Impacts of SB 467 and Other Restrictive Oil Production Policies on Jobs and Retail Prices

MARCH 2021

PREPARED FOR:State Building and Construction Trades

Council of California

PREPARED BY:Capitol Matrix Consulting

ImpactsofSB467andOtherRestrictiveOil

ProductionPoliciesonJobsandRetailPrices

OnFebruary17,2021,SenatorsScottWienerandMoniqueLimonintroducedSB467,whichwouldprohibittheissuanceofnewpermitsorrenewalofexistingpermitstoconducthydraulicfracturing,acidwellstimulationtreatments,steamGlooding,waterGlooding,orcyclicsteamoperationsbeginningJanuary1,2022.Themeasurewouldprohibitallhydraulicfracturing,acidwellstimulationtreatments,steamGlooding,waterGloodingor,cyclicsteamoperationsunderexistingpermitsbeginningJanuary1,2027.SenatorWieneralsoindicatedhisintentiontoadd2,500footwellset-backrequirementstoSB467throughfutureamendments.

Whilebyfarthemostdraconianmeasureintroducedsofar,SB467isbutoneofseveralmeasuresunderconsiderationinCaliforniathatwouldseriouslydiminishoilproductioninthisstate.Othermeasuresincludestatewidewellsetbackrequirementsaswellasproposedandenactedlocalordinancesthatplacenumerousrestrictionsonoilproduction-relatedac-tivities.

Inthisbrief,weevaluatetheimpactsthatSB467andotherpoliciesthateliminatingCalifor-niaoilproductionwouldhaveon(1)jobs,income,taxesandothermeasuresrelatedtocrudeoilproduction,and(2)retailpricespaidatthepumpforgasolineandotherreGinedpetroleumproducts.Wealsolookattheeffectsthathigherpriceswouldhaveonhouseholdsatvaryingincomelevels,aswellasjobsinCalifornia.

2

SummaryOurkeyGindingsare:

● SB467wouldresultintherapidphase-outofvirtuallyallcrudeoilproductioninCaliforniaby2027.Thisisbecause95percentofCaliforniaoilproductionreliesonwaterGlooding,steamGlooding,orcyclicsteamoperationstomaintainGlowofoilintowells.Ifastatewide2,500-footoilwellsetbackrequirementisaddedtothebill,97percentofproductionwouldbeeliminated.BecauseoftheintegratednatureofoiloperationsandthedevastatingimpactsthemeasurewouldhaveonalloperatorsinCalifornia,suchabanwouldlikelyendinvestmentsinmuchoftheremainingpro-ductionaswell.

● Therapidproductionphase-outwouldresultintheeliminationofvirtuallyallofthe50,000jobsand$1.5billioninstateandlocalrevenuestiedtocrudeoilproduction.Aproductionphase-outwouldalsoputatrisktensofthousandsofjobsinmid-streamanddownstreamindustriesthatareinvolvedinthetransportation,reGining,anddistributionofpetroleumproducts.

● WeestimatethetotaleconomicvalueofprovenoilreservesinCaliforniaisbetween$20billionand$30billion,withtheactualamountdependingmainlyonfuturecrudeoilprices.ThistotalisrelatedtoproducingGieldsonly.Itdoesnotincludetheadditionalvalueassociatedwithmineralrightsheldonseveralmillionsofacresofundevelopedlandsheldbyproducersandinvestorsinthestate.SB467orothermeasuresrestrictingproductionwouldresultinamajorlossinwealthtomineralrightsownersandproducers.Suchmeasurescouldalsoresultinamajorliabilitytothestateifmineralrightsownersandproducersweretoprevailin“takings”law-suits.

● Theaffectedoil-industryandalliedconstructionjobs,manyheldbyunionmembers,arehigh-payingwithbeneGits,andareavailabletoworkerswithoutcollegedegrees.TheywouldbeextremelydifGiculttoreplaceevenifthestateprovidesmajorsupportforjobtrainingandrelatedemployeeassistanceprograms.

● Beyondthemajorimpactsoncrudeoilproductionindustryjobsandincome,therapidphase-outofproductionwillmakeCaliforniaalmost100percentdependentonwaterborneimportsforpetroleumproducts.ThiswillputCaliforniaatmoreriskofsupplydisruptions,anditwillputupwardpressuresontransportationfuelpricespaidatthepumpbyCalifornians.Thisisbecause:

3

➢ Evenunderthebestofcircumstances,thelossofreliablesuppliesofCaliforniacrudeoilwouldrequirereGinerstobuildandmaintainlargerinventories,buildmorestor-agecapacity,andre-conGigureoperationstoaccommodateincreasesinforeigncrudeoil.InCalifornia’sisolatedfuelmarkets,suchcostswouldlikelybepassedalongtoconsumers,sincetherearenocrudeoilorreGinedproductspipelinesthatlinkCali-forniatootherU.S.supplysources.

➢ Moreimportantly,reGinersdonotcurrentlyhaveadequateportaccesstoaccommo-datemorethanaboutone-halfofthe400additionaltankersthatwouldneedtobeofGloadedeachyear.Ifpastexperienceisanyindication,itishighlyunlikelythatenoughcapacityandrelatedinfrastructurecouldbeaddedintime(ifever)tooffsetthedeclineindomesticproduction.ThiswouldleadtosupplyshortfallsofcrudeoilorreGinedpetroleumproductsneededtomeetCalifornia’sdemandforpetroleumproducts.

➢ Becausedemandforpetroleumisinelastic,largeincreasesingasolineandrelatedtransportationfuelpriceswouldberequiredtobringmarketsbackintobalance. 1

● Basedonassumptionsandmethodologiesdescribedinthisbrief,weestimatethatgaso-lineanddieselpriceswouldlikelyrise70centspergallonduetothepass-forwardofreGinerycosts–evenifportconstraintsdonotbecomeafactor.

● Ifwaterborneportconstraintsweretobecomeafactor,whichwebelieveisespeciallylikelygiventhequickphase-outofCaliforniacrudeoilsuppliesmandatedbySB467,thengasolinepricescouldeasilyrisebybetween$1and$2dollarspergallon,andtheycouldbrieGlysoarby$10dollarsormorepergallon.

