Can California Drill its Way Out of its Economic Hole?

by Ken Silverstein Originally appearing in Energybiz California’s economic fate may brighten if oil and gas developers could get access to vast reserves there. That’s the opinion of economic developers, who are saying that the state would then diminish its 9.8 percent jobless rate and provide a source of wealth for decades -- if environmentalists would compromise. The quandary is that California sits atop more shale oil and shale gas than any state in the union, by far. But, it has some of the nation’s strictest environmental rules that include a 2006 law to limit greenhouse gas emissions. As with many industry and ecological disputes, the two sides tend to take an all-or-nothing approach. In this case, though, the quest to find overlap is absolutely necessary. At one point, the state’s annual budget deficit was about $26 billion and its unemployment level 18 months ago stood at 11.5 percent. Now, after a November 2012 ballot initiative, the citizens there voted for a tax increase that will reduce that red ink to about $2 billion. Critics are saying, however, that it is coming at the expense of domestic enterprises that may find it cheaper to move their businesses across state lines, creating a negative economic effect. One possibility: The Monterey Shale, which stretches from Central California down through Southern California. It holds 15.4 billion barrels of recoverable crude oil. By comparison, North Dakota’s Bakken Field has 3.6 billion barrels -- a place that now has 3 percent unemployment. “California is already a major player in crude oil, producing nearly 10 percent of the nation’s output,” says Bob Bellemare, chief operating officer of New Mexico-based Mykrobel , an energy consulting firm. “There are many policy options available that could balance the goals of greenhouse gas reduction and increased oil-gas production. For example, regulators could require ‘offsets’ such as making developers buy renewable energy credits. It may raise their cost of doing business but it would be the price they would pay to drill.” California’s environmental goals are cultivated by a “global warming law” requiring greenhouse gas reductions of 25 percent by 2020. Voters there rejected an effort in 2010 to rollback that statute until unemployment fell, noting that “new energy” jobs there total around 500,000. Billions, meanwhile, are pouring in from venture capitalists. Polarized Positions San Francisco-based PG&E Corp. is in favor of the current law to reduce greenhouse gas emissions there. It has said that maintaining such a regulatory structure is enabling capital formation in the state’s vibrant clean tech sector that it services. The utility has also said that such progression is good for the agricultural and tourism industries, allowing them to prosper by “billions of dollars a year.” Are the two sides at eternal odds? Public policy is often reactive, meaning that situations may reach such a critical point that it would require action. If the supply and demand for oil and gas got too far off kilter, more drilling would occur to meet demand and to curb prices. As for California, one could argue that it has crossed that “crisis point,” says energy consultant Bellemare. According to the U.S. Energy Information Administration , the United States has 25 billion barrels in proved unconventional shale oil, or deposits locked up in rocks deep underground. It also says that 2,552 trillion cubic feet of potential natural gas resources exist, adding that shale gas comprised 23 percent of all natural gas production in 2010 but that it is expected to make up 46 percent by 2035. Allowing greater access to all of those deposits is necessary, says the California Chamber of Commerce , adding that it could result in more ecological benefits. Consider that the Energy Department is also reporting that carbon dioxide emissions are 2.4 percent less in 2011 than they were in 2010, and 9.1 percent than 2007. Much of that is attributable to fuel switching -- the change from coal-fired power to natural gas-fueled electricity -- as well as people driving less. “It is impossible to create a successful program and achieve real, quantifiable reductions without understanding the various industries targeted by the regulations,” says the chamber. “All regulations should be monitored vigilantly to ensure they are meeting their environmental goals in a way that allows for business growth and economic development in California.” Throughout the country, more areas are opening up to development, with restrictions. Industry is complaining that such oversight is burdensome. But environmentalists are dismayed that pristine regions are even accessible. Therein is the dilemma, which is how to promote economic development while limiting emissions and degradation. “Wherever there is an environmental consequence, regulators could require developers to offset that with an environmental gain,” says Bellemare. “Markets work better when there are regulations on which industry can depend.” California may have turned the corner. But if it wants to accelerate its economy, it may have to reconcile its desire to build its burgeoning clean tech sector with that of giving fossil fuel developers a little more leeway. It’s a tough act given the polarized positions, but one that may be ultimately necessary.

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Can California Drill its Way Out of its Economic Hole?

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