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Black Gold Rush

Few states were more successful in resisting the onslaught of the Great Recession than North Dakota. As most of the nation quickly plunged into economic deprivation at the end of 2008, North Dakota’s fortunes soared and never looked back.

Breakthroughs in horizontal drilling techniques, decades in development, suddenly made it possible to pull billions of barrels of high-grade oil out of the huge Bakken shale deposits that stretch continuously across the western half of North Dakota and into the northeastern corner of Montana. The oil boom in ND rivaled the black gold rush in Texas and later in Alaska in the last century. Recoverable reserves of oil in the Bakken field surged from a paltry 150 million barrels in 2005 to today’s estimate of 8 billion barrels, a number which is expected to grow exponentially.

The Bakken oil boom has filled North Dakota’s fiscal coffers to overflow, with annual surpluses a given in the state budget. No state has a brighter employment picture: there are so many jobs being created in the Peace Garden State—(yep, that’s what the locals call it, and no, it’s not a more sedate version of New Jersey)—that many new hires are having a hard time finding lodging, sleeping in their cars or RVs while new housing is built.

In fact, when President Obama visited Elkhart, Indiana in 2009 to commiserate with a town then suffering from the highest unemployment in the nation (15.3 percent), we suggested in this space that he utilize federal stimulus funds to purchase the output of one of Elkhart’s largest industries—Elkhart bills itself as “the RV capital of the world”—and ship them up to North Dakota so new oilfield workers could live in them. The president didn’t take us up on this idea, but it’s probably still valid.

While Dakotans have been thriving up North, few states were hit harder by the national downturn than California. The housing market collapse devastated the Golden State at the same time it faced a fiscal reckoning brought on by decades of piling up long-term debt.

The nation’s largest state has been painfully taking its fiscal medicine in huge dollops during the past four years, in the form of deep budget cuts and huge tax increases. Last year, a State Budget Crisis Task Force headed by former Fed Chairman Paul Volcker estimated California’s long-term debt at a staggering $370 billion. After swallowing that gloomy news, Californians trudged to the polls in November and approved a referendum increasing their state income taxes by a whopping $6 billion a year.

All of that may be about to change, seismically, for the better. The key to that positive change resides in the same place in California it did in North Dakota—buried more than a mile underground in the middle of a huge shale deposit.

According to Mike Mills, a physicist and a Manhattan Institute senior fellow,  California has “Saudi Arabia-scale” oil resources, primarily in its largely untapped Monterey shale field, which stretches northeast for more than 200 miles from Bakersfield in central California. The U.S. Energy Information Administration estimates that the Monterey shale field alone holds 15.4 billion barrels of oil, rivaling America’s total conventional reserves.

Map of U.S. shale gas and shale oil plays as of May 9, 2011. (Source: U.S. Energy Information Administration, based on various published studies.)

Map of U.S. shale gas and shale oil plays as of May 9, 2011. (Source: U.S. Energy Information Administration, based on various published studies.)

 

 

 

In a recent Op-Ed piece in the Wall Street Journal, Mills cited a University of Wyoming study estimating that California collects about $15 billion in tax revenues for every billion barrels of state oil production. If that’s accurate, Mills said, “then simply by opening up Monterey oil development—no incentives, grants or state funds required—tax receipts could total $250 billion over the coming two decades.”

Other experts cited by Mills, including economists Robert Hahn and Peter Passell, at the American Enterprise and Milken Institutes respectively, say that in addition to tax revenues, each billion barrel yield of oil generates another $30 billion to $80 billion in broad economic and social benefits that ripple through an economy.

Simply put, the overall economic benefits of opening up the Monterey shale field could reach $1 trillion. “One can only imagine the impact on California’s education system, social programs, infrastructure, and even energy-tech R&D. Moreover, with that kind of revenue, Sacramento tax collections could wipe out debt and deficits,” Mills said in his WSJ column.

But even before the breakthrough horizontal drilling technique of hydraulic fracturing (a.k.a. “fracking”) emerged to unlock the riches embedded in shale deposits, California—birthplace of the “green” movement—has been increasingly reluctant to expand the development of its oil resources.

In the 1960s, California’s oil production ranked second nationally, at about 400 million barrels annually. Oilfields stretching from Long Beach to Bakersfield were tapped. There was even oil production in Beverly Hills, with drill rigs tastefully hidden in large, windowless buildings. Today, with production down 50 percent, California has dropped to No. 4 in oil production, behind Texas, North Dakota and Alaska.

Thus far, California hasn’t dived head-first into an embrace of fracking. Other states with large shale deposits—including Pennsylvania, Ohio and Louisiana—are moving full speed ahead with large-scale fracking operations. Environmental concerns about the potential for ground-water contamination from fracking have kept California and New York on the sidelines.

But the vast economic growth potential contained in their shale deposits may prove impossible to resist, and a change in attitude about tapping into them appears to be taking shape in California.

According to reports, a battle for mineral rights is now underway in the scenic vineyards of Hames Valley near Bradley, CA. The federal Bureau of Land Management, which has subsurface mineral rights for much of the Monterey shale field, in December sold about 15 leases for thousands of acres of potential shale development in California. Last year, CA Gov. Jerry Brown fired the two state regulators who had overseen a 70 percent decline in state drilling permits since 2008, a notable turnaround for a state leader who in his first stint as governor in the 1970s pioneered many of California’s landmark environmental protection statutes.

And further advances in drilling technology itself soon may overcome the concerns about fracking, experts say. “Water-free hydrofracking”—an oxymoron if ever we heard one—may be on its way.

So stay tuned. It says here there’s a high probability we may soon be hearing the same rallying cry out West that echoed across California in 1849: “There’s gold in them thar hills!”

Black gold, that is.

 

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