I recently received an email from a reader in Fairbanks.  He was questioning my opinion that Alaska’s economy will hold together as long as the oil prices stay high.

Here is his question.

It appears that Alaska has not experienced the “crashes” of other markets but why do you think it is because of high oil prices? I would think that if oil prices continue at current levels or even increase that housing prices will have to decrease as it costs more per month in expenses to heat the home and for the drive to and from.

And here is my answer…it’s my opinion and I’m sticking with it.  For now anyway.

Alaska’s economy is oil dependent.  Well, at least 80% of it is oil dependent.  That means 80% of the money that comes into the state comes in because of oil.  If oil prices were to tank as they did in the 80’s then the oil companies lose incentive to find more oil and to figure out how to get more oil out of their current wells.  That means they lay off workers.  No more workers, no more people buying stuff at Walmart or meals at your local restaurant

We get less for royalty oil as well.

And the state gets less taxes from the oil companies.

It’s a triple whammy…we lose jobs and we lose taxes and we lose royalties.  The economy will go downhill very fast if oil prices drop.   So swallow hard and smile when you fill your tank.  Without those high prices we would be in poor shape.

It is more expensive to heat and drive, but at least we still have jobs.  If we don’t have jobs we don’t have any money to pay our house payments and car payments, let alone the fuel payments.

There is some evidence that oil prices will fall.  Here is a report about lower gas prices in the near future.  The report says demand for gasoline is dropping because of a recession.  That will likely mean that crude oil prices will go down as well.  I don’t think they will far too far but no one knows for sure.  There is certainly a cut off line below which it will begin to hurt the state’s budget.  I think the state is budgeting for $70 per barrel oil.  It will have to go lower than that before we will begin to feel it in the economy.