updated 7/16/2008 5:16:06 PM ET 2008-07-16T21:16:06

With 16% of the nation’s land area and 0.22% of the nation’s population, Alaska is America in the Arctic, a state created by a federal government which it now often resents and an individualistic society that has responded to its unique situation in creative ways that commend themselves to the attention of what Alaskans call the Lower 48 or, more simply, Outside. Alaska would not be American at all but for the expansive dream of Secretary of State William Seward, who took advantage of a fleeting opportunity to create an American Pacific empire by purchasing it from Russia in 1867 for $7.2 million (the Russian Orthodox Church still claims 30,000 members in Alaska, many of them Alaska Natives). The Alaska Territory owed most of its early growth to decisions made by the federal government. It started growing feverishly with the Klondike gold rush in 1897, just as William McKinley reaffirmed the gold standard. Anchorage, the major city here, had its beginnings in 1913 as the chief worksite of the federal government’s Alaska Railroad, completed in 1923. The Alcan Highway, connecting Alaska to the Lower 48, was built by the Army in the grim war days of 1942, when the Aleutian island of Attu was held by the Japanese, the only part of the United States occupied by a foreign enemy since the War of 1812. Alaska is the only state abutting Russia, across the Bering Strait and over the North Pole, and even today Alaska remains militarily strategic. The military remains a major presence at Fort Richardson and Elmendorf Air Force Base near Anchorage and Fort Wainwright and Eielson Air Force Base near Fairbanks; the Pentagon in 2004 installed interceptors for the national missile defense system at Fort Greely 100 miles southeast.

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Alaska’s giant size remains hard for Americans to comprehend: If superimposed on the Lower 48, it would stretch from Florida to southern California to Lake Superior. The westernmost Aleutians are closer to Tokyo than Juneau and farther west than Wellington, New Zealand. One-third of Alaskans have no access to the state’s roads and are reachable only by boat or airplane; Alaska has, per capita, six times the number of pilots and 16 times the number of aircraft as the rest of the nation, and 722 registered airports. The wild is always nearby; moose walk around residential neighborhoods in Anchorage, and a much higher rate of people go missing here than in the Lower 48. Only 670,000 of 300 million Americans live in Alaska, with 61% in Anchorage and the (by Alaska standards) nearby Kenai Peninsula and Matanuska-Susitna Valley. This is the fastest-growing part of Alaska, with a dynamic private sector economy. Fairbanks, with 13% of the population, is a pipeline and mineral service center deep in the interior, unprotected from Arctic winds in winter and crowds of mosquitoes in the brief but hot summer. The Panhandle, with 11% of the people, is the old Alaska, with towns settled by Russians and the old state capital of Juneau built up against steep mountains on inlets from the Pacific. The other 15% of Alaskans live in the Bush, scattered in small towns and the oil port of Valdez, in Native settlements and on hundreds of lakes; about half the people here are Alaska Natives. They are greatly outnumbered and outvoted on many issues, and yet are the object of awed respect for their achievement in building viable civilizations with impressive art traditions in such a forbidding environment.

Alaska won statehood in 1959, after a valiant campaign. But statehood did not end federal decision-making power over Alaska—or the widespread resentment of it. Alaska’s economy at statehood depended on fishing, oil production in Cook Inlet around Anchorage and the military—all federally regulated or controlled. Less than a decade later, however, Alaska’s economy and public life were reshaped by the discovery of North Slope oil. It began suddenly, accidentally: On the day after Christmas 1967, at Prudhoe Bay on the Arctic coast, an undulating roar as loud as four jumbo jets directly overhead drew a crowd of 40 men, heavily clothed against the 30-below weather, to an oil rig. Suddenly a natural gas flare shot 30 feet straight up: This was the great 12 billion barrel North Slope oil field. Earlier oil companies had drilled seven dry wells on Prudhoe Bay, and Arco chief executive Robert Anderson wouldn’t have ordered this last try, except that he had a drilling rig nearby. This was the greatest oil strike ever in the United States and the beginning of much of today’s Alaska.

