Impacts

Economy

Proponents of expanded drilling claim that extracting oil from the Monterey Shale formation will help California’s economy grow, but many oil industry analysts have strong doubts about whether the formation is economically viable. Additionally, there are many unknowns when it comes to the long-term costs to public health, safety, environment and infrastructure that must be more clearly understood in order to have a full picture of the potential impact of fracking on California’s economy.

Economic Impact

There are a lot of unanswered questions about the future economic impact of extracting oil from the Monterey Shale formation. A 2011 report by the U.S Energy Information Administration (EIA) and oil industry consultant INTEK Inc estimated that there are 15.4 billion barrels of recoverable oil from the Monterey shale. Banking on this data, the oil and gas industry has made bold claims about the economic impact fracking would have on California’s economy. In 2014, the EIA lowered their official estimates of recoverable oil in the Monterey Shale by 95.6%, from 13.7 billion barrels to 0.6 billion barrels.

The 95.6% reduction means the Monterey Shale, at current levels of recoverable oil, could only meet US oil consumption for 32 days. Further, the stark reduction highlights the common misperception that California is on the edge of an oil boom. Oft-cited predictions for job creation and significant economic growth are based on dated EIA estimates, and have not taken into consideration the significant reduction. Many in the industry itself, including the CEO of Chevron, have raised serious doubts about the economic viability of the Monterey Shale.

Based on original EIA/INTEK estimates, The University of Southern California authored a report suggesting that by the year 2020, the development of the Monterey shale could increase California’s Gross Domestic Product (GDP) by 14%, provide 2.8 million jobs, and provide $24.6 billion annually in additional tax revenue – a 10% increase.  These high estimates of economic activity have been widely cited as facts. They are based on massively inflated estimates of recoverable oil, and dependent on a hypothetical explosion of production in the Monterey Shale.1

Employment

Due to technological advances, the oil industry can do many activities remotely and does not need the large workforce that it has required in the past. According to a report commissioned by the Western States Petroleum Association, only 45,840 people in California are directly employed in oil and gas extraction.  The average salary for an oil extraction worker is $49,960 per year.

As of 2013, the county with the largest Kern County, where the majority of unconventional oil extraction takes place has an unemployment rate over 12%, and only 6% of residents are employed by the oil industry.2

Tax Revenues

California is the only major oil producing state that does not charge a severance tax. California oil and gas producers pay property taxes, corporate tax-rates, and others fees to the state; however, the property tax rates often underestimate the value of underground reserves and the effective corporate tax rates are often lessened after exemptions and loopholes.  In total, California is receiving far less in tax revenues from oil producers than other states.  Severance taxes are generally incurred when a non-renewable resource is extracted on privately owned land.  This table shows the top five oil producing states and the rate at which they taxed oil in 2012.

The top 5 states with regards to severance tax rates, a key factor in evaluating fracking economics

Several bills and propositions that have been floated imposing a severance tax failed after intense opposition from the oil industry. In 2006, California’s Proposition 87, which would have imposed a tax of 1 to 6% on every barrel of oil produced, failed by a 54.7% margin. The battle over Prop 87 was the most expensive in California history, with the oil industry spending over $95 million dollars to defeat it-the largest amount in the history of California ballot initiatives.

Unintended Costs

A number of fracking’s costs are not currently included in economic projections; likely this is because oil companies are not responsible for these costs. Instead, they are passed along to California taxpayers. It is important for Californians to factor in these costs and make decisions based on accurate understanding of the full economic impacts.

Infrastructure costs

Fracking places intense demands on infrastructure that are often left out of economic calculations.  A recent look at fracking’s demand for equipment, sand, and water found that each well may require 3,950 vehicle trips.  In California, this number may be even higher, given that the Monterey Shale produces an average of 16 barrels of wastewater for every barrel of oil recovered.  Trucks carrying these heavy loads of equipment and water put a lot of stress on roads. Compared to a single axle with a 3,000 pound load, heavier trucks that weigh upwards of 30,000 pounds do 7,500 times more damage to the road. Due to damage from high volumes of fracking traffic making the roads unusable, some counties in Texas have been forced to replace paved roads with gravel. Researchers at Carnegie Mellon and the RAND Corporation have placed the road-reconstruction cost per oil well as ranging from $13,000 to $23,000. Ultimately, the state transportation agencies and taxpayers must bear the cost of increases in fracking traffic. The Infrastructure Report Card determined that 68% of California’s roads are already in poor or mediocre condition. Despite this, no analysis to date has looked at the potential impact of additional fracking traffic on California’s roadways.

Photo of road destruction. Including transportation and infrastructure costs, fracking economics begin to make less sense

A before and after picture of roads in highly-fracked parts of Texas, where some communities are turning paved roads into gravel because of lack of funding. (Source: Texas Department of Transportation)

Threat of Earthquakes

There is extensive research showing that wastewater injection can cause both large and small earthquakes. The largest earthquake linked to wastewater injection had an  estimated magnitude of 5.6-5.7.3  An earthquake of that magnitude can cause up to $4 billion in damage.  Even a medium sized earthquake can cause millions of dollars in damage if it occurs in a highly populated area. With the current regulatory framework in California, the oil companies responsible for such an earthquake would not be held accountable for damages. Read more about how water injection has been directly linked to earthquakes. 

Seismic risks are a key factor in understanding fracking economics

This home was damaged by a magnitude 5.7 earthquake in Oklahoma. An earthquake of that size is extremely rare in the region and scientists suspect the quake was triggered by nearby wastewater injection wells. (Credit: AP/Susan Ogrocki).

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