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Economists doubt pumping more oil in California would lower fuel prices

20200310-bc-oilprices

An oil pump station works in a field off Merced Road in this 2020 file photo.

The political notion that ramping up in-state oil production would lead to cheaper gasoline resurfaced Monday at a news conference outside a refinery off Rosedale Highway.

Rep. Kevin McCarthy, R-Bakersfield, told reporters fuel prices would be lower if Gov. Gavin Newsom loosened restrictions he has placed on the state’s oil producers.

“Just the removal of 1,000 permits (awaiting state approval), I think you’ll see a drop,” he said.

But do lower gas prices really belong on the list of local oil production benefits, such as additional high-paying jobs and more tax revenues to pay for public services?

Economists say no, for two main reasons: Oil trades on a global market, and in-state production will remain a proverbial drop in the bucket almost no matter how much money and effort are invested in it.

“If you could increase (California oil production) by half a million barrels a day, what do you think that would do to the price? Almost nothing,” said Stanford University economist Frank Wolak, senior fellow at the Stanford Institute for Economic Policy Research. Maybe the added supply would lower prices a penny per gallon of gas, he estimated.

Contributing to the state’s oil supply nevertheless makes sense on other levels, Wolak said, and fuel prices might start to come down more noticeably if the Biden administration were to roll back changes it has made to national oil policy.

The faculty director of the Energy Institute at the UC Berkeley Haas School of Business, economist Severin Borenstein, agreed there are employment and other benefits from in-state oil production, but “the idea that opening up ... oil drilling would give us relief at the pump is just, you know, completely unfounded.”

Even if California production jumped by two-thirds to reach 568,000 barrels per day — the level it peaked at the last time barrel prices topped $100, in 2014, when there were six times more drilling rigs active in the state than there were last month — he said it would have little effect on the market. It would amount to a little more than half of 1 percent of global consumption.

California cannot easily make up the difference by bringing in oil from other states like Texas and North Dakota, because no oil pipelines cross the Rockies. Most of the difference is made up by bringing in foreign and Alaskan oil through seaports. As recently as 2019, California had to import about three barrels of foreign oil for every two barrels of domestically produced crude it used.

Kern County lawmakers have previously claimed cheaper gas will come from boosting in-state oil production. The suggestion returned to local politics right after the Biden administration cut off imports of Russian oil on March 8. Oil prices were spiking and unleaded gas in California was selling at record highs.

In a news release March 10, state Sen. Shannon Grove, R-Bakersfield, said Newsom could impact gas prices by immediately approving applications for 1,000 oil field permits pending review.

“With California gas prices soaring above $5.00 and no end in sight, this action would provide relief for motorists at the pumps,” she stated.

Locally elected politicians were already calling on the governor — suing him, in the case of the Kern County Board of Supervisors — to ease up on anti-oil policies he has put in place since taking office. The industry was complaining as well about a slowdown of approved projects in Kern since a legal challenge halted the county’s permitting system in October and review responsibilities fell to state regulators.

McCarthy said at Monday’s news conference he could not predict how much gasoline prices would fall if California pumped more oil because a big factor in the price of oil is future expectations.

An industry representative who attended the event but did not speak at the podium, Rock Zierman, noted refiners pay different prices for oil based in part on transportation costs. The CEO of the California Independent Petroleum Association trade group added that prices would likely drop if the United States, including but not limited to California, got more active in oil production.

Another industry supporter, Taft Mayor Dave Noerr, noted before the news conference there’s not a direct correlation between oil and gasoline prices, referring to other factors as the “Sacramento surcharge.”

Grove said state government could simply cut fuel taxes and take off as much as $1 per gallon. Instead, Newsom on Thursday proposed rebating residents $400 per vehicle, capped at two, and freezing the gas tax for one year rather than let it rise with inflation July 1 as scheduled.

The California Energy Commission declined to weigh in on the matter. But it delivered an email response from the state Department of Conservation, parent agency of the state’s primary oil regulatory division, emphasizing that oil is a global commodity.

“The pace of permit approvals in California does not drive gasoline prices at the pump,” the department stated. It added that there’s no guarantee oil produced in California would be refined and sold as gasoline in California.

Records show California does export refined petroleum, though not as much as it did, and that the state has sold oil internationally as well.

According to the energy commission, U.S. International Trade Commission data shows the state exported 621,000 barrels of crude oil to China in May 2020, probably related to the idling of a Bay Area refinery. There are no reports of any crude exported from the state since then.

More common are exports of California diesel: The commission reported 700,000 barrels of diesel refined in California were shipped overseas in December 2020, down from about 2.8 million in February 2019.

The governor’s communications director, Erin Mellon, responded to a question about the potential impact of increased production on gas prices by noting California oil producers have not availed themselves of 46 percent of the 632 oil drilling permits issued by the state in 2021 and so far in 2022.

Even if oil companies had all the permits they needed, increasing production is not a sure thing, Cal State Bakersfield economist Nyakundi Michieka explained.

Producers might hold back on drilling — generally a steep investment anyway — because of heightened uncertainty regarding the duration of the Russia-Ukraine war and potential supply increases by OPEC or other U.S. oil-producing states, Michieka said by email.

Questions also remain about how much oil China, a major buyer, will need as the country enters another pandemic lockdown, he added.

What’s more, it can take six months to a year to increase oil production, Michieka said, and that’s assuming the necessary labor is available and ready to go.

UC Berkeley’s Borenstein dismissed the oil industry’s argument that transportation costs play a large role in the prices refiners pass along, especially in times of relatively expensive oil.

He affirmed increasing in-state oil production would create local jobs and raise money for public services through property taxes. But he said a balance exists between value and environmental damage.

“California has generally tilted more toward weighing the environmental damage heavily,” he said.

Stanford’s Wolak asserted producing more oil domestically makes more sense than Biden’s approach of asking other countries to pump greater volumes for export. He also noted climate change is driven by oil consumption, not production.

“It’s not that we’re not going to consume the oil,” he said. “It’s just going to come from someplace else.”