Finding oil in Prudhoe Bay was something like finding it on the moon. It was not clear in 1967 who owned the oil or how it could be taken out. The Statehood Act of 1959 provided for the state to choose its own public lands, but only after settling Native land claims. Congress, not Alaska, settled such claims in the 1971 Alaska Native Claims Act which set up 12 regional and 220 village Native corporations, gave them $962 million and time to select their own 44 million acres, and ended the Interior Department’s freeze that enabled the state to stake claims to mineral-rich acreage. The only feasible way to get the oil out—the Arctic Ocean ice only breaks up in late July for six weeks—was a pipeline. But that was opposed by environmentalists for fear it would destroy the delicate permafrost and interfere with caribou migrations. Development-minded Alaskans got a pipeline bill through Congress in 1973, by just a one-vote margin in the Senate, but the pipeline had to be built on stilts and wasn’t opened until 1977, and Congress banned oil exports to Japan and other obvious East Asian markets. Then in 1980, after brilliant lobbying by environmentalists, Congress passed—over the objections of Alaska’s two senators and in the face of tears from its Congressman-at-Large Don Young—the Alaska Lands Act, which set aside 159 million acres as national parks, national monuments or wilderness: One-third of the state was protected from development. Much, if not all, of this was for the best. The pipeline came on line just as oil prices were approaching their peak, thus generating maximum revenues to the state, which gets 100% of the royalties. The environment was protected much better than it would have been without the environmentalists’ safeguards—though there was a major oil spill in March 2006 from a corroded transmission line. The caribou herd has risen from 3,000 animals to 32,000 and the Natives got more autonomy than the non-Native majority of Alaskans would have given them. With oil providing more than 80% of its revenue, the state abolished its income tax in 1980 and created a low-tax regime that has helped Alaska to grow even as oil revenues and military spending declined.

Wisely, Alaska did not squander its windfall. In 1976, Governor Jay Hammond persuaded the legislature to establish a Permanent Fund for most of the oil revenues. Each year it presents every one-year resident with a dividend of 20% of the average of profits for the preceding five years—$1,107 in 2006. More important, even though $14.3 billion has been paid in dividends, most of the money has been invested. The North Slope is producing less than half as much oil as in the late 1980s, but the Permanent Fund was worth $32.9 billion in 2006, and most of its income now comes from investments rather than oil. Some speculated that Alaska voters would pressure legislators for bigger payouts. But Alaskans have acted like investors: They want their dividend checks not just now, but in the future. In spring 2004, then-Governor Frank Murkowski urged the legislature to use earnings from the Permanent Fund to balance the budget. But the state Senate balked, and it turned out that sharply rising oil prices pushed the state’s budget into surplus.

Similarly, the 12 regional Native Corporations created by the Alaska Native Claims Act have proved to be successful, not just in providing income for Natives, but in helping them preserve Native traditions and adapt to Alaska’s market economy at their own pace. On Indian reservations in the Lower 48, all land is held by the tribe and supervised by the government; elections held on the political model have produced a winner-take-all politics that is too often corrupt and incapable of pursuing long-range strategies. The corporate model, on the other hand, allows the Alaska Native corporations’ management more continuity in office—though some have made bad decisions and been thrown out. But the cumulative voting method, by which a minority can get a seat on the board, has produced management that is sensitive to all opinions. Huge windfalls are avoided because 70% of profits from mineral sales are shared by all corporations. But the corporation itself, not a distant federal bureaucracy, is left with the choice of how much ancestral land to retain and how much to exploit economically. Individual Natives can make the transition from their traditional communal economy, living on subsistence fishing and hunting, or make their way in the market economy; 43% of Natives now live in Anchorage, Fairbanks, Juneau, Matanuska-Susitna or the Kenai Peninsula. In 2004, the 42 regional and village Native corporations had revenues of $4.5 billion, and employed 13,000 Alaskans. Under federal law Native corporations are eligible for sole-source Pentagon contracts with no upper limit, and their federal contracts rose from $265 million in 2000 to $1.1 billion in 2004; but in 2006 there were charges of abuses in some contracts.

