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Expanding California’s Oil Industry Won’t Stop Gas Price Increases

The state’s oil producers claim that an increase in oil drilling could help stop runaway gas prices, but, since the price of oil is set by global market forces, it’s unlikely that $5.72 per gallon statewide price would drop.

(TNS) — From the dusty fields of the San Joaquin Valley to the offshore platforms of Southern California, California's oil producers say they could help stabilize runaway gasoline prices — if only Gov. Gavin Newsom's administration would let them.

Oil industry executives say the state Department of Conservation is sitting on an estimated 1,000 permit applications to drill new wells — frustrating their efforts to increase supplies as war rages in Ukraine and America cuts off imports from Russia.

"We could see a surge in production if the Newsom administration would get the permits off the desk," said Kevin Slagle, a spokesman for the Western States Petroleum Association, the industry's main lobbying organization in Sacramento.

But here's the reality: Any surge in production probably wouldn't make a dent in gasoline prices, averaging $5.72 a gallon statewide as of Friday.

The price of oil is set by global market forces — and California doesn't have nearly the influence on supplies as, say, Saudi Arabia. More drilling in Kern County, the capital of the California oil industry, or off the coast of Santa Barbara almost surely wouldn't make a significant difference in price.

"They would be a drop in the global oil market," said Severin Borenstein, an energy economist at UC Berkeley. "The idea that ratcheting up production in California would change the price of gasoline isn't plausible."

Environmentalists said California shouldn't give in to oil producers' demands.

The industry is "trying to exploit this international conflict and higher gas prices to advance their own interests," said Hollin Kretzmann, a lawyer with the Center for Biological Diversity. "The solution is to move us rapidly to renewables and electrification so we don't have to rely on oil and gas."

For his part, Newsom is attempting to ease the pain at the pump — while sticking to green energy policies to reduce California's dependence on fossil fuels.

In January, he proposed legislation that would postpone an increase in gas and diesel taxes, based on inflation, due to take effect in July. In his State of the State address Tuesday, he asked the Legislature to send Californians a tax rebate — details to be determined — to soften the blow from the recent spike in retail prices.

At the same time, he made it clear that he wouldn't support a widening of California's oil extraction business.

"When we've been heating and burning up, one thing we cannot do is repeat the mistakes of the past by embracing polluters," he said. "Drilling even more oil ... only leads to even more extreme weather, more extreme drought, more wildfire."

California Among Tops in Oil Production

California is the nation's seventh largest oil production state, with most of the industry centered around Kern County at the southern end of the San Joaquin Valley. California produced 130 million barrels of oil last year, according to the U.S. Energy Department. That was well behind the 1.7 billion barrels produced by the leader, Texas, but within shouting distance of Oklahoma and Colorado and not far behind Alaska.

In Kern County, oil and natural gas are the bedrock industries along with agriculture. Bakersfield High School athletes are called the Drillers, while the area's business elite dine at the Petroleum Club. Energy accounts for 16,000 jobs in the county, including gas-station employment, according to the Kern Economic Development Foundation.

"It's still a major driver," said Aaron Hegde, an economist at CSU Bakersfield.

But not as big as it used to be. Oil production in California peaked at nearly 400 million barrels in 1985 and has been falling ever since.

What happened? One factor is that California's oil fields are aging, particularly in Kern County, and simply aren't as efficient at producing crude as they used to be. That means California's fields become a lot less economically viable when prices falter.

There's also the issue of environmental policy.

The infamous 1969 oil spill off the Santa Barbara coast helped spark environmental consciousness in the state; last fall's spill off Huntington Beach reinforced suspicion about oil production among many Californians. Meanwhile, California has become the unchallenged leader among the states on regulating air pollution and greenhouse gas emissions.

After a mini-scandal erupted at the Department of Conservation in 2015, when the agency acknowledged that oil producers were dumping wastewater into fragile aquifers, the state pushed to regulate the industry more stringently.

In 2019, Newsom signed a law overhauling the agency to put more emphasis on "protecting public health and safety and environmental quality, including reduction and mitigation of greenhouse gas emissions." Last year he established a ban on new fracking permits, set to begin in early 2024, and urged his administration to "analyze pathways" to end all oil production in California by 2045.

The courts, meanwhile, have put a clamp on the oil industry right now.

In 2020 the Fifth Circuit Court of Appeal, citing the California Environmental Quality Act, struck down a Kern County ordinance designed to fast-track permitting for new wells. Last year the Center for Biological Diversity, which won the Kern case, filed a separate lawsuit against Newsom's administration, saying it wasn't performing adequate environmental reviews before approving new permits.

While that case is still pending, Kretzmann, the environmental group's lawyer, said the suit appears to be having the desired effect. "The state knows it can't just rubber-stamp permits," he said.

Statistics compiled by the Department of Conservation show that permitting of new wells has fallen off considerably. In 2019, the agency issued 957 permits for new oil and natural-gas wells. That figure rose significantly in 2020, to 1,649. But in the first nine months of last year, only 243 permits were issued for new oil and gas wells.

Oil Industry Bitter About Environmental Rules

Some oil producers say Sacramento's attempts to throttle back their industry have left California motorists desperately short of gasoline.

"You don't want our oil; you do want our oil. What is it? The reality is you do need it," said Chad Hathaway, founder and chief executive of Hathaway LLC, an oil production company based in Bakersfield.

Crude prices in the Midway-Sunset oil field, which covers much of Kern County, jumped to nearly $125 a barrel this week before falling back to $106 on Friday. During the depths of the pandemic in spring 2020, when the economy cratered and motorists stopped driving, it was under $17.

But because of a shortage of well-drilling permits, the recent price jump hasn't caused a rush to find new supplies. "We're kind of stagnant, actually, status quo," Hathaway said.

Newsom's office, however, suggested the industry could drill more. It just needs to act on the permits that have been granted.

Erin Mellon, a spokeswoman for the governor, said 46 percent of the permits granted since January 2021 haven't been put to use.

Rock Zierman, CEO of California Independent Petroleum Association, said Newsom's statistics don't tell the whole story. A producer might obtain a batch of permits for an unexplored area, drill one new well and come up dry. Such is the hit-or-mass nature of the oil business.

"Because we are in an extraction business, there's no way to know where oil is until you start to drill," Zierman said. "That's why we submit new permits and that's why we need (the state) to act on the permits in a timely manner."

He said he's surveyed some of the major oil producers in the state and "they're almost out of permits that they can act on."

Even if California oil producers were suddenly allowed to expand their drilling operations, that wouldn't create an immediate gusher in supply. It could take six to nine months to increase output, said David Hackett of Stillwater Associates, an oil industry consulting firm in Irvine.

"You just can't flip a switch," Hackett said.

But David Hackett, an industry consultant in Irvine, said allowing production to increase certainly wouldn't hurt.

"The policy has to change," said Hackett, chairman of a firm called Stillwater Associates. "What little bit happens in California will contribute."

Hackett cited Santa Barbara County's recent rejection of a bid by ExxonMobil to restart three offshore oil platforms that were idled after a 2015 spill.

He said the platforms would have produced more than 3 million barrels a year — not a huge amount by global standards.

"That's the equivalent of about nine Russian tankers a year," he said. "Nine tankers is not a lot, but nine tankers here and five tankers there and pretty soon you're talking about serious stuff."

(c)2022 The Sacramento Bee (Sacramento, Calif.) Distributed by Tribune Content Agency, LLC.
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