● Evena$1.00pergallonincreasewouldraisehouseholdexpendituresongasolineanddieselby$10billionperyear(anaverageof$733perhousehold).A$2.00pergallonincreasewouldraiseannualhouseholdexpendituresby$20billion($1,466perhouse-hold).Householdswouldalsofacehighercostsforotherpurchases,whichweestimatewouldrangefrom$2.5billionto$5billionannuallyinthecaseofa$1.00increaseingasolineprices.ThisisduetotheimpactofhighertransportationfuelpricesonthecoststoproduceanddistributevirtuallyallproductsandservicesthroughouttheCali-forniaeconomy. 2

The overwhelming majority of goods movement (whether by aircraft, truck, rail, or ship), food production and delivery, and personal1

transportation relies on petroleum fuels, and the majority of travel is relatively nondiscretionary. Therefore, the demand for petroleum fuel is inelastic, meaning that it does not vary significantly despite price changes.

As one example, higher transportation fuel costs – whether from regulatory constraints on in-state petroleum production or from2

mandated electrification of trucks and construction vehicles – decreases competitiveness of California farmers and manufacturers by driving up cost relative to competitors in other states and other countries like Mexico and China.

Impact of Restrictive Oil Policies on Jobs and Retail Prices● Thepriceincreaseswouldhaveadisproportionateimpactonlow-andmoderate-income

households,whospendagreatershareoftheirincomesonmotorfuelsthantheirhigher-incomecounterparts.Low-andmoderate-incomehouseholdsinCaliforniaarealreadystrugglingwithrentsandenergycoststhatareamongthehighestinthecountry.

● Thehigherpetroleum-relatedcostswouldalsoleavehouseholdswithlessdisposablein-cometospendonothergoodsandservices,whichwilldepressbusinesssalesandemploy-mentthroughouttheeconomy.Weestimatethata$1.00increaseinretailgasolinepriceswouldresultinalossofbetween80,000and95,000jobswhendirectandmultiplierim-pactsareincluded.

● Arapidphase-outofoilproductionwouldhaveintenseimpactsintheSanJoaquinValley,where75percentofstatewidecrudeoilproductionoccurs.Suchaphase-outwouldalsohavesubstantialimpactsontheCityofLongBeachwhere1,000publicandprivatesectoremployeesaretiedtotheCity’soperationsintheWilmingtonoilGield,whichwouldbeshutdownunderSB467.

IntroductionCaliforniaisthe7thlargestproducerofcrudeoilintheU.S.Inadditiontosupportingover50,000jobs,California’soilandgasexplorationandproduction(E&P)industrysuppliesaboutone-quarterofthepetroleum-relatedenergyneedsofthisstate’speople,businesses,andgovernments.ThesepositivecontributionswouldbevirtuallyeliminatedwithinsixyearsbySB467(WienerandLimon),ameasureintroducedonFebruary17,2021,whichwould:

● Prohibittheissuanceofnewpermitsorrenewalofanexistingpermitforhydraulicfractur-ing,acidwelltreatments,waterGlooding,steamGlooding,orcyclicsteamoperations,begin-ningonJanuary1,2022;and

● Prohibitallhydraulicfracturing,acidwelltreatments,waterGlooding,steamGlooding,orcyclicsteamoperations,beginningonJanuary1,2027.

5

Impact of Restrictive Oil Policies on Jobs and Retail PricesSB467wouldeliminatealmostallCaliforniacrudeoilproductioninaverycompressedtimeframe.Thisisbecauseproducershave,formanyyears,reliedonenhancedoilrecovery(EOR),suchaswa-terGloodingorthermalsteaminjection,tomaintainoilGlowinCalifornia’smatureoilGields.Accord-ingtoestimatesproducedbyCatalystEnvironmentalConsultingusingwellproductiondatafromtheCaliforniaGeologicEnergyManagementDivision,95percentofoilproducedinCaliforniaduring2019utilizedeitherwaterHlooding,steamHlooding,orthermalsteam–thetypesofop-erationsthatwouldbeeliminatedunderSB467. Iftheauthorsadda2,500-footoilwellsetback3

requirementtoSB467,about97percentofcurrentoilproductionwouldbeeliminated.Further,giventhecommoninfrastructureinvolvedinpower,oilgathering,andpipelinetransportationsys-tems,theshut-downof95to97percentofoilproductionwouldalsothreatentheabilityofopera-torstocontinuetheremainingproductionaswell.

WenotethatwhileSB467isbyfarthemostrestrictivemeasurecurrentlycirculating,therearemanypoliciesunderconsiderationthatindividuallywouldhavemoderatetomajorimpactsonoilproductioninthestate.Whencombined,thesepolicieswouldeliminatethemajorityofCaliforniaoilproductionoverarelativelyshortperiodoftime.ThesearealsohighlightedinFigure1.

Figure1PoliciesAimedatReducingorEliminatingCaliforniaCrudeOilProduction

*Includesproductionphase-outrequiredbytheLosAngelesCountySustainabilityPlan,restrictionsincludedintheVen-turaCountyrevisedGeneralPlan,andsimilarproposalsinotherjurisdictions.

Policy ApproximateAmountofProductionAffected

SB467–Eliminationofoilproductionwater-Glooding,steam-Glooding,cyclicsteam,hydraulicfracturing,andacidwelltreatmentsby2027.

148million(outofatotalof156million)barrels;151millionbarrelsifa2,500footwellsetbackre-quirementisaddedtothebill.

Banonhydraulicfracturing 27millionbarrels

Moratoriumandpotentialbanonhigh-pressurecyclicsteam 11-13millionbarrels

Wellsetbackrequirements 25millionbarrelsassuming2,500-footsetback

Variouslocalrestrictions* Potentially25millionbarrels

Catalyst Environmental Solutions is a diversified environmental consulting firm with considerable experience in the energy sector.3

Catalyst specifically estimates that 38 percent of California oil production is tied to steam flooding, 30 percent is tied to water flood-ing, and 27 percent is tied to cycle steam. This leaves just 5 percent attributable to conventional production using no EOR. Hy-draulic fracturing and acid well treatments, which are also banned by SB 467, largely take place in fields that rely on EOR.

