"It'll Cost BILLIONS!": Big Oil Peddles Economic Doom

Industry’s approach is to count only the purported economic costs of regulation, without counting the economic value of the benefit. The economic benefit of keeping wells out of neighborhoods is only meaningful when presented in the context of the economic benefit of reducing the risk of residents’ health problems and their attendant costs.
Community leader Katie Valenzuela at an AB 345 rally in Sacramento
Community leader Katie Valenzuela at an AB 345 rally in Sacramento
Credit: Photo courtesy of Max Whittaker, Greenpeace

AB 345, the bill pending in the California Senate that would require establishment of setback buffers from oil and gas drilling operations, is going to “cost the state BILLIONS,” oil lobbyists and their friends are telling elected officials (shouty caps theirs, not mine). The bill could, the lobbyists lament, require close to $100 billion in compensation to mineral rights owners, and cost billions more in lost state revenue. And lead to the collapse of the global economy, the crumbling of Western civilization, and a return to seashell currency.

Ok, I made up that last bit. But it’s in keeping with the desperately hyperbolic tone that characterizes California oil industry opposition to even the most modest efforts to protect the public from its activities. 

The industry and its allies need to stop and take a deep breath (unless, of course, they’re near an oil well, in which case I don’t recommend it). The numbers they are throwing around are, not to put too fine a point on it, unmoored from reality and wildly wrong. They are, by turns, based on mischaracterization of the substance of the bill, and on cost calculations developed to address unrelated scenarios. Moreover, they turn a blind eye to the economic benefit of curbing fossil fuel industry excesses.

AB 345, for all the breathless catastrophizing that surrounds it, is a pretty modest piece of legislation. It is designed to address the problem of oil drilling happening too close to where people live, work, and go to school—which a recent slew of peer-reviewed studies has associated with all manner of health risks (including premature birth, fetal death, cancer, respiratory ailments, and other such problems). The version of AB 345 first introduced by Assemblymember Muratsuchi in February of 2019 would have directly established a statewide setback buffer of 2,500 feet, which is a minimum protective distance based on the findings of the studies. However, politics being the art of the possible, it was scaled back through amendments to simply require that the California Geologic Energy Management Division (CalGEM) establish a setback via a rulemaking, laying out parameters for doing that (including, for instance, a requirement to consider available health science and the possibility that the setback should be 2,500 feet).

Oil well in Baldwin Hills, LA
Oil well in Baldwin Hills, LA

Industry’s opposition arguments to legislators overlook entirely amendments to the 2019 proposal. They assert, “According to Assembly Appropriations Committee, AB 345 could cost up to $4 billion dollars in lost state revenue”—a claim also found in the oil lobbyists’ laughably transparent Astroturf blog ExtractingFact. But that Appropriations Committee estimate was based on the original version of the bill. The cost of the mandate in the current version of the bill is—well, virtually nothing, since CalGEM is already in the pre-rulemaking phase of its health and safety rulemaking and are going through that process with or without legislative involvement. 

It is, of course, possible that a setback established by CalGEM would cost the state something, but it is wildly premature to speculate at this point what such costs might be. We don’t know at this point how large the setback established by CalGEM would be, which wells (new and/or existing) it would apply to, and what cost mitigating measures CalGEM may put in place, among other things. And in any case, all regulations have to go through an economic analysis and an extensive public process.

The letter and the blog go on to cite a report on health impacts of oil drilling issued by the City of Los Angeles in July 2019, claiming that the report “estimated that the potential cost to the City of establishing a future setback distance could be a as high as $97.6 billion in compensation for the future value of mineral rights owed from takings litigation.” But if you go to the report itself, you see that this number is a calculation of the entire value of oil reserves within the City of Los Angeles (“[A]pproximately 1.6 billion barrels of additional volume of recoverable crude oil exist within the City that could be produced using existing technology….The projected future value of the remaining oil reserves belonging to mineral rights owners in the City calculated for a 20 year period at 6% interest rate is $97.6 billion.”). 

Thus, the Very Scary Number that the industry is throwing around is, in fact, not the calculated cost of establishing a setback buffer to protect public health and safety, but the cost of an immediate shutdown of the entire oil industry in Los Angeles. 

The context of the figure is a discussion in the Los Angeles report of the possible need for “takings” compensation to mineral rights owners if oil production is required to be shut down. Leaving aside, as already noted, that AB 345 itself does not require shutting down any production, it bears note that a simple valuation of resources in the ground is not the way to get at possible takings compensation costs. Culver City, home to the Inglewood oil field, is contemplating phasing out oil production there, and recently crunched numbers actually relevant to assessing possible compensation liability: a study of the necessary time for amortization of oilfield investments, since property owners cannot recover compensation if they’ve already received a reasonable return on such investments. 

