A Tale of Two Oil States

While the shale boom lifts Texas, California sits on vast resources

WSJ Editorial

Texas and California have been competing for years as U.S. growth models, and one of the less discussed comparisons is on energy. The Golden State has long been one of America's big three oil producing states, along with Texas and Alaska, but last year North Dakota surpassed it. This isn't a matter of geological luck but of good and bad policy choices.

Barely unnoticed outside energy circles, Texas has doubled its oil output since 2005. Even with the surge in output in North Dakota's Bakken region, Texas produces as much oil as the four next largest producing states combined. The Lone Star State now pumps nearly two million barrels a day, and Texas Railroad Commissioner Barry Smitherman (who is also oil commissioner) says "total production could double by 2016 and triple by the early 2020s." The entire U.S. now produces about seven million barrels a day.

The two richest fields are the Eagle Ford shale formation in South Texas, where production is up 50% in the last year alone, and the 250-square mile Permian Basin. Midland-Odessa in the Permian is one of America's fastest-growing metro areas.

More than 400,000 Texans are employed by the oil and gas industry (almost 10 times more than in California) and Mr. Smitherman says the average salary is $100,000 a year. The industry generates about $80 billion a year in economic activity, which exceeds the annual output of all goods and services in 13 individual states.

Now look to California, where oil output is down 21% since 2001, according to Energy Department data, even as the price of oil has soared and now trades in the neighborhood of $95 a barrel. (See the nearby chart.)

This is not because California is running out of oil. To the contrary, California has huge reservoirs offshore and even more in the Monterey shale, which stretches 200 miles south and southeast from San Francisco. The Department of Energy estimates that the Monterey shale contains about 15 billion barrels of oil, which is about double the estimated supply in the Bakken.

Occidental Petroleum, the big oil player in California, has recently purchased leases from the Interior Department to drill in the Monterey shale, but in April a federal judge blocked the breakthrough drilling process known as hydraulic fracturing, or "fracking," in the state. The judge ordered an environmental review of the drilling process that Texas, North Dakota and other states have safely regulated for years.

A large part of the explanation for the Texas boom and the California bust is the political culture. Despite their cars, California voters have elected politicians who consider fossil fuels to be "dirty energy."

The plaintiffs in the Monterey shale lawsuit were the local chapters of the Sierra Club and the Center for Biological Diversity. Rita Dalessio, chairwoman of the Ventana chapter of the Sierra Club, said, "We're very excited. We're thrilled" by the judge's ban, adding that "I'm sure the champagne is flowing in San Francisco." This attitude is prevalent among California's elite and wealthy.

California has also passed cap-and-trade legislation that adds substantially to the costs of conventional energy production and refining. The politicians in Sacramento and their Silicon Valley financiers have made multibillion-dollar and mostly wrong bets on biofuels and other green energy. Texas has invested heavily in wind power but not at the expense of oil production.

Another contrast is that most Texas oil is on private lands, which owners are willing to lease at a price. In California much of the oil-rich areas are state or federally owned, and leasing doesn't happen because of political constraints. In California it can take weeks or even months to get approval for an oil rig. The average in Texas? Four days.

In short, Texas loves being an oil-producing state while California is embarrassed by it. And it's no accident that Texas has been leading the nation in job creation since the recession ended. The energy boom is creating thousands of jobs related to drilling but also in downstream industries such as transportation, high-technology, construction and manufacturing. The Texas jobless rate is 6.4% while California's is still the third highest at 9.4%.

Texans are realizing another benefit from oil production: money to fund government services. According to energy analyst Kathleen Hartnett White of the Texas Public Policy Foundation, "oil and gas production generated $12 billion in state taxes in 2012." This helps Texas avoid a state income tax. California's top marginal income-tax and capital-gains tax rate is 13.3%.

California has the natural resources and technical expertise to be the next Texas if it wants to be. What it needs is the political will. California Governor Jerry Brown at least says he wants to drill, but his dominant Democratic Party is so beholden to the already-rich greens that the state is paralyzed.

So the oil remains locked in the ground, as one million Californians look for work, as its schools and roads deteriorate, and as it keeps raising taxes to balance the budget. What a tragedy. Imagine how fast the U.S. economy would grow if California were more like Texas.