6

Impact of Restrictive Oil Policies on Jobs and Retail Prices

JobandRevenueImpactsofanOilProductionPhase-outAsindicatedinFigure2,in2019theoilandgas (O&G)productionindustrywasresponsiblefor4

50,100jobs,$19billionineconomicoutput,and$4.4billioninlaborincome.Italsoprovided$1.5billionintaxes,fees,andotherrevenuestostateandlocalgovernmentsinthe2019-20Giscalyear. 5

Figure2

CMCEstimates:KeyContributionsoftheOilProductionIndustry

inCalifornia(2019)

AveragepayintheO&Gindustrywas$139,000in2019,nearlydoublethestatewideprivate-sectoraverage.Manyhigh-payingjobsintheindustryareavailabletoworkerswithlessthancollegede-grees.

Revenuesfromoilandnaturalgassalesareplowedbackintothelocaleconomies,ascompaniesin-vestindevelopingtheirreservestoreplacethebarrelsofoilandcubicfeetofgastheyproduce.Theseinvestmentsfurtheraddtojobs,income,andeconomicactivityinCalifornia.Aboutthree-

OilProduction 156.1millionbarrels

TotalOutput(directandmultipliereffects) $19.1billion

Employment(directandmultipliereffects) 50,100jobs

LaborIncome(directandmultipliereffects) $4.4billion

State/LocalTaxesandotherrevenues(directandmultipliereffects) $1.5billion

Our estimates of jobs, labor income, and average wages are based on North American Industry Classification Codes (NAICS)4

which include jobs attributable to both crude oil and natural gas production. While operations banned by SB 467 would directly apply to only California oil production, the bill’s restrictions would indirectly eliminate most natural gas production as well. This is because 90 percent of natural gas production in California is “associated gas,” which is extracted as a byproduct of oil production.

The crude oil production industry has been negatively affected by the economic fallout of the COVID-19 pandemic; partial year5

data indicates that production and jobs fell significantly during 2020. As oil markets stabilize over the next couple of years, the Cali-fornia oil and gas industry holds considerable potential to be an economic leader in terms of investment and job growth in this state. The extent to which this potential is realized, however, depends partly on economic factors, but also, to a large degree, on whether state and local legislative and regulatory policies will facilitate new oil industry investment.

7

Impact of Restrictive Oil Policies on Jobs and Retail PricesquartersoftheproductionandindustryjobsarelocatedintheSanJoaquinValley,anareathatoth-erwisefaceshighunemploymentandlagginghouseholdincomes.

VirtuallyallofthecontributionsshowninFigure2wouldbeeliminatedbySB467,andasigniGicantportionofproductionwouldalsobeeliminatedbyotherpoliciesunderconsideration(andshowninFigure1).Thesepolicieswouldalsoputatrisktensofthousandsofjobsinvolvedinthetrans-portation,storage,andreGiningofcrudeoil.Thedownstreamimpactswouldbeevenmorepro-nouncedifsomereGinerswerenotabletoreplaceCaliforniaproductionwithforeign-sourcedcrude,orifthecrudeoilwerereplacedwithreGinedproductsfromabroad.

Impactsonroyaltyowners,mineralrightsowners,andproducers.Asidefromtheeconomicactivityassociatedwithannualproduction,theoilreservesthemselvesrepresentamajorsourceofwealthtoCalifornia.Thevalueofthesereservescanbemeasuredbyestimatingthepresentvalueofafter-taxcashGlows(i.e.,annualrevenuesminusoperationalandinvestmentcosts)generatedfromallfutureextractionofoilfromthesereserves.Weestimatethatthevalueisintherangeof$20bil-lionto$30billion,dependingonthefuturepriceofcrudeoil.Theseestimatesrelatetotheextrac-tionfromproducingreserves.Theydonotincludeanyfuturevaluefromtheresourcesinthesever-almillionmineralacresthatarecurrentlyundevelopedinCaliforniaandthatholdsigniGicantpoten-tialforfutureproduction.Whilethevalueofthesenon-producingassetsisdifGiculttoascertain,webelievethattheyareworth,inaggregate,severalbillionsofdollars. 6

Abanonoilproductionwouldgreatlydiminishthevalueofbothproducingandundevelopedre-serves.Thiswouldresultinamajorlossinwealthtoroyaltyowners,mineralrightsownersandproducersinCalifornia.Itcouldalsoresultinamajorliabilitytothestateiftheaffectedentitiesweretoprevailin“takings”lawsuits. Ataminimumthestatewouldfacemillions–perhapstensof7

millions-ofdollarsinlitigationcostsdefendingagainstsuchlawsuits. Iftheplaintiffsweretopre8 -vailinoneormoreoftheselawsuits,thestatewouldberequiredtopaythecompaniesandownersofthemineralrightsaffectedbythebanthepresentvalueofthelostproGitsfromtheoilthatwouldnolongerberecoveredintheseGields.

Localimpacts.TheeconomicimpactswouldbeparticularlyintenseintheSanJoaquinValley,wherethree-quartersofstatewideproductionislocated,andwagespaidoutsideoftheoilproduc-tionindustryare,onaverage,one-thirdlowerthanthestatewideaverage.Thephase-outwillalso

In addition to losses related to oil reserves that could no longer be accessed, the enactment of SB 467 or other measures banning6

oil production would also eradicate the value of hundreds of millions or even billions of dollars worth of investments in pipelines and related infrastructure, which would no longer be needed to transport and store oil produced in California fields.

Under the “takings” theory, a legislatively mandated ban on production would result in the “taking” by government of a valuable7

asset owned by oil and gas producers and mineral rights owners. As compensation, the state would be required to pay the affected entities an amount equal to the present value of the lost profits from the oil and gas that would no longer be recovered from the California fields. In December 2017, the Monterey County Superior Court ruled that a 2016 Monterey County ballot initiative banning oil production (Measure Z), if applied, would constitute an unlawful taking of the property of certain royalty and mineral rights own-ers.

