California's Next Growth Period: Will Oil Be Part of the Picture?

by: Gregor Macdonald

A person born in California at the turn of the last century, as long as they lived to turn 85, would have been able to witness the rise and fall of the state’s production of oil. California oil production steadily rose to a peak in 1985, at an annual average of 1.10 Mb/day. It’s actually not uncommon, in the 20th century, for a region’s output trajectory to find its apex in the course of a human lifetime.

kern-county-oil-californiaCalifornia still produces oil, of course. How much? About half, of the 1985 level. Much of that now comes from old fields and is the product of more modern technology that scrapes out the forgotten oil by means of pressure and other enhanced recovery techniques. The state has quite a few stripper wells, too. The simple grasshopper shaped pumpers that produce 10-15 barrels a day. These were actually of great interest to the media last year, when oil was above 125. The economics for this army of small wells gets a lot harder when oil goes below 50.00. And this is not trivial. Over half of California’s oil production now comes from these small wells. This pulls down the average production per well in California to an amazingly small 13.1 barrels a day.

It’s impressive to think about the achievement of early exploration (and not just oil exploration) of California. Distances are huge. Mountain ranges are hard to cross. Temperature and climate zones are many, and disparate. The gold rush era—the railroad era—is almost a separate historical era to the 20th century period, in which the state was finally tamed by oil powered vehicles, in its totality. That is when the Los Angeles basin, with its “rose beneath the snow-capped mountain”, really began to accelerate its growth. The car went on to form the map of Southern California.

This month I’ll be looking at the prospect of future oil production from California’s offshore waters. While I am skeptical as are many others of the US Geological Survey/Minerals Management estimates, there is no question that a significant quantity of oil is recoverable there. As with all new oil developments at this late stage in the Oil Era, new production has to contend with offsetting decline from existing production. That said, while there is really no chance, or even need, for California to try and attain the previous production highs of 1985, the principle interest now for the Golden State is to raise the necessary capital to fund its next period of development. That period is unlikely to be marked by new, net growth in physical infrastructure. Rather, California must now focus on trying to sustain itself, under a new growth metric. Perhaps the growth of human capital.

Photo: Kern County Oil Field, 1927