Californians Want Oil’s Tax Revenue Without the Oil

a | A

The only thing California’s environmentally friendly Democratic legislators prefer to regulating private industry is spending public dollars. So it’s fascinating to watch them struggle with an unfolding dilemma.

The state can tap into a gusher of new revenue only if legislators resist the muscular green lobby and allow oil companies to take advantage of vast petroleum reserves in the Monterey Shale geologic formation that runs south and east from San Francisco.

The federal government, which auctioned drilling leases in a portion of the Monterey Shale late last year, estimates that the formation holds more than 15 billion barrels of oil.

A Bloomberg report in December said that’s 64 percent of all estimated U.S. shale oil reserves and double the amount in North Dakota’s Bakken Shale and Texas’ Eagle Ford Shale combined.

The lure is enormous, but so is the likely pushback in a state where leaders are trying to craft a myopic alternative future based on subsidized “green jobs.” Historically oil-rich California has fallen to fourth in oil production in the U.S. (behind Texas, North Dakota and Alaska).

The state’s new cap-and-trade system, which auctions off pollution credits to reduce emissions from greenhouse-gas producers, is going into full swing. This system will impose significant new costs -- the state Chamber of Commerce views it as a tax -- on manufacturers and especially oil producers. Environmental groups are trying to stop the hydraulic fracturing, or fracking, technology that’s driving the potential new oil boom.

Tax Plans

Equally dangerous to the burgeoning oil potential are plans that would make it uncompetitive. For instance, State Senator Noreen Evans, a Democrat from Santa Rosa, has introduced a bill that would impose a 9.9 percent severance tax on oil extraction to fund California’s higher education and parks.

Evans and other prominent Democrats have long complained that, unlike other states, California doesn’t levy a severance tax on oil extraction. That’s true, but it imposes higher total taxes and more onerous regulations on oil producers. If California imposes such a levy, its tax rate on oil producers would soar above that of Wyoming, which has the highest, according to a recent CalWatchdog report.

There are good and bad signs when it comes to the likelihood that the state will exploit this new economic opportunity.

California’s Governor Jerry Brown has the reputation of an environmental zealot, but he clearly understands the competitive climate. At a recent governors conference in Washington, Brown called on other states to jump on board California’s environmental agenda as a way to lessen the impact on the state’s business development. Otherwise cheaper, traditional energy in other states could make California less competitive.

Despite his push for cap-and-trade, Brown has been applauded at times by the oil industry. In November 2011, he removed two regulators who had slowed the granting of permits for oil-drilling projects to a trickle. Bloomberg Government reported that after one of those officials was appointed by previous Governor Arnold Schwarzenegger, drilling permits dropped by 73 percent from the year before.

Furthermore, in December the Brown administration released new fracking rules that a San Diego Union-Tribune editorial called “welcome in their moderation and straightforwardness,” Environmentalists, however, complained that they were designed to advance rather than hinder the process.

Industry Critics

“Huge oil and gas corporations, backed by the powerful Western States Petroleum Association, have already begun the environmentally destructive practice of fracking in California -- and Governor Jerry ‘Tunnel Vision’ Brown is doing nothing to stop them,” wrote Dan Bacher on the LA Progressive website.

Environmentalists have also criticized Brown’s continuing efforts to reform the California Environmental Quality Act -- a relic from 1970 that’s under fire even from Democrats, as it has slowed down projects they support.

Even with Brown’s overtures to the industry, there are many political hurdles and environmentalist traditions that remain before California can take advantage of the Monterey Shale.

Author Joel Kotkin argues in a new Manhattan Institute study that U.S. economic growth remains dependent on “real” industries such as oil production and manufacturing, not just on the service-sector and technology jobs that have long captured the attention of California political and opinion leaders.

These industries, which provide the high-income, blue-collar jobs that Democrats say they care about, aren’t thriving in densely populated metropolitan areas along the coasts. Instead, the new U.S. growth corridors can be found in the Gulf Coast, the intermountain West, the Great Plains and the Southeast, he wrote.

Many Californians and other Americans have come to think that “in a postindustrial economy, dependence on raw materials is increasingly irrelevant -- and even detrimental -- to future growth,” Kotkin wrote.

Perhaps the potential riches of the Monterey Shale will change that attitude. After all, in a previous era, oil derricks and wells lined part of the Southern California coast -- symbols of the state’s emerging economic might -- without leading to environmental Armageddon.

As the legislative session progresses, California’s leaders will choose between two types of green -- environmentalism or the lure of new cash. Which way they turn will say much about the future of the state’s long-term economic competitiveness.


(Steven Greenhut is vice president of journalism at the Franklin Center for Government and Public Integrity. He is based in Sacramento, California. The opinions expressed are his own.)


This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the editor responsible for this story:
Katy Roberts at kroberts29@bloomberg.net