As an indication of potential litigation costs, in May 2018 Monterey County dropped its appeal of the December 2017 Superior8

Court ruling overturning a substantial portion of Measure Z (see footnote 7), citing the potential for “millions of dollars in attorney fees and costs, potentially tens of millions of dollars.” http://www.co.monterey.ca.us/Home/Components/News/News/1421/1336

8

Impact of Restrictive Oil Policies on Jobs and Retail PriceshavenegativeimpactsontheCityofLongBeach,whichistheworkinginterestownerofthegiantWilmingtonoilGield.VirtuallyalloilproductionintheWilmingtonGieldisaidedbywaterGlooding,andthuswouldbeshutdownunderSB467.Theshutdownwouldeliminatetensofmillionsinan-nualrevenuestothecity,aswellasover1,000publicsectorandprivatesectorjobscurrentlyasso-ciatedwithoilextractionfromtheWilmingtonoilGield.

Insum,SB467orsimilarmeasureseliminatingCaliforniaoilproductionwillputtensofthousandsofworking-classfamiliesandtheircommunitiesatrisk.Thelossofoil-industryandalliedconstruc-tionjobs,manyheldbyunionmembers,wouldsubjectthesefamiliestopotentiallyextendedperi-odsofunemploymentaswellaslikelyreductionsinfuturepayandbeneGits,evenaftergoingthroughjobretrainingprograms.

Restrictivepolicieswillhavepronouncedimpactsevenifonlyappliedtonewwellsandprojects…WhileSB467wouldbanallEORandhydraulicfracturingby2027,someotherproposalsunderconsiderationwould“only”applydirectlytonewdrilling,facilityorpipelineconstruction,andothernewindustryinvestments.Proponentsoftenclaimthatsuchproposalswouldhavelimitednear-termimpactsbecauseexistingproductionwouldbeabletocontinue. Thisassertionignoresthree9

importantfeaturesoftheoilproductionindustry:

•TheGirstisdecliningproductionthatnaturallyoccursovertimeasreservoirsaredepleted.

•Thesecondisthesubstantialamountofsustainedinvestmentthatisrequiredtocounterthenat-uraldecline.

•ThethirdisthatoperatorsdevelopexistingGieldsinphasestoensuretheefGicientuseofsurfacewellpads,aswellasactiveandidlewellbores.Muchinfrastructurecurrentlyinplacewasde-signedtoprocesstheproductionfromneworrecompletedwellsaswellascurrentlyactivewells.

Weestimatethat,withoutcontinueddrillingandotherinvestments,thebasedeclinerateforCali-forniaoilGieldsisupto15percentperyear.Thisimpliesthatwithoutinvestment,mostproductionwouldbegonewithinadecade.TheproductiondeclineisonlycounteredthroughdevelopmentofnewGields,drillingofreplacementwellsincurrentlyproducingGields,recompletionofexistingwellsindifferentoil-bearingzones,orotherinvestmentsinGieldoperations,includingEOR.RestrictingdrillinginexistingGieldsinterfereswiththeefGicientoperationofwellsandinfrastructure,increasestheunitcostofproduction,andnegativelyimpactstheproductivityandreturnsoninvestmentforbothoperatorsandroyaltyowners.TheseimpactswouldfurtherdrivedownwardproductionandinvestmentinCalifornia.

Proposals placing limits on new drilling have been vague regarding the extent to which their restrictions would affect recompletions9

or deepening of existing wells.

9

Impact of Restrictive Oil Policies on Jobs and Retail PricesInvestmentsinnewandreplacementproductionarealsoresponsibleforasubstantialproportionofthejobsandincomegeneratedbytheE&Pindustry.Policiesthatrestrictnewdrillingandotherin-vestmentswillresultinanimmediateandsharpdeclineinoilindustryrelatedjobs,andarelativelyquickphase-outofproduction.

ImpactonPricesatthePumpBeyondthenegativeimpactsonindustryjobs,policiesleadingtoaphase-outofcrudeoilproduc-tioncouldhavemajorimpactsonallCaliforniahouseholdsandbusinessesbycreatingmoreinsta-bilityinpetroleummarkets,potentialsupplyshortages,andalmost-certainincreasesinretailpricesforgasolineandotherpetroleumproducts.Inthissection,wediscuss(1)theimpactsthatfallingin-stateproductionwouldhaveonpricesofgasolineandotherreGinedpetroleumproducts,and(2)theimpactsthatthesehigherpriceswillhaveonhouseholdbudgetsandthebroadereconomy.

Background–Californiaisan“EnergyIsland”

CaliforniacrudeoilproductioniscrucialtothestableoperationsofCalifornia’spetroleummarkets.Thisisbecauseunlikemoststates,whichareinterconnectedtopetroleumsuppliesthroughnet-worksofpipelinesrail,andshortdistanceshipments,Californiaisan“energyisland,”relyingalmostexclusivelyonin-stateproductionandwaterborneimportsmostlyfromforeigncountriesintheMiddleEast,SouthAmerica,andAfricatomeetpetroleumdemand.CaliforniareceivesdecliningamountsofoilfromAlaskaandverylittlecrudeoilfromtheother“lower-48”states.Thisisprimar-ilyduetothelackofinterstatecrudeoilpipelinesreachingfrommid-continentregionstoCalifor-nia,andthehighcosts,safetyconcerns,andstrongpublicresistancetorailshipments. Similarly,10

CaliforniaimportsonlysmallamountsofreGinedmotorvehiclefuelfromotherstates.ThisreGlects(1)thelackofinterstatereGinedpetroleumpipelinesextendingfrommid-continentortheGulfCoasttoCalifornia,and(2)thelackofout-of-statereGineriesthatproducesufGicientquantitiesofmotorvehiclefuelthatmeetsCalifornia’sspecialfuelformulationrequirements. 11

GivenCalifornia’sisolationfromotherU.S.markets,in-stateproductionplaysacrucialroleinensur-ingasteadyandreliablesupplyofcrudeoiltohelpreGinersmeetCalifornia’senergyneeds.ThelossofthesesupplieswillmakeCaliforniahighlydependentonwaterborneimportsofcrudeoilorre-

Total shipments into California by rail were 8.2 million barrels in 2019, representing only 1.2 percent of total crude oil demand in10

the state. See “Oil Imports by Rail, 2019,” California Energy Commission. https://www.energy.ca.gov/data-reports/energy-almanac/californias-petroleum-market/oil-supply-sources-california-refineries-1

According to the California Energy Commission, refineries capable of producing gasoline meeting California’s stringent fuel stan11 -dards are located in the State of Washington and the Gulf Coast. However, imports from these sources are limited by transportation and capacity constraints; thus, California has relied on imports from abroad to cover shortfalls in gasoline meeting the state’s fuel specifications. (See “California gasoline imports increase 10-fold after major refinery outage.” U.S. Energy Information Administra-tion, October 13, 2015. https://www.eia.gov/todayinenergy/detail.php?id=23312.)

