California’s Crude Oil Production and its Climate Change Policies

California is among the most aggressive jurisdictions in the world in its pursuit of public policies to reduce its emissions of greenhouse gases (GHGs), linked with climate change. At a time when the Trump administration in Washington is working to reverse the Obama administration’s climate policy achievements, California and other sub-national entities are taking the lead in the development and implementation of meaningful domestic policies to mitigate the impact of human activity on the climate.

At the same time, California is a producer of crude oil.  Is this inconsistent, or even counter-productive?  In a recent report, advocates have criticized Governor Jerry Brown, and proposed a ban on crude oil production within the State, in furtherance of California’s climate policies.  The thinking goes, crude oil production leads to environmental impacts, so how can it be allowed?

The logic is flawed, and the prohibition – if adopted – would impose tremendous costs on the State with little or no environmental benefit.  As California has developed its climate policies, the need to balance the benefits of these policies with their economic and human consequences has always been a challenging issue.  Achieving aggressive climate goals will not be cheap, so designing sensible, effective policies is critical.  Simply adopting any and all restrictions that might achieve some emission reductions would unnecessarily raise the human cost of limiting GHG emissions.  This is no doubt obvious to some readers of this blog, but for others, let me explain.

At its heart, the climate problem arises because of CO2 emissions associated with the use of energy and related services.  We heat our homes in the winter and cool them in the summer using electricity and natural gas.  We use gasoline to get to work and take vacations.  As each country or state – including California – tries to reduce its GHG emissions, the policies and regulations adopted to achieve this end nearly always target the activities that lead to GHG emissions – the generation of electricity, the use of transportation, and the heating of living spaces.

The proposed ban on crude oil extraction would flip this on its head, focusing instead on the supply of a fossil fuel.  But the simple reality is that the sources of fossil fuel supply are so ubiquitous that crude oil from other regions of the world will replace supplies from California, if California chose not to supply its own on-going needs.  Oil and gas used to heat homes and to power vehicles comes not only from California, but from most every region of the globe.  Many of these regions have expanding supplies of crude oil due to technological improvements, including the Bakken shale of North Dakota, and vast supplies available with relatively little effort, such as in the Middle East.

Advocates claim that reduction of California crude oil production would reduce global consumption of crude – a claim of questionable validity.  But that is not even the right question.  There are many things that can be done to reduce GHG emissions, and a sensible, affordable, and sustainable policy will be one that achieves reductions at the lowest cost.  Even if restricting California’s oil production might reduce global crude consumption, California would certainly bear all of the economic consequences of this policy, as the state would then rely solely on crude oil imports.

In fact, a restriction on California’s crude production is unlikely to reduce GHG emissions within California. The State’s total GHG emissions are limited by the cap of California’s GHG cap-and-trade system.  The most a restriction on California’s crude production can do is to increase costs, while achieving little or no incremental improvement in GHG emissions.

Moreover, supply-side restrictions can limit technological progress that can have very positive economic and environmental consequences.  The same advocates oppose shale “fracking,” but the innovative combination of hydraulic fracturing and horizontal drilling has led both to tremendous economic benefits by expanding supplies of low-cost domestic energy and reducing energy imports, and to environmental benefits by allowing lower-carbon natural gas to displace higher-carbon coal in the generation of electricity across the United States.

By focusing on policies aimed at achieving the appropriate policy goal of reducing GHG emissions – rather than trying to choose winners and losers among technologies and energy sources used to achieve those goals – California can achieve its climate policy goals in ways that are environmentally effective, economically sensible, and ultimately sustainable.  In my view, Governor Brown merits compliments rather than criticism for California’s progressive environmental and energy policies.


In the past, I have periodically advised the Western States Petroleum Association (WSPA), although on a very different issue, namely the design of California’s CO2 cap-and-trade system.  That was about two years ago, and neither WSPA nor any of its member companies are aware of my writing this essay.  As always in this blog, I am expressing my personal views, and not speaking on behalf of any of the institutions, organizations, or firms with which I am or have been associated.


Crude Oil Prices, Climate Change, and Global Welfare

A few weeks ago, I participated in a panel session titled, “The Remarkable Transformation of the Energy Sector: Does it Also Transform Our World.” The motivating question was: “Is the dramatic decline in oil prices a complete gift to the West because of the enormous funds being saved, or is it an unintended Trojan horse because development of renewable energy as well as new fossil-fuel sources will decline in the West, posing longer new challenges?”

The other members of the panel – from private industry – had vastly more expertise (and relevant insights) on fossil-fuel markets, but here’s what I had to say. This is hardly at the sweet spot of my professional competence, so I welcome your comments and corrections! In general, how would you answer that question?


