencil or, in David's case, David Thiel's case, just a click, a mouse click to move that column, to move that category from this column to that column, and all of a sudden, rather than doing the hard work of keeping spending under control or increasing revenues to offset the increased spending that people want to do, rather than doing the hard work of that, through one magical mouse click you're able to create all this additional fiscal space, as you said, at the national level.
Speaker 1:They've created $3.6 billion of additional fiscal space, additional spending. Trillion. Trillion is trillion. We're dealing at the national level. We deal with billions in Alaska. Trillions at the federal level. 3.8 trillion of additional fiscal space.
Speaker 1:That Thune is now busily trying to get the bill through by giving it away. And it's madness, michael. I mean we're not creating additional value. We're not creating additional fiscal space by actually reducing spending, just like we didn't in Alaska. We're not creating additional fiscal space by actually reducing spending, just like we didn't in Alaska. We're not creating additional fiscal space by reducing spending or increasing revenues the old-fashioned way. We're doing it, by accounting tricks that don't change reality, which was we're spending a lot more. We're committed to spending a lot more going forward than we have the revenue to cover. We're creating huge future deficits. But those in control of the sharp pencil or those in control of the mouse think they're being smart, think they're doing good things by making these accounting changes and and the country suffers for it. The state alaska has suffered for it's just, it's, um, it's it's, it's a downward, downward slope that we get ourselves on brian brian just kind of sums it up for me.
Speaker 2:He says feeling like we're living in a lewis carroll world. When I use a word humpty dumpty, said in a rather scornful tone, it means just that, what I choose it to mean, whether neither more nor less. The question is said, alice, whether you can make words mean so many different things. The question is said Humpty Dumpty, which is to be master? That's all, that's right. Who's in charge of this? I mean, it's a thing, oh man, brad, it is.
Speaker 1:It's a mad, mad, mad mad world, that's for sure that. Well, that that's a great quote. It's a great we do live in an orwellian world here yeah, absolutely.
Speaker 2:Who controls the word? Who controls the definitions of the word I get? So we've been watching this for so long, we've been talking about these for so long. Um, I mean, I guess we can't stop talking about them. But it's just, you know, I said something the other day on Firearms Friday, because there's some good stuff in the big beautiful bill that's been added for firearms rights and I'm like, at this point, just vote it in. I mean you know what, just vote it in, voted into it. At least we get that stuff, because these guys aren't going to stop. They're not going to stop until we hit the brick wall or the oscillating fan. I mean one of the two is going to happen, right, and when the yogurt hits it it's going to be a mess. But I mean, until then, I just don't know. I don't know how these guys can continue to sleep at night. That's what kills me. Continue to sleep at night, that's, that's what. That's what, that's what kills me.
Speaker 1:You're sort of another version of day trader, right? I mean it's, it's, oh, I'll just change the rules, or I'll just change. I'll just change how we account for things.
Speaker 2:Yeah, it's going to be. Uh, it's going to be interesting to watch. Let's continue on. Brad Keithley, alaskans for sustainable budgets the weekly top three, number three, number three. It's the weekly top three Number three Alaska's oil. You know, we've got new oil fields that are supposedly going to come online and all these other things, but there's this pesky thing out there called the oil tax code and, brad, you said it needs an overhaul. Give me your thoughts here.
Speaker 1:Yeah, we've talked about this on the show previously. My thoughts on that SB21 has become broken in the new age that we're in of huge amounts of drilling going on by existing players on the North Slope, which is resulting in a significant reduction in taxes, oil taxes. A reduction, significant reduction in taxes, oil taxes Over the next decade. I mean this number can't be repeated often enough to get people awake. Over the next decade, production is projected to rise by 40% through the new fields coming on board, and that's a great thing for Alaska, but oil revenues revenues to the state from that production are projected to decline by 20%. So what you've got going on is oil production going up, revenues from that oil going down 60-point spread.
Speaker 2:60-point spread Going up 40% revenues, down 20%.
Speaker 1:Regardless of price. I mean that is a number that sort of exists regardless of price. It changes at the margins. The revenue number changes at the margins on price, but it's not price driven. What's going on is the way SB21 was built, and no, it's not the per barrel oil tax credits that everybody complains about.