10

Impact of Restrictive Oil Policies on Jobs and Retail PricesGinedproductsfromremoteforeignsources,asfaras14,000nauticalmilesaway,tomeetitsenergyneeds.

ThelackofaccesstoU.S.suppliesimpliesthatthestatewillnotbeabletorelyonaquickinGluxofcrudeoilorreGinedproductstooffsetsupplyshortagesthatwouldbemorelikelytoemergeifCali-forniabecameevenmoredependentonimportedoil.IttakesuptothreeweeksforshipmentsfromAfricaortheMiddleEasttoarriveatCaliforniaports.

LossofCaliforniaProductionWouldIncreaseRetailPricesThroughTwoMainChannels

SB467orotherstateandlocalpoliciesrestrictingin-stateoilproductionwouldincreaseretailpricesby(1)raisingcoststoreGiners,whowouldneedtoreconGigureoperationsandexpandinven-toriesastheybecome100percentreliantonimportedcrudeoil,and(2)creatingpotentiallylargesupplyshortagesasreGiners’accesstoportsandrelatedstoragefacilitiesisconstrainedbycapacitylimits.

HigherReHineryCosts

PetroleumreGineriesarecomplexindustrialfacilitiesthatareintricatelydesignedtohandlespeciGictypesofcrudeoil.CaliforniareGineriesaredesignedandbuilttoprocesstheheavycrudeoil(withrelativelylessthanaverageamountsofsulfur)thatcomefromCaliforniaoilGields.ReplicatingthechemicalcharacteristicsofCaliforniacrudeswithforeign-sourcedoilwillposeasigniGicantchal-lengetoproducers.IfitisnotpossibletoGindsuitablecrudereplacement,reGinerieswouldneedtoincurmajorcoststoreconGiguretheirreGiningprocesses.

Inaddition,CaliforniareGinerswouldbecompetinginglobalmarketsforthesecrudes.Assuch,theywouldfaceadditionalrisksandchallengesassociatedwithforeignsupplydisruptions,volatilemar-ketconditions,andintensecompetitionfromChinaandothermajoroilimporters.Managingthesechallenges,aswellassupplychainsaslongas14,000miles,willbecomemoredifGicultandexpen-siveifCaliforniasuppliesarecurtailedbystateandlocalgovernmentmandates.Thelossofdepend-ablelocalsupplieswillrequirereGinerstomakemajorinvestmentsincoastaltankageandpipelinesforthepurposeofincreasinginventoriestoguardagainstsupplyGluctuations.

Oneindicationofthepriceimpactsofdwindlingin-statesuppliescanbefoundbylookingatthein-creaseintherelativepriceofCalifornia-producedoilcomparedtointernationalbenchmarksthatoccurredasin-statesuppliesdeclinedoverthepastthreedecades.In1994,in-stateproductioncov-ered47percentofCaliforniademandforpetroleumproducts,andthepriceofMidway-SunsetcrudelaggedtheBrentspotpriceby26percent.(ThelowerpricereGlectsthehigherdensityandviscosityofMidway-Sunsetoil,whichmakesitmoreexpensivetotransportandreGine.)By2019,in-stateproductionhadfallenbynearlyhalf,to25percentofCaliforniaconsumption,andthepricegaphadnarrowedtojust5percent.

11

Impact of Restrictive Oil Policies on Jobs and Retail PricesThenarrowingpricedifferencereGlectsapremiumthatreGinersarewillingtopayintheshorttermtocontinueusingstablesuppliesofCalifornia-producedcrudestooptimizefuelinputsandavoidaddedinvestmentandinventorycosts. 12

IfthehistoricalrelationshipsbetweenCaliforniacrudeoilproduction,consumption,andpricesweretoholdinthefuture,eliminationofCaliforniaproductionwouldraisegasolinepricesatthepumpby70centspergallon. Thisisaconservativeestimatethatassumesasmoothtransition13

withnobottlenecksorsupplyshortfalls.Itisalsobasedonarelativelylong-termlinearrelationshipbetweenCaliforniasuppliesandprices.ThereisevidencethatthepriceeffecthasacceleratedinrecentyearsasCaliforniaproductionhasdeclinedbelow30percentofCaliforniademand.IfwebaseourestimatesontherelationshipbetweenpricesandCaliforniasuppliesduringjustthe2014through2019sampleperiod,theestimatedpriceincreaseassociatedwitheliminationofCaliforniasupplieswouldbe$1.40pergallon.

SupplyShortages

InadditiontothereGinery-relatedcostsdiscussedabove,theeliminationofvirtuallyallin-stateoilproductionwouldmakeCalifornianearly100percentdependentonwaterborneimports.AmajorconcernisthatCaliforniareGinersdonothaveaccesstoadequateportandrelatedinfrastructurecapacityneededtoaccommodatetheadditional400medium-sizedtankersofoilthatwouldbeneededtoreplacethelossofCaliforniacrudeoilproduction. 14

Inapaststudywecompletedin2019,weestimatedthatreGinerscouldreplaceaboutone-halfofcrudeoilsuppliesfromCaliforniaproductionwithouthavingtomakemajornewinvestmentsinportsoron-sitefacilities. Replacementoftheotherhalfwouldrequiremajorinvestmentsinport15

expansions,additionaltankageandpipelines,andreGineryreconGigurations.Asnotedintheprevi-oussection,theseandrelatedinvestmentswouldcostmultiplebillionsofdollarsandwouldlikelybepassedalongtoconsumers.