I start (and started) from the premise that the dramatic decline in crude oil prices that took place from August, 2014 ($96/barrel), to March, 2015 ($44/barrel), was due – on the one hand – to decreased demand, a function of slow economic growth in Asia, Europe, and elsewhere, endogenous, price-driven technological change leading to greater fuel efficiency, and policy-driven technological change that also has been leading to greater fuel efficiency, such as more stringent Corporate Average Fuel Economy (CAFE) standards in the United States; and – on the other hand – was due to increased supply, partly a function of the growth of unconventional (tight) U.S. oil production (a product of the combination of two technologies – horizontal drilling and hydraulic fracturing).  And, in the presence of all of this, Saudi Arabia decided not to restrict its output to prop up prices.

[Before proceeding, I should note that since May of this year, crude oil prices have increased by about 30% from their March low, but as of May ($60/barrel) are still far below their August 2014 level.]


When one examines virtually any significant price change from an economic perspective, there inevitably seems to be both good news and bad news. So with the fall in crude oil prices.

The Bad News

First of all, I assume that low crude oil prices are problematic for the economic and political stability of some of the oil-producing/exporting countries, including Saudi Arabia, Russia, Venezuela, and Nigeria.  (For details, see Bordoff and Losz 2015, below.)

Second, it’s frequently been asserted that low oil prices are bad news for the development of alternative forms of energy, including renewable sources. Of course, in the United States, there isn’t much effect on electricity generation from renewable (wind and solar), because in the U.S. electricity sector, renewable supplies compete with coal and natural gas, not with fuel oil (but in other countries, which use more fuel oil for electricity generation than we do, there can be a disincentive for renewable dispatch – and hence development).

Third, there can be – indeed, has been – a major impact in the U.S. motor fuels sector, where the market for biofuels (mainly ethanol) is negatively affected by low conventional gasoline prices. However, these impacts must be somewhat muted by public policies, which directly or indirectly subsidize (or, in fact, require) the use of biofuels.

Fourth, low gasoline prices have resulted in decreased demand by consumers for motor vehicles with high fuel efficiency, and SUV and pickup truck sales have rebounded from previous lows. But these effects are also muted, to some degree, by public policies, including U.S. CAFE standards.   Finally, low gasoline prices also have short-term effects in the form of more driving and fuel use by the existing fleet of motor vehicles, which is bad news in terms of emissions (and congestion).

Differences across Sectors

Before turning to the “good news” about low crude oil prices (and there surely is good news), it’s worthwhile noting that whether individual businesses find these low prices to be good or bad depends largely upon the economic sector in which they operate. For example, whereas commercial airlines are finally making profits, due to the low price of jet fuel (their most important variable operating cost), manufacturers of commercial aircraft will see lower demand for new planes if low jet fuel prices become the long-term norm. The primary factor driving the larger airlines to replace aircraft in their fleets is the lower operating costs due to the much greater fuel efficiency of new models.

And, of course, low oil prices are systematically bad news for oil producers, including the major U.S. companies.

The Good News

Finally, here is the upside of these significant changes in crude oil markets.

Low oil prices are unambiguously good for aggregate global welfare. This includes consumers in the United States, Europe, Japan, and South Korea. And, at least temporarily, OPEC seems to have lost its ability to set a price floor.

Low oil prices mean an increase in consumers’ disposable income, amounting to nearly $2,500 per U.S. household annually, according to Stephen Brown (see below).  If we subtract the income losses to U.S. oil producers, the net gain per U.S. household amounts to a bit more than $800 per year, with gains accruing disproportionately to low-income households.

Turning to the environmental realm, there is also good news, or at least the possibility of good news. An opportunity for new, sensible energy and climate change policies has emerged with these low oil prices.

First, now is the time to reduce – or better yet, phase out – costly and inefficient fuel subsidies, which exist in many parts of the world, particularly in developing countries.

Second, with gasoline prices relatively low – and natural gas supplies holding down electricity prices, at least in the United States – there has never been a better time to introduce progressive climate policies in the form of carbon-pricing, whether via carbon taxes or through carbon cap-and-trade. Unfortunately, none of us should hold our breath waiting for that to happen.


For further reading, I recommend:

Bordoff, Jason, and Akos Losz.  “Oil Shock: Decoding the Causes and Consequences of the 2014 Oil Price Drop.”  Horizons, Spring 2015, Issue No. 3, pp. 190-206.

Brown, Stephen P. A.  “Falling Oil Prices: Implications in the United States.” Resources, Number 189.  Washington:  Resources for the Future, 2015, pp. 40-44.