Speaker 1:The way SB21 was built was that a couple of things go on when you have new oil development, significant new oil development. One is you're able to expense the capital expenditures you're making for developing new fields against current taxes. There's no amortization. You spend a dollar, a capital dollar, today that dollar is a credit or is a deduction from oil taxes today and it's company-wide. So when Conoco spends dollars developing Willow which they need to do, but when they spend dollars developing Willow capital dollars developing Willow it's being deducted from oil taxes that otherwise are due from them today. And because Willow is a long-term development, the capital deduction is going on year after year after year after year.
Speaker 1:Then the second thing that was in SB21 is, once you get production from that new development, there's a mechanism called the gross value reduction, and what the gross value reduction does is reduce the amount of taxes, effectively reduce the amount of taxes on new oil. So if you're producing from Prudhoe, the oil tax rate is one thing is X. If you're producing tax from or producing from a new field, like Willow will be, or like any of the new fields that have been, some new fields that have been developed in the last few years, instead of what you're paying in Prudhoe, instead of the tax rate you're paying in Willow X, you're paying a lower tax rate. Why? And so even though you're adding an additional barrel, you're not adding an additional barrel that pays the same amount of tax as the old, as the old oil barrels pay, is paying a lower rate. So as production goes up, the average tax goes down because of the GBR. The combination of those two things, even before you get to the per barrel credits, the combinations of the allowance of deducting capital expenditures in the years in which they occur, in the years in which they occur, and the GBR for the new oil you develop, have result in production taxes going down over time, even as production rises. That's what SB21 did and we're finding in the current decade. It's a problem because SB21 was sold on. As volumes go up, then Alaskans will share in the benefit of those volumes going up. Yes, we have to give up on the front end by changing the tax code to reduce taxes and create all these credits, but when production goes up, we'll share. Well, that turns out.
Speaker 1:That's not what's happening with the way SB21 works in the current environment. When I see people going around saying, drill baby drill, trump opens new lands, or Trump's going to permit new drilling, or we've got new fields out there, we need to go in and we need to develop them. Drill baby drill. I'm all for that. But we need to change the tax code. We need to bring the tax code up to date. We need to modernize SB 21. We need to revise SB 21 to to to achieve the promise that it, that that was projected at the time it was passed, which was when all these volumes, all these production volumes, come on board, that Alaskans receive their share of it. What's going to happen in the absence of that is, if we have all this additional drilling, we're going to have all these additional credits created by the capital expenditures, we're going to have all these additional GVR volumes and revenues from production are going to continue to go down.
Speaker 2:And the worst part is that more development, more exploration in the current model would drive our revenues down even more, because they're just taking it off the legacy fields. They're just taking more off the legacy fields and when they put more in the pipeline it's a lower percentage anyway. So it's again a self-licking ice cream cone of where it's just getting worse and worse and worse. And we've done this to ourselves over and over and over again in this state. You know, whether it was ELF or ACEs or SB21, you know the pendulum swings one way or the other.
Speaker 2:Oh, the state's getting too much. Oh, the oil companies are getting too much. Oh, the state's getting too much, oh, the oil. You know we've got to have some equity and we got there's way too many bells and whistles in most of these plans instead of just saying you know, why don't we just have a wellhead tax? Why don't we just have a? You know, I mean, why don't you just have one tax instead of all these different indicators and escalators and all these other kinds of things just make it flat. I mean, just why do we have to jump through all these hoops?
Speaker 1:Well, we're trying to incentivize certain activities and the capital deductibility was intended to incentivize spending, intended to incentivize spending on on on new developments. And so if you're going to spend on new developments, we're going to give you a deduction, an immediate flow, through deduction on your, on your, on your current taxes. And it was intended to to incentivize that. And the GVR was intended to, was intended to incentivize going out and developing new fields that otherwise weren't getting developed. And the GVR was intended to incentivize going out and developing new fields that otherwise weren't getting developed. And you can go through all these pieces and you can explain what they were trying to incentivize.
