By TOM GRAY
Posted 08/08/2012 07:05 PM ET
By refusing to tap much of the oil wealth off its shoreline, California is forgoing a resource that could go far to revive its economy and bring state and local governments back to fiscal health.
On dry land, too, California is missing an opportunity: Its vast onshore oil reserves are underused, thanks to a green-energy agenda that raises the cost of oil production and refining.
Policymakers have to realize that their quixotic quest to outgrow fossil fuels isn't helping the state.
California's attitude toward oil began to shift in January 1969, when a well six miles off the Santa Barbara coast blew out just after workers had finished drilling it. The spill was the largest in American waters at the time; it now ranks third behind the Deepwater Horizon and Exxon Valdez spills.
Its impact extended far beyond California; more than any other single event, it brought the various strands of environmentalism and conservation together into a national movement.
But the spill's most immediate result was that California stopped leasing tidelands — the zone within three nautical miles of shore, whose resources the state owns — to oil companies. Not a single acre of this oil-rich seabed has been auctioned since, though drilling continues in areas leased before 1969.
Onshore, the situation is less dire: New wells are continually being drilled, mostly on private or federal land. But the state no longer goes out of its way to attract oil investment, and environmental and land-use laws give local opponents tools to stymie drilling plans.
Outside of regions like the southern San Joaquin Valley — where drilling has been an important part of the economy and landscape for a century or so—Californians don't like drilling rigs and can block projects at the local government level.
Another problem for onshore oil producers is California's ambitious climate-change law, AB 32, passed in 2006 but only now starting to take hold in the form of specific regulations. When fully in effect, it will slam drillers with a cap-and-trade system that amounts to a carbon tax.
Second, AB 32's Low Carbon Fuel Standard (LCFS) requires that the "carbon intensity" of all transportation fuels sold in California from production to transportation to combustion — fall by 10% by 2020.
Despite its evident distaste for oil, California is still the country's fourth-largest producer — behind Texas, Alaska and North Dakota — and yields more than 15 million barrels of crude per month, about 9% of the U.S. total. That doesn't count the output from offshore federal tracts, which is still a respectable 22 million barrels per year.
The biggest onshore story is the potential of the Monterey Formation (also known as the Monterey Shale), a zone of petroleum-rich rock that extends much of the state's length. The Monterey holds an enormous amount of oil, estimated at up to 500 billion barrels.
Though it has long been difficult to extract oil directly from it, advancing technology, along with rising oil prices, has put much more of its oil within reach. If even a small fraction of its reserves proves accessible, the Monterey would be the biggest shale oil play in the nation.
In July 2011, the federal Energy Information Agency (EIA) estimated that the Monterey had 15.4 billion barrels of recoverable crude — four times what's estimated to lie within the Bakken Shale formation, which is fueling North Dakota's current oil boom.
Those 15.4 billion barrels would be worth about $1.5 trillion at today's crude prices. If the EIA estimate is reasonably close to the mark, the Monterey Formation would be in a class with oilfields in Saudi Arabia.
California could certainly use an oil boom right now. Its jobless rate is stubbornly running nearly 3 percentage points above the national average, and most new drilling in the Monterey Formation would be taking place in the San Joaquin Valley, where unemployment is chronically high.
(In the four counties most likely to be sites for drilling — Kern, Fresno, Tulare and Kings — the March 2012 jobless rate averaged 17.5%, compared with 11.5% for the state as a whole.)
It's too early to tell how much of a boost the state would gain from tapping the Monterey, but the impact could be huge. The state government would reap these rewards without having to spend much initially, since the oil industry provides its own infrastructure of pipelines, tanks, pumps, drilling rigs and refineries. All the drillers need is a green light.
Until California surrenders to realism, its oil drillers will be fighting political and regulatory head winds. If they can look anywhere for hope, it's not to the political elites but to the broader public. Ordinary Californians are not anti-oil ideologues, and a fair number favor drilling off the state's coast.
If California's political leadership agrees at some point to commence new drilling off the coast, the prospects for the local economy would be bright. California was once a genuine petro-state, one of global importance. If it so chooses, it stands a good chance of becoming one again.
