The unprecedented collapse in the nation's benchmark oil price this week is not expected to hurt Kern petroleum producers, local observers say, though it does reflect difficult market conditions weighing heavily on the county's economy and employment.
Because California is an "energy island" geographically isolated from much of the U.S. oil industry, local producers do not get paid based on the price posted for West Texas Intermediate, the domestic benchmark that sank into negative territory Monday.
Instead, most oil companies in Kern get paid according to prices of local and international grades of crude, which are down but not as low as WTI.
"West Texas (Intermediate) has very little to do with California," veteran Taft oilman Fred Holmes said Tuesday. "We have no pipelines coming or going out of California anywhere.”
This does not mean local oil companies are completely insulated from the trouble facing WTI.
Global demand for oil remains severely depressed because of the economic slowdown caused by efforts to protect people from COVID-19. Meanwhile, a supply glut originating with a recent price war between Saudi Arabia and Russia has contributed to historically low barrel prices everywhere.
The practical difference is that WTI rose to $10.01 per barrel Tuesday at the same time Kern County's benchmark, Midway-Sunset, dipped to $13.26.
Published reports suggest WTI's drop this week has been caused by a combination of factors including the settlement of contracts for future oil deliveries and a shortage of storage capacity in Cushing, Okla., where the U.S. price benchmark is calculated.
Negative oil prices, which were previously unheard-of, are seen as a quirk of the current U.S. market. With few buyers and nowhere to store the oil that continues to be produced domestically, negative prices imply oil companies are willing to pay refiners to take crude off their hands.
That's not the situation in Kern, where prices are nevertheless well below levels posted early in the year.
Midway-Sunset was trading in the upper $60s per barrel in early February. It fell to less than $40 in early March then dropped again to the low $20s before recovering briefly to almost $30 in early April.
Until recently, Midway-Sunset had not fallen below $20 per barrel since early 2016.
Cal State Bakersfield economist Nyakundi Michieka noted that Midway-Sunset's price has often tracked more closely with WTI than with the global benchmark, Brent crude. But sometimes, including lately, it's the other way around, he said by email.
He predicted that an international agreement to dial back crude oil production starting next month will likely influence prices. But he cautioned that the effect may not be very significant without a substantial increase in global demand for energy.
In the meantime, local oil producers have responded to the low price environment by canceling projects and laying off workers.
It's hard to say how soon there might be substantial recovery in oil prices. But the head of Bakersfield-based oil producer Aera Energy LLC, writing for a company newsletter posted online last week, linked improvement in prices with development of a COVID-19 vaccine.
"Further, I believe that once we’re past the pandemic, we’ll see pent-up demand emerge throughout our economy," President and CEO Christina Sistrunk stated. "That will, in turn, drive oil prices to a more normal range."
A company spokeswoman noted Aera gets paid for its oil according to posted prices for Midway-Sunset, not WTI.
Holmes, who noted that local oil field employment has been devastated by the global oversupply of oil and a 40 percent drop in demand, said Kern's petroleum industry won't rebound until people resume driving and traveling to a similar degree as before coronavirus concerns all but halted the world economy.
CEO Rock Zierman of the California Independent Petroleum Association trade group said by email that as the economy recovers it will be important to continue producing oil in a state where domestic production supplies only about one-third of demand.