Finally, the industry letter asserts that AB 345 would kill 7,000 blue collar jobs. The citation for that number is a report titled, “Economic and Revenue Impacts of a Statewide Oil Production Ban in California, December 2018, Capitol Matrix Consulting.” No link to the report is provided and it appears to be unpublished—but the title is kind of a dead giveaway that it was evaluating a wholesale end to the oil industry, not setback buffers.

Perhaps the biggest problem with industry’s hyperventilating AB 345 propaganda, however, is not the lying with statistics problem but the forest for the trees problem. Its cost numbers lack any context in the bigger picture of California’s economy, and fail to take into account the economic benefit of protecting public health—and, since industry has brought it into the discussion, of moving away from oil production and toward a clean energy economy.

Industry’s approach here, as is so often the case in these types of battles, is to count only the purported economic costs of regulation, without counting the economic value of the benefit. Inaction on setbacks has economic costs as well. All of those preterm babies and kids with asthma and cancer cases are, besides each being personal hardships and tragedies, a source of health care costs that someone has to pay for—and that someone is not the oil driller whose wells those people live near. So the economic benefit of keeping wells out of neighborhoods is only meaningful when presented in the context of the economic benefit of reducing the risk of residents’ health problems and their attendant costs. 

The related blind spot in industry’s numbers game is its failure to recognize either the very small and dwindling contribution of the oil industry to California’s economy, or the significant and growing contribution of clean energy industries in the state. While industry loves to blame its woes on environmentalists—that’s an old story—the fact of the matter is that California’s oil industry has been in decline for decades, with the state having peaked in oil production levels in the 1980s, and dropped from third to seventh place among oil producing states within the space of a few years. While it’s certainly possible in principle that putting setbacks in place will contribute a bit to a decline in production levels here and there, the downward trend is already overwhelmingly in place.

In recent years, the oil industry has represented just 0.9 percent of the state’s GDP, and less than 0.2 percent of its total employment—a very small fraction of jobs in other industries (construction, health, tourism, agriculture, etc.). It’s not that the relatively small number of oil jobs don’t matter. Those workers and their livelihood matter very much—and since they are already suffering from the oil industry’s precipitous decline, it is important that we find ways as a society to help them and their communities transition to other sources of support. 

But it’s pretty clear that siding with industry in opposing setbacks is not the way to achieve that. First of all, it’s important to recognize that oil industry leaders bemoaning lost blue collar jobs are crying crocodile tears. Employment in oil and gas extraction in Kern County shrank by nearly 40 percent between 2014 and 2017 as a result of industry restructuring and efforts to cut operating costs. Additionally, the recent economic downturn caused by the pandemic exposed the inherent instability of oil industry jobs, which are highly susceptible to price shocks, notwithstanding industry holding itself out as supporting community economic stability. Just this week, hard-hit Marathon Petroleum announced that it was decommissioning its Martinez refinery, which will leave 740 workers jobless.

And in the longer term, it is clear that California’s true economic future—and locus of jobs—is not the dying oil industry, but the growing clean energy industry. While the clean energy economy has also suffered a downturn in the COVID-19 crisis, its overall trajectory in recent years has been strong and growing. According to a report by Environmental Entrepreneurs, at the end of 2019, clean energy employment comprised thirty percent of statewide construction jobs, many in rural areas and small businesses; and those represented three percent of all jobs statewide (substantially more than provided by California’s oil industry). And another study showed that $1 of spending in clean energy industries creates nearly three times as many jobs as the same amount spent in the fossil fuel industry. 

Consistent with these trends, a recent study by Synapse Energy Economics evaluated the likely economic impact of a 2,500 foot setback, and predicted that total employment would increase, not decrease, if the setback policy were put in place, due to gains in clean energy jobs replacing any diminution in oil production that would result from implementation of the setback. 

So if you still want to look at really big eye-popping numbers, perhaps you’ll want to turn your attention away from the bogus ones being spread around by the oil industry, and focus instead on the amount of money being spent to do the spreading. In the 2019-2020 legislative session, the oil and gas industry spent a cool $30.78 million on lobbying. 

Unfortunately, in the climate created by those massive industry lobbying expenditures, AB 345 was voted down yesterday in the Senate Natural Resources and Water Committee—but it still has one more chance to pass at the next hearing on August 12. If you would like something other than money to do the talking in Sacramento, you’ll want to contact your Senator using this link to voice your support for AB 345. And assure them that it is a path toward community health, not economic doom.