California Could Be the Next Shale Boom State

Thanks to the Golden State’s dire fiscal situation, don’t be surprised if the governor were to proclaim: ’There will be oil.’

Could 2013 find California lawmakers and Gov. Jerry Brown finally making the connection between fiscal challenges and energy markets? The Golden State is well positioned to become an exporter of hydrocarbons and enjoy a gusher of oil revenues. While many Californians will find that hard to contemplate, ideology bends more easily than the laws of physics and the imperatives of economics.

The $6 billion a year in additional income taxes Gov. Brown convinced Californians to approve in Proposition 30 last November won’t begin to solve the state’s fiscal problems. Last year’s State Budget Crisis Task Force, co-led by former Federal Reserve Chairman Paul Volcker, estimated the state’s long-term debt at no less than $370 billion.

But California has Saudi Arabia-scale oil resources, notably in its largely untapped Monterey shale field, which stretches northeast for more than 200 miles from Bakersfield in central California. New technologies, especially smart, horizontal drilling and hydrofracturing, aka "fracking," make that oil accessible, and cleanly. 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.

California collects about $15 billion in tax revenues for every billion barrels of state oil production, according to research conducted last year by the University of Wyoming’s Timothy Considine and Edward Manderson. If that is accurate, 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. Economists Robert Hahn and Peter Passell, at the American Enterprise and Milken Institutes respectively, point to another $30 billion to $80 billion in broad economic and social benefits that ripple through an economy for every billion barrels of oil production.

Do the math: 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.

There is a precedent for this. Technologies of the early 20th century unleashed oil fields from Long Beach to Bakersfield. Beverly Hills sits atop a legacy field still in production, its surface hardware hidden artfully off Pico and Olympic Boulevards in large windowless buildings. Black gold, not the gold rush, funded many California businesses for the first half of the 20th century.

In the heyday of the 1960s, when the state’s education system was first in the nation, California’s oil production ranked second nationally, at about 400 million barrels annually. Now with production down 50%, California has dropped to No. 4 in oil production, behind Texas, North Dakota and Alaska. North Dakota’s embrace of the shale-oil revolution vaulted it to No. 2 and has led to low unemployment, no deficit, and university funding on the rise.

The fracking and smart-drilling revolution that has unlocked "tight" oil and reversed America’s 40-year production decline, emerges from the same constellation of information and materials technologies that yielded the iPad and MRI. Bill Gates recently observed that the "one thing that is different today [in energy] is software, which changes the game." Those few words contain more wisdom than most energy tomes.

Still, many believe that innovation can replace hydrocarbons and have invested tens of billions on that bet. They may be right someday, but not in time frames that matter to this generation or the next. Liquid hydrocarbons—diesel, gasoline—remain unmatched in those features vital for cars and aircraft: energy density, safety, ease of transport and storage. Finding alternatives at the scale needed, at any price, has been devilishly hard.

Patents are predictive here: Over the past five years, about 65,000 patents have been issued across the entire alternative-energy domain versus 150,000 for new hydrocarbon technologies. Soon, for example, water-free hydrofracking will emerge. Water for fracking is a rising operational cost, and a political hot potato even though Los Angeles uses more water in an hour than is needed to create a dozen hydrofracked wells. (For context: nationally, water for oil and gas extraction doesn’t approach 1% of agriculture use.)

Every credible forecast from the U.S. Department of Energy to the International Energy Agency sees liquid hydrocarbons supplying 80% to 90% of transportation-energy growth for the next two decades. With global vehicle fuel demand expected to grow by the equivalent of adding another United States’ worth of consumption, much of that growth coming in Asia, California is ideally suited to become a major exporter.

Oil companies will tell you that they are ready and able to produce that bounty, but leadership has to come from Sacramento in cooperation with the federal Bureau of Land Management, which has subsurface mineral rights for much of the Monterey shale field. Yet there is good news on this front. In December, the BLM sold some 15 leases for thousands of acres of potential shale development—in California. Add to this that a year ago Gov. Brown fired his two regulators who had overseen a 70% decline in state drilling permits since 2008, and you have the makings for progress.

A savvy politician might also point out the promise of Silicon Valley developing still more advanced hydrocarbon tech. One can foresee a growing array of software, sensor, materials and big-data startups that underpin the smart controls and data processing central to modern oil production.

For California, it could be back-to-the-future, a well-funded future, courtesy of technology again unleashing wealth from natural resources. That would be quite a future to behold, and quite a legacy for Gov. Brown.

This piece originally appeared in Wall Street Journal

This piece originally appeared in The Wall Street Journal