See for example, the California Resources Corporation Annual Report, 2018. On page 29, the company cited two reasons for the12

increases in California crude prices relative to the Brent benchmark during 2017 and 2018 : “(S)trong demand for California crude oil to optimize local refinery yields as well as a decline in overall California crude oil production.” (Italics added for emphasis.)

This estimate is specifically based on a regression analysis of the relationship between (a) the percentage of California crude oil13

consumption supplied by California production and (b) the relative price of Midway-Sunset as compared to the price of Brent crude oil. We found that during the 1994 through 2019 sample period, each one percentage point decline in the share of California con-sumption supplied by California production was associated with a 0.8 percentage point increase in the relative price of Midway-Sun-set crude.

This calculation is based on an “LR 1” class tanker carrying an average of 390,000 barrels of crude oil. (Source: U.S, Energy14

Information Administration, London Tanker Brokers’ Panel).

“Impact of a Statewide Oil Production Ban on Downstream Petroleum Markets.” Capitol Matrix Consulting, August 2019.15

12

Impact of Restrictive Oil Policies on Jobs and Retail PricesThebiggerchallengeforreGiners,however,wouldbeinsecuringthemultiplepermitsandrelatedenvironmentalandlanduseapprovalsneededbyCaliforniaports,storageterminaloperators,andthereGinersthemselvestomoveforwardontheinvestments.Weindicatedinthe2019reportthatCalifornia’shistoryofmajordelaysandpermitdenialsforoil-relatedcapitalprojectsinandaroundCaliforniaportsbodespoorlyfortheprospectsofnewinvestmentsbeingapproved. Nothinghas16

occurredduringtheintervening18monthstochangeourview.Absentthesecapacity-buildingin-vestments,Californiawouldfacechronicsupplyshortagesandmuchhighertransportationfuelprices.TheseshortageswouldbelikelytooccurunderSB467.Thisisbecause(1)demandforpe-troleumproductsisunlikelytodeclinesigniGicantlyoverthenextseveralyearsgiventhemixofmo-torvehiclesontheroad,and(2)thestateandlocalpermittingprocessforneededportexpansionswouldalmostcertainlyextendforyearsbeyond2027,whenin-stateproductionwouldceaseandforeigndemandwouldsoarunderSB467.

Demandformotor-fuelsisinelastic.Innormalmarkets,wherebothsupplyanddemandcanad-just,asupplyshortageisresolvedthroughresponsesbybothconsumers(throughreducedde-mand)andproducers(throughincreasedsupply).Ifsupplyisconstrained,however,thenallofthepriceadjustmentwilldependonhowmuch(andhowquickly)consumersreducedemandinre-sponsetohigherprices.Thechallengeisthatmuchtravelandproduct-movementarenon-discre-tionary,leavingconsumersandbusinesseswithfewoptionstocurtailpurchases,particularlyintheshortterm.Asaresult,demandfortransportationfuelshasbeenfoundtobeprice-inelastic.Forexample,anoften-citedstudyofgasolinedemandintheU.S.conductedinthemid-1990sfoundthattheshort-termelasticityofdemandwasabout-0.2andthelong-termelasticitywasabout-0.6. , Anelasticityof-0.2impliesthata10percentincreaseinthepriceofgasolinewillreduce17 18

consumerdemandbyjust2percent.Recentstudieshavefoundtheshort-termprice-elasticitytobeevenlower.TheU.S.DepartmentofEnergy’sEnergyInformationAdministration(EIA)estimatesashort-termpriceelasticityintherangeof-0.02to-0.04forvehiclemilestraveledinresponsetochangesingasolineprices.Thismeansthata100percentincreaseingasolinepriceswouldreducetravelbyjust4percentorless. 19

Ibid.16

Molly Espey, “Explaining the Variation in Elasticity Estimates of Gasoline Demand in the United States: A Meta-Analysis.” The17

Energy Journal. 1996, Volume 17, Issue 3, 49-60.

Long-term price elasticity is defined in many studies to be the consumption effect after one year. Long-term price elasticities are18

higher than short-term price elasticities because consumers have more opportunity in the longer term to adjust behavior – such as by moving closer to jobs or nearer to public transit or by purchasing a more fuel-efficient car. It should be noted that these forced adjustments make consumers worse off, in terms of having to trade in a car earlier than had been financially optimal prior to the gas price increase and/or being forced to drive smaller vehicles with less-than optimal passenger or storage capacity.

Source: “Gasoline prices tend to have little effect on demand for car travel.” U.S. Energy Information Administration, December19

15, 2014. https://www.eia.gov/todayinenergy/detail.php?id=19191#:~:text=The%20price%20elasticity%20of%20motor,to%20raise%20automobile%20travel%201%25.

13

Impact of Restrictive Oil Policies on Jobs and Retail PricesThekeyimplicationoftheinelasticdemandforgasolineisthatevenmodestsupplyshortfallswillresultinsubstantialincreasesinretailprices.Californianshaveexperiencedthedramaticimpactsofsupplyshortfallsinrecentyears.Forexample,inthemonthsfollowingtheFebruary2015outageattheTorrancereGinery(whichsuppliesabout10percentofgasolineconsumedinCaliforniamar-kets),wholesalegasolinepricesspikedasmuchas$1.35pergallonbeforeincreasedsuppliesofgasolinefromabroadalleviatedshortfallsintheCaliforniamarkets.Policiesthatdrivedowndomes-ticsuppliesanddrive-updependenceonwaterborneimportswillresultinpotentiallylargerandmorepersistentsupplyshortfallsthantheonethatoccurredin2015.PriceImpacts

Toprovideageneralindicationofthemagnitudeofretailpriceincreasesthatwouldresultfromagovernment-mandatedeliminationofoilproduction,wedevelopedestimatestakingintoaccountthevariousfactorsdiscussedabove.Theseestimatesarebasedonourstatisticalanalysis,discussedabove,regardingthelong-termrelationshipbetweendecliningCaliforniaproductionandrisingpricesreGinerspayforCaliforniacrudeoil, aswellascalculationsofpriceimpactsofshortages20

thatwouldlikelyemergeduetoport-relatedcapacityconstraints,usingshort-termandlong-termpriceelasticitiesofdemand. 21

Inbothcases,weassumethatgivenCalifornia’sisolatedpetroleummarkets,thecostincreaseswillbepassedalongtoconsumersinthestate.Importantly,theseestimatesassumethatforeigncrudeoilsuppliesarenotdisrupted.OurresultsaresummarizedinFigure3,whichshows:

● IfreGinerieswereabletoreplaceallofthelostCaliforniaproductionthroughhigherimports,pricesatthepumpwouldrisebyabout70centspergallon.Thecostincreasesunderthisscenariowouldberelatedsolelytothepass-throughofhigherreGinerycostsassociatedwithreconGigurationsandlargerinventoriesneededbecauseofincreasedrelianceonimports.

