USC Price School of Public Policy

Price, Viterbi add to diverse array of energy-related studies

March 12, 2013

Adding to a diverse array of energy-related studies done at USC in recent years, the USC Price School of Public Policy and the Viterbi School of Engineering, in association with The Communications Institute (TCI), embarked on an exploratory look at the potential economic impact of new oil drilling in California’s Monterey Shale.

The Monterey Shale Formation is a 1,750-square-mile swath of mostly subterranean shale rock that runs lengthwise through the center of the state with a total resource base of 15 billion barrels of oil, representing approximately two-thirds of the shale-oil reserves in the United States.

Researchers concluded that access to these deep oil deposits could have sizable positive impacts on the California economy. However, reaching the oil locked within the shale requires advanced oil-extraction technologies, including advanced geophysical monitoring technologies, horizontal drilling and hydraulic fracturing, the latter of which may pose as yet undefined environmental risks.

The study is only part of California’s total energy picture and did not examine the environmental and other impacts, which will be included in subsequent reports.

“If you just look at the economics alone, the impact of this unconventional oil development would help stimulate the California economy to a very significant extent,” said USC Price research professor Adam Rose, who coordinated the research efforts for the study. “It would generate a large number of jobs, tax revenue and business throughout the state, not only to oil drilling but to all the industries that support it directly and indirectly, and all the industries that use oil. This really ripples throughout the economy.”

Western States Petroleum Association provided a grant for the study with the understanding that the research would be completed independently so as to be objective and nonpartisan.

The study and related conclusions were based on careful analysis of available data from the United States Energy Information Administration, and very limited data from California oil producers. Due to the data limitations, the report represents only a preliminary overview of the economic impact that development of the Monterey Shale could have on California.

Researchers developed low, high and median scenarios for enhanced oil drilling in the Monterey shale deposit, studied the historic links between California oil and gas drilling and the state’s per capita gross domestic product, and conservatively applied patterns of economic development gleaned from enhanced drilling in North Dakota, which had the most moderate expansion of the oil-boom states for the years studied, ending in 2010.

Using the median scenario, the report concluded that economic effects from enhanced drilling in California would include an increase in the state per capita GDP by $1,600 to $11,000, or by 2.6 percent to 14.3 percent for various years of the time horizon 2015 to 2030. Personal income is projected to grow between $40.6 billion to $223.3 billion, or from 2.1 percent to 10 percent, and increased tax revenues for state and local government is projected to grow by $4.5 billion to $24.6 billion.

The median scenario of the report also projected 512,000 to 2,815,800 new jobs stimulated directly in the oil industry and indirectly throughout the state’s economy, depending on the year. The authors concluded that not all of these jobs would be filled by California residents. Rose noted that “the job gains to Californians will be highly dependent on future plans for education and training.”

The researchers made no policy or regulatory recommendations but sought to expand the base of information that will lead to improved policy decisions for the people and businesses of California, and for the state as a whole.

“This research is only part of the story, but an important part — the economic part,” said USC Price dean Jack H. Knott. “We are currently seeking grants to look at other pieces of the puzzle, such as the operational, environmental and regulatory practices involved with the use of advanced extraction technologies. There are always tough choices in energy policy, and it’s important to look at all evidence-based information.”

The project originated from ongoing research conducted by the Reservoir Monitoring Consortium (RMC) and Induced Seismicity Consortium (ISC) under the leadership of Viterbi research professor Fred Aminzadeh, who also serves as director of the USC Global Energy Network, in which the two consortia are housed. The Viterbi and Price Schools partnered on the study, as they did in projects last year on energy and sustainability. Aminzadeh served as the principal investigator of the study, and Rose, who has worked on energy and environmental economics for 40 years, served as liaison between researchers from different fields working on the report.

The study also contained two background chapters on energy and the California Economy written by Kevin Hopkins, TCI Director of Research and an economist and policy analyst. TCI President Jack Cox also contributed to the development and production of the full report.

Aminzadeh and Rose named six concerns for shale drilling that need to be addressed: potential contamination of water supply, increased seismic activity, land-use challenges, overwhelming small communities, a continued reliance on oil and the air pollution/greenhouse gases that result. The potential for creating artificial earthquakes already is being looked into by USC’s Induced Seismicity Consortium (ISC). The Center for Sustainable Cities, housed within USC Price, focuses on issues of environmental protection, energy conservation and greenhouse gas reduction policies. “All relevant environmental and technological issues deserve serious research, analysis, and reflection,” said Aminzadeh. “We intend to address each of them specifically and in detail in a series of follow-on reports.”

A potential positive benefit that also requires further exploration is that tapping into the large shale oil reserves would significantly reduce the dependence on foreign oil for California and the United States as a whole, contributing to national security.

USC Price professor Peter Gordon and JiYoung Park, a University at Buffalo assistant professor who received his Ph.D. in planning from USC Price in 2007, joined with Aminzadeh to author the chapter titled “Macroeconomic Impacts of Advanced-Technology Oil Drilling in the Monterey Shale,” which included the above figures projecting the economic impact in the state. The analysis was based on oil development scenarios adapted from U.S. Energy Information Administration projections at the national level and oil well “decline curve analysis” conducted by Aminzadeh and his team. However, Professor Gordon noted, “because modeling extraordinary impacts is especially challenging, precise forecasts are tenuous; instead, we are interested mostly in general patterns of development.”

Rose said he hopes funding for the second part of the study will come from a wide range of sources including foundations, government agencies, industry, environmental and public-interest groups.

“What we would like to do is a comprehensive, interdisciplinary analysis of the many aspects of shale-oil drilling in an objective way,” Rose said. “Ideally, subsequent reports will address all the big issues, including the risk and uncertainty.”