Speaker 1:But the net result of it, in the current environment where we have these high development expenditures going on, the net result in this current environment is productions going up while production revenues are going down.
Speaker 1:So when Republicans or anybody else says I mean what we're doing, you know we have a bad enough projection for the next 10 years with the 40% increase in production but the 20% decline in revenues.
Speaker 1:We have a bad enough projection If we have additional development, if we start in on additional fields and have additional capital expenditures, particularly by existing incumbent producers up there, if we have additional developments, what we're going to have is an even lower tax revenue over the next 10 years. It's going to keep knocking it down and knocking it down and knocking it down as we go forward. So, before we get into this drill, baby drill, we want all of this additional production to come on, lord. We want additional leasing. We want companies out there. We want to push them out there. We want to encourage everything we can. Before we go down that road, we really need to fix the way the oil tax system works in this environment first, because if we don't, all we're doing is driving near-term tax revenues deeper and deeper and deeper and increasing the amount of deficits that we've got in this state more and more.
Speaker 2:and more and increasing the amount of deficits that we've got in this state more and more and more. Down to less than two about two minutes here, brad. So how much wiggle room is there on there? You and I have talked about a number. I mean, is there 400 million left on the table? 500 million?
Speaker 1:Is that kind of where we're at. We could be making that up. We could change those things and make that money up. It's probably 500 million, Michael, through SB 21 reform needed SB21 reforms, plus the 100 million from the Hillcourt blue poll. So we're probably talking about 500 to 600 million dollars. Now remember, if we, if we, if we calculate the budget on a current law basis, we've got like a one point five billion dollar deficit. So this these don't think this is the be all and and end-all, that this solves all the problems, but it is an additional $500 to $600 million and it would reduce the deficits we're running significantly if we took that step.
Speaker 2:And, of course, there's no will to take that step. It seems like, I mean, a lot of Democrats are looking for a billion dollars and the Republicans don't want to move an inch, and yet, at the same time, we're the ones in the middle getting squeezed. All the Alaskan people, who are the owners of the resource, are getting squeezed on this and I mean I just don't know. I don't know how to move this needle at this point.
Speaker 1:Well, I mean Republicans. Republicans who go out and say drill baby drill are doing the state a disservice unless they fix oil taxes first. So actually, you know, those Republican legislators who are running around saying drill baby drill are a problem. They are part of the problem, not part of the solution if they don't go in and fix oil taxes first. And I'm going to keep talking about them that way.
Speaker 2:I mean how anybody can look at a chart to see, oh, oil production going up 40%, oh, our revenue is declining 20%. I mean, any time you look at those charts and they cross like that somebody's got to go. What? I mean, why aren't we asking those questions? You know why isn't it? I mean you know why are we asking those questions? You know why isn't it? I mean, you know, at any time you talk about any new oil taxes, the Republicans are like well, no, no, we can't, because we'll stymie development. Well, what good does it do to develop if we're losing money in the long run on a finite resource? Right, at some point you got to go. Well, maybe we should just sit on the oil then, and when it's really needed then we'll do something. I mean, you know, at some point you can't just keep losing money and say we're doing good. I think Brian's comment was we'll make it up on volume next year, right? I mean, isn't that the answer?
Speaker 1:Yeah, it is, I don't think I mean. Sb21 started with a very clear principle let's get additional production, because Alaska wasn't getting its share of investment. If you looked on a global basis, alaska ACES had put Alaska in a hole in terms of getting additional investment. So let's revise the code to get additional investment and we'll get increased production. Additional investment will lead to increased production. We'll get increased production and Alaskans will share in that in terms of increased revenues, because obviously, as production goes up, revenues will go up. Right, people still say that. And so you, you, you start with that simple premise in SB21, and then you start putting in bells and whistles because this company wanted that or that company wanted this, and it all seemed to work because it was going to incentivize production. And, of course, at the back end, if you incentivize production and increase production, you'll have increased revenues.