● If,becauseofportcapacityconstraints,reGinerieswereabletoreplaceonly75percentofthelostin-stateproduction,theestimatedpriceincreasewouldbe$1.00pergallon.Overamultiple-yearperiod,thepriceincreasewouldeventuallydiminishto70centspergallon,asconsumersmakeadjustments(suchaspurchasingmorefuel-efGicientautomobilesormov-ingclosertowheretheywork,orbyworkingremotely.)

● IfreGinerieswereonlyabletoreplace50percentofthelostCaliforniaproduction,thepriceimpactcouldreach$2.00pergalloninthenearterm,decliningto70centspergallonasconsumersmakelongertermconsumptionadjustmentstogasolinepriceincreases.

Supra 6.20

For purposes of these calculations, we use the short-term price elasticity of demand of -0.2 and a long-term price elasticity of21

-0.6, both consistent with Espey’s 1996 analysis (see footnote 10). We also used a starting retail price of $3.41 per gallon of gaso-line, consistent with price levels found in late January 2021.

14

Impact of Restrictive Oil Policies on Jobs and Retail PricesFigure3ImpactsofEliminationofCaliforniaCrudeOilProductiononRetailGasolinePrices

Theseestimatesdonotencompassthefullrangeofpriceeffectsthatcouldoccur.PriceincreasescouldbelessifreGinersorterminaloperatorswereabletoquicklysecureapprovalsforport-expan-sionprojects,orifCaliforniademandfallsbymorethanexpected.Largepriceincreasescouldde-velopifsupplyshortfallsemerge,orifconsumersareunabletoreduceconsumptionbyasmuchasweareassuminginresponsetopriceincreases.Forexample,usingtheEIAshort-termelasticityes-timates,pricescouldtemporarilyspiketo$10pergallonormore.OfevengreaterconcernistherisktoCaliforniafamiliesandthebroadereconomyfromincreaseddependencyonforeignenergyimports.EffectscouldbecatastrophicifCaliforniaisexposedtoabruptforeignsupplycutbacksduetointernationalturmoil,regionalskirmishes,disruptionofsupertankertransportroutes,accelerat-eddemandincreasesinChinaandIndia,orotherfactors.

ImpactofPetroleumPriceIncreasesonConsumersPriceincreasesofthesemagnitudeswouldhavemajorimpactsonhouseholdsandbusinessesinCalifornia.A$1.00pergallonpriceincrease(whichwouldoccurifreGinerswereabletoreplace75percentoflostCaliforniaoilproduction)wouldtranslateintoadditionalCaliforniaexpendituresof$20billionongasolineanddiesel.FulleliminationofCaliforniaproductionwouldraiseexpendi-turesongasolineanddieselby$40billion.

Per G

allo

n Pr

ice

Incr

ease

$0.00

$0.55

$1.10

$1.65

$2.20

100% replaced through imports 75% replaced through imports 50% replaced through imports

Near term (approximately 1 year) Long term

15

Impact of Restrictive Oil Policies on Jobs and Retail Prices

Householdswoulddirectlypayaboutone-halfofthoseextraexpenses,throughhigherpricesatthepumpforgasolineorotherpetroleumproducts.Theywouldindirectlypayforaportionoftheotherhalf.Theexactamountwoulddependonhowmuchofthehighertransportationfuelcostsincurredbybusinessesandgovernmentarepassedalongtoconsumersintheformofhigherpricesforprod-uctsandservices(and,inthecaseofgovernment,highertaxes).

DirectEffectsfromHigherMotorVehicleFuelPrices

Higherpricesatthepumpwouldactmuchlikearegressivetax,hittinglow-andmoderate-incomefamiliesespeciallyhard. AccordingtotheConsumerExpenditureSurvey(CES)producedbythe22

U.S.BureauofLaborStatistics,averageexpendituresofallCaliforniahouseholdsforgasolineandothermotorvehiclefuelswere$2,475annually,or2.9percentofaveragehouseholdincomein2017-18.

Weestimatethatifgasolinepricesrose$1.00pergallonaveragemotorvehiclefuelexpendituresforatypicalhouseholdwouldincreaseby$732peryearto$3,207.Thiswouldraisemotorvehiclefuelexpendituresfrom2.4percentto3.7percentofatypicalhousehold’sannualincome.

Ifpricesroseby$2.00pergallon,atypicalhouseholdwouldfacea$1,465peryearincreaseinan-nualmotorvehiclefuelcosts–raisingitsexpendituresfrom$2,475to$3,940peryear.Thiswouldraisespendingonmotorfuelsfrom2.9percentto4.5percentofaveragehouseholdincome.

However,asindicatedinFigure4,theimpactswouldbeuneven.Thepercentofincomespentonmotorvehiclefuelsismuchgreaterforlow-andmoderate-incomehouseholdsthanfortheirhigh-incomecounterparts;hence,theimpactsofretailpriceincreaseswouldlikewisefallmoreheavilyonlow-andmoderate-incomefamilies.SpeciGically:

● A$1.00increaseingasolinepriceswouldraiseannualspendingforthebottom20percentofhouseholds(thosehavingincomesuptoabout$22,000)by$358,from9.4percentofin-cometo12.2percentofincome.A$2.00increasewouldraiseaveragespendingforthisgroupby$716,from9.4percentupto15percentoftheirtotalbudget.