• Gray, formerly editorial-page editor at the Los Angeles Daily News and senior editor at Investor's Business Daily, writes on California's economy and politics. This article was adapted from the Summer 2012 issue of City Journal.
On dry land, too, California is missing an opportunity: Its vast onshore oil reserves are underused, thanks to a green-energy agenda that raises the cost of oil production and refining.
Policymakers have to realize that their quixotic quest to outgrow fossil fuels isn't helping the state.
California's attitude toward oil began to shift in January 1969, when a well six miles off the Santa Barbara coast blew out just after workers had finished drilling it. The spill was the largest in American waters at the time; it now ranks third behind the Deepwater Horizon and Exxon Valdez spills.
Its impact extended far beyond California; more than any other single event, it brought the various strands of environmentalism and conservation together into a national movement.
But the spill's most immediate result was that California stopped leasing tidelands — the zone within three nautical miles of shore, whose resources the state owns — to oil companies. Not a single acre of this oil-rich seabed has been auctioned since, though drilling continues in areas leased before 1969.
Onshore, the situation is less dire: New wells are continually being drilled, mostly on private or federal land. But the state no longer goes out of its way to attract oil investment, and environmental and land-use laws give local opponents tools to stymie drilling plans.
Outside of regions like the southern San Joaquin Valley — where drilling has been an important part of the economy and landscape for a century or so—Californians don't like drilling rigs and can block projects at the local government level.
Another problem for onshore oil producers is California's ambitious climate-change law, AB 32, passed in 2006 but only now starting to take hold in the form of specific regulations. When fully in effect, it will slam drillers with a cap-and-trade system that amounts to a carbon tax.
Second, AB 32's Low Carbon Fuel Standard (LCFS) requires that the "carbon intensity" of all transportation fuels sold in California from production to transportation to combustion — fall by 10% by 2020.
Despite its evident distaste for oil, California is still the country's fourth-largest producer — behind Texas, Alaska and North Dakota — and yields more than 15 million barrels of crude per month, about 9% of the U.S. total. That doesn't count the output from offshore federal tracts, which is still a respectable 22 million barrels per year.
The biggest onshore story is the potential of the Monterey Formation (also known as the Monterey Shale), a zone of petroleum-rich rock that extends much of the state's length. The Monterey holds an enormous amount of oil, estimated at up to 500 billion barrels.
Though it has long been difficult to extract oil directly from it, advancing technology, along with rising oil prices, has put much more of its oil within reach. If even a small fraction of its reserves proves accessible, the Monterey would be the biggest shale oil play in the nation.
In July 2011, the federal Energy Information Agency (EIA) estimated that the Monterey had 15.4 billion barrels of recoverable crude — four times what's estimated to lie within the Bakken Shale formation, which is fueling North Dakota's current oil boom.
Those 15.4 billion barrels would be worth about $1.5 trillion at today's crude prices. If the EIA estimate is reasonably close to the mark, the Monterey Formation would be in a class with oilfields in Saudi Arabia.
California could certainly use an oil boom right now. Its jobless rate is stubbornly running nearly 3 percentage points above the national average, and most new drilling in the Monterey Formation would be taking place in the San Joaquin Valley, where unemployment is chronically high.
(In the four counties most likely to be sites for drilling — Kern, Fresno, Tulare and Kings — the March 2012 jobless rate averaged 17.5%, compared with 11.5% for the state as a whole.)
It's too early to tell how much of a boost the state would gain from tapping the Monterey, but the impact could be huge. The state government would reap these rewards without having to spend much initially, since the oil industry provides its own infrastructure of pipelines, tanks, pumps, drilling rigs and refineries. All the drillers need is a green light.
Until California surrenders to realism, its oil drillers will be fighting political and regulatory head winds. If they can look anywhere for hope, it's not to the political elites but to the broader public. Ordinary Californians are not anti-oil ideologues, and a fair number favor drilling off the state's coast.
If California's political leadership agrees at some point to commence new drilling off the coast, the prospects for the local economy would be bright. California was once a genuine petro-state, one of global importance. If it so chooses, it stands a good chance of becoming one again.
• Gray, formerly editorial-page editor at the Los Angeles Daily News and senior editor at Investor's Business Daily, writes on California's economy and politics. This article was adapted from the Summer 2012 issue of City Journal.
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