Speaker 1:Well, we've come to find out it sort of worked through the 20 teams. When you look at it, it incentivized additional investment, but it wasn't so much that it plowed down, uh, production or production plowed down revenues. It was it sort of, you know, worked the way it was supposed to. But when you get into the 2020s, you have these big expenditures going on by ConocoPhillips, in particular, willow, but also PICA, which is all all the oil search is doing. Santos is doing is creating future tax credits so when they start producing they won't have to pay much because they've had all these capital expenditures that that that they that they gotten to carry over as credits against future against, as credits against future taxes.
Speaker 1:You all of a sudden you realize, whoops, it didn't work the way it was supposed to, which is as production increases, but our revenues are going to increase and so, and so you really need to sit back and go. Whoops, you know it didn't work the way we wanted, so we need to go in and revise it to make sure it does work the way. We want that Alaskans get a share of the revenues that are being produced by this additional production that they've paid for by changing the tax code to create these incentives. That's a simple concept. Production goes up. Alaskans ought to share. Not working that way, you ought to go back and make it work.
Speaker 2:They keep wanting to set this perfect. We want to set this perfect thing in stone and then leave it, never, realizing that, with the vagaries of the market or changes or things like that, it needs to constantly be adjusted. That's the thing. It's like they want to set it and forget it and then never go back and touch it again. And that's what they did with Elf. That's what they did with Aces.
Speaker 1:That's what they do with SB. It's the same thing, yeah, and the set it and forget. It seems to work in somebody's favor. Aces, it worked in favor of the state and against the oil companies and ultimately against the state because of decreased production, production, of decreased investment. And so you go in with SB 21 and you reset it and you want to set it and forget it. But you know it. Ultimately it works out that it's running in favor of the company. So of course the companies don't want to change it. No, money, money handover.
Speaker 2:They'll spend millions to try and convince you that it's that. Don't mess with it or they'll leave. They'll pick up their toys and leave, which, uh, okay, go for it. I mean, how much have you spent on and all this stuff, you guys it's? I think it's a false. I think it's a false threat, uh, in that regard. But again, four or 500 million, $600 million potentially left on the table. As Alaskans, as a resource owner, that makes me mad. I mean we shouldn't be leaving that on the table and we'd have a lot less problem. Now, the problem is, of course, that if we had five or six hundred million dollars more, the legislature would just spend the hell out of it anyway. But I mean, until we get something else fixed in there, we're still losing the money at this point.
Speaker 1:Well, it would at least some of it, and I think a lot of it would drop to the PFD. It would, it would, it would possibly it would pop out in terms of reduced PFD cuts and and so would go, would go to the benefit of of Alaskan families, and I think I think that's a good thing. And so the flip side of that is, you're taking money out of Alaskan families, legislators, you're taking money out of the pockets of Alaskan families in order to make oil companies richer. And I'm not trying to gouge the oil companies. I'm just trying to get the damn thing to work so that, when production increases, alaskans benefit along with it the simple concept we started with back in 2013 and 2014,. I'm just trying to get the damn thing to work the way it was supposed to. I'm not trying to gouge them.
Speaker 2:No, I mean, I just think everything should be equitable and fair. As owners, we should get our fair share. As producers, they should get their fair share. That's how it should work. That's why I think this idea of setting it and forgetting it is ridiculous. You need to constantly be able to go in there and tweak it and adjust it so that everybody gets their equitable share. You know, so to speak, on that. All right, brad Well, cape Breton awaits my friend. I hope you have a lovely time. I hope you enjoy yourself and we look forward to talking with you again next week.
Speaker 1:Next week I'll have a Cape Breton background behind me. I'll be looking out the picture window of my cabin there.
Speaker 2:I can't wait to see it All right. Thanks, Brad, Appreciate you coming on board and joining us. Thank you so much. Thanks for having me.
Speaker 1:Michael. Well, that's a wrap for another week's edition of the Weekly Top Three from Alaskans for Sustainable Budgets. Thank you again for joining us. Remember that you can find past episodes on our YouTube, SoundCloud, Spotify and Substack pages, and keep track of us during the week on Facebook and Twitter. This has been Brad Keithley, Managing Director of Alaskans for Sustainable Budgets. We look forward to you joining us again next week on the Weekly Top Three.