● Incontrast,thesame$1.00increaseingasolinepriceswouldraiseannualspendingforthetop20percentofhouseholds(thosewithincomesabove$140,000)by$1,026indollarterms;butasapercentofhouseholdincome,theincreasewouldbesmall,goingfrom1.6percentto2.0percentofannualincome.A$2.00increasewouldraiseexpendituresby$2,052,orfrom1.6to2.5percentoftheirtotalhouseholdbudget.

Estimates based on household spending patterns by income level found in the 2017-18 Consumer Expenditure Survey for Cali22 -fornia, published by the U.S. Bureau of Labor Statistics. https://www.bls.gov/cex/tables.htm

16

Impact of Restrictive Oil Policies on Jobs and Retail PricesFigure4

ImpactofEliminationofCaliforniaOilProductiononHousehold

ExpendituresforMotorVehicleFuels,byHouseholdIncomeLevel

ThesepriceincreaseswouldcomeontopofCalifornia’smuchabove-averagecostsforrents(whicharecurrently50percentormoreabovethenationalaverage),andenergy.Withregardtoenergycosts,Figure4showsthatresidentialpricesforelectricityaretwo-thirdshigherthanthenationalaverage,androughlydoublethoseofCalifornia’swesternstateneighbors.Gasolineis41percenthigherthanthenationalaverage,andbetween20percentand40percenthigherthanitswesternneighbors.Naturalgasis30percenthigherthanthenationalaverage,andbetween6percentand56percenthigherthanitswesternneighbors. 23

Shar

e of

Inco

me

Spen

t on

Mot

or F

uels

0.0%

4.0%

8.0%

12.0%

16.0%

Lowest 20 Percent Third 20 Percent Highest 20 Percent

Current amount100% of lost CA production replaced through imports75% of lost CA production replaced through imports50% of lost Califorrnia production replaced through imports

Gasoline prices are based on AAA daily survey as of January 30, 2021. https://gasprices.aaa.com/state-gas-price-23

averages/. Estimates of electricity prices are from the U.S. Energy Information Administration, Electric Power Monthly. https://www.eia.gov/electricity/monthly/epm_table_grapher.php?t=epmt_5_6_a. Estimates for natural gas are from the U.S. EnergyInformation Administration, Natural Gas Prices. https://www.eia.gov/dnav/ng/ng_pri_sum_dcu_nus_m.htm

17

Impact of Restrictive Oil Policies on Jobs and Retail Prices

Figure5

EnergyPricesinCaliforniaVersustheU.S.andNeighboringStates

Critically,thebottom45percentofCaliforniahouseholdstypicallyspendtheirentireannualincomeonnecessitiessuchasfood,rent,transportation,healthcare,andutilitiesThesehouseholdshavenoroomtoabsorbtheincreasesingasolinepricesthatwouldresultfromstatepolicieseliminatingCaliforniaoilproduction.

IndirectEffectsonPricesofOtherGoodsandServices

Inadditiontothedirectcostsassociatedwithhigherpumppricesfortransportationfuel,house-holdswouldfacepriceincreasesonotherproductsandservicestheypurchase.ThisisbecausetransportationfuelexpensesareasigniGicantcomponentoftheoverallcostsoffood,consumergoods,airtravel,publictransportation,andmanyotherproductsandservicesthathouseholdspur-chase.Thepass-throughoftheseindirectcostswouldhavesubstantial,thoughperhapslessvisible,impactsonhouseholdbudgets.Weestimatetheseeffectscouldbebetweenone-quarterandone-halfofthedirect(priceatpump)impacts.

WesternNeighbors

Column1 California U.S. Nevada Arizona Oregon Washington

Gasoline(1/30/2021)(PerGallon) $3.411 2.422 $2.763 $2.431 $2.701 $2.834

Electricity(11/2020)(Centsperkilowatthour) 22.26 13.35 11.61 11.69 11.12 9.84

NaturalGas(11/2020)(Perthousandcubicft) $14.38 $11.07 $9.20 $13.51 $10.38 $10.59

18

Impact of Restrictive Oil Policies on Jobs and Retail PricesBroaderImpactsofHigherPetroleumPricesintheEconomyTakingintoaccountboththedirectandindirectimpactsofhigherpetroleumprices,weestimatethata$1.00increaseinaveragegasolineanddieselpriceswouldraiseconsumercostsbybetween$12.5billionand$15billionannually.Thiswouldreducetheamountofdiscretionaryincomethathouseholdswouldhavetospendonothergoodsandservices.Thiswouldhavenegativeimpactsonbusinessesthroughouttheeconomy,resultinginlossesofbetween80,000and95,000jobs. These24

losseswouldbeaboveandbeyondthelossesincurredbytheoilproductionindustryanditssuppli-ers.ConclusionSB467aswellasotherstateandlocalpoliciesunderconsiderationthatwouldcurtailoreliminateCaliforniaoilproductionwouldhavefar-reachingimpactsthatextendwellbeyondthemultipletensofthousandsofworkersintheoilproductionindustryanditssuppliers.AsigniGicantdeclineinCal-iforniaoilproductionwillputupwardpressureonretailpricespaidbyCaliforniaconsumersforgasolineandotherpetroleumproducts.Thisisduetoboth(1)majorreGinerycoststhatwillbein-curredastheyshifttonearly100percentdependenceonimportedoil,and(2)theveryrealriskofsupplyshortfallsthatwillariseifCaliforniaisunabletoadequatelyexpandportandstoragetermi-nalcapacitytoaccommodatetheadditional400tankersthatwillberequiredtounloadcrudeoilorreGinedproductsthroughCaliforniaportseachyear.Thehigherprices,whichwebelievecouldrangeupto$2.00pergallonofgasoline(andspikeevenhigherforbriefperiods),wouldactlikearegressivetax,raisingcostssubstantiallyonlow-andmoderate-incomehouseholdsthatarealreadyfacingrentsandenergycoststhatareamongthehighestinthenation.Thedeclineinhouseholddiscretionaryincomeswouldalsoimpactspendingonothergoodsandservicesintheeconomy,de-pressingjobsandincomesthroughoutCalifornia.

Multiplier estimates are based on the IMPLAN input-output model and database for the California economy, using an allocation of24

the $12.5 billion and $15 billion disposable income losses to households of varying income levels based on data from the Consumer Expenditure Survey for California (see footnote 17).

19