Not all is rosy here. Native villages in the Bush have little in the way of a private sector economy, and rates of alcoholism and suicide remain high. In the solemn mien so typical of Natives, one may be seeing the memory of great kill-offs by disease, which struck Native villages as recently as the 1920s. Native subsistence hunting was threatened by a 1989 state Supreme Court decision that struck down the subsistence preference for fishing and hunting by rural residents. The legislature refused to pass a constitutional amendment allowing it, and in 1999 the Interior Department took over regulation of fishing (it had regulated hunting since 1990) and shut down commercial and sports fishing for a time to protect Natives’ subsistence. But in the long run, Natives have made great progress.

The federal government continues to make decisions that shape Alaska’s economy—and not always Alaska’s way, despite the clout of Ted Stevens, senator since 1968, and Don Young, Congressman-at-Large since 1973. They have failed to get approval of oil drilling in a small sliver of the Arctic National Wildlife Refuge—an area the size of Washington-area Dulles International Airport in an area the size of Delaware—although it was on the verge of being approved in 1989 when the Exxon Valdez ran aground in Prince William Sound in March 1989. Environmental groups have made ANWR oil drilling one of their main issues in their direct-mail fundraising even though ANWR is estimated to have between 9 and 16 billion barrels of oil, the most by far in any untapped U.S. oil field. In 2005 and 2006 the Senate approved ANWR drilling as part of its budget resolution, but that was stricken by the House when liberal Republicans threatened to withhold their votes; the House approved ANWR drilling as part of a defense appropriation, but Stevens fell three votes short of a filibuster-proof majority in the Senate to approve that. Prospects in early 2007 looked dim with Democrats in the majority in both houses. In the meantime oil production on the Slope, which peaked back in the 1980s, falls steadily—or even sharply. In March 2006 the Slope had its biggest oil spill ever, from a corroded BP transmission line, and in August 2006 BP shut down its largest field in Prudhoe Bay, eliminating half the oil production on the Slope.

The North Slope’s oil has been pumped out through the pipeline since 1977, but there has been no way to get its vast quantities of natural gas out. So it’s been burned off at the wellhead or pumped back into the ground; there is an estimated 30 trillion cubic feet in Prudhoe Bay and another 70 trillion cubic feet elsewhere on the Slope. Stevens worked for years to get an 80% federal loan guarantee for a gas pipeline into an energy bill, and in October 2004 inserted the proposal into the military construction appropriation. He omitted a provision guaranteeing producers a minimum price for the gas but did provide for rapid permit approval and avoidance of judicial review. Murkowski accepted two proposals—one from the three North Slope oil companies, another from a pipeline company with Native corporations involved—to build the pipeline, and he urged that the state take an equity interest in the project as well. These plans faded after Murkowski's defeat in the 2006 primary; in the closing days of his administration, eight state legislators successfully sued to prevent him from signing a proposed contract with producers to develop North Slope gas reserves. In March 2007, Governor Sarah Palin, who had defeated Murkowski in the August 2006 primary, introduced the Alaska Gasline Inducement Act, which would offer up to $500 million in seed money to help build the natural gas pipeline as well as freeze production taxes for 10 years.

Alaska remains heavily dependent on oil and on the federal government, but that is not all there is to its economy. Fishing, long its largest private employer, has stabilized as fishermen have come to accept state Fish and Game limits on boats and size of catches; the salmon fisheries here, unlike so many in the world, have not been dangerously depleted. Tourism, the number two private employer, is on the rise, with some 1.4 million tourists spending $2 billion a year; many arrive on cruise ships from which they view glaciers in the southeast, troop into Russian-settled Sitka and Juneau and, in some cases, make side trips as far inland as Denali National Park and Mount McKinley. In August 2006 voters by just 52%-48% approved a $50 per passenger cruise ship tax; the ballot proposition also taxed gambling revenues in Alaskan waters and required environmental observers to monitor the ships. Another spur is the air freight business. The Anchorage airport, near the top of the world, is seven hours from New York, Tokyo and London, and is a major cargo transfer point for UPS, FedEx, Northwest Airlines and the U.S. Postal Service. More all-cargo, wide-bodied aircraft move through Anchorage International than any other U.S. airport.

Alaska has also benefited from federal spending, including millions of dollars every year in “Stevens money”— construction, highway, sewer and harbor projects shepherded by Senator Stevens, chairman of the Appropriations Committee in 1997–2001 and 2003–05 and the most senior Republican in the Senate. Don Young, chairman of the House Transportation and Infrastructure Committee from 2001–07, has sponsored many projects as well. But in 2005 opponents of earmarking funds made a cause celebre of Young’s provisions authorizing two huge proposed bridges, one from tiny Ketchikan to Gravina Island (population 50, plus the local airport) and the other from Anchorage to the largely uninhabited land two miles across Knik Arm. The former became known as “the bridge to nowhere,” and attempts were made to delete it. Stevens’s and Young’s ability to channel funds into Alaska projects may be reduced by the fact that their party is now in the minority in both houses (though Stevens has long worked amicably with Democratic appropriators) and by new rules requiring identification of earmarks.

Politically, Alaska is heavily Republican, with a libertarian streak. In national politics, it has been solidly Republican since the 1970s because national Democrats have favored locking up natural resources. No Democrat has been elected to Congress since 1974, and if one came close in 2004, it was in unusual circumstances: Senator Frank Murkowski, elected governor in 2002, promptly appointed his daughter, state Representative Lisa Murkowski, to his U.S. Senate seat. That prompted a proposed state constitutional amendment revoking the appointive power from the governor. It passed, and the issue almost enabled former Governor Knowles, the Democrats’ strongest Senate candidate in years, to beat Lisa Murkowski. But she won 49%-46%.

In state races, persona and specific issues matter more than party. Frank Murkowski was the first Republican nominee elected governor since 1978, and he was only the second governor in state history to be denied renomination in 2006. The biggest issue in the latter election was the natural gas pipeline, and the terms and conditions under which it could be built. Murkowski was criticized not only by Democrats but by many Republicans for proposing terms too favorable to the oil companies. He was opposed by former Wasilla Mayor Sarah Palin and former state Senator John Binkley. Palin, who opposed Murkowski’s proposals on the gas pipeline, won 51% in the August primary; Binkley, by far the biggest spender, won 30%; Murkowski won only 19%, the most embarrassing primary performance for an incumbent governor since Democrat Preston Smith won 9% in the Texas primary in 1972. Murkowski ran ahead only in his home town of Ketchikan, at the very southern end of the Panhandle, and in the rest of the Panhandle he ran second or third. Palin’s greatest strength was in her home area, the Matanuska Valley, and in greater Anchorage.

The Democratic nominee was Tony Knowles, governor from 1994 to 2002 and nearly successful Senate candidate in 2004. Knowles ran chiefly on his experience, which he claimed would allow him to negotiate the best pipeline deal for the state, while Palin cast herself as a fresh face and a maverick Republican who was unconnected to the Murkowski administration. Palin won by a 48%-41% margin, with 9% for Independent Andrew Halcro, a businessman and former Republican state representative. Palin carried greater Anchorage and her home area 54%-37%, and also carried the Fairbanks area 53%-37%. Knowles carried the Panhandle 56%-27%, where Palin had run a weak third in the Republican primary. But in the Bush, Knowles’s big margins in the Native areas in the north were balanced off by Palin margins in the Valdez area and the hinterlands of Fairbanks. The Panhandle, as noted, was the odd man out, and one reason is the particular politics of Juneau. The state’s capital is remote from most Alaskans, reachable only by harrowing and often-cancelled plane rides through the fjords, and since statehood there have been efforts to move the capital to a site near Anchorage. Alaskans voted to do so in 1974, but rejected proposals to pay for it in 1978 and 1982. In 1994, Juneau, threatened with the loss of 40% of its economy, raised $1 million and defeated a proposal to move all state government by 55%-45%; in 2002 it helped defeat a proposal to move the legislature by 67%-33%.

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