COVID-19 shutdown is crushing oil prices. Why this part of California isn’t celebrating

One bright spot in the economic turmoil ripping through California has been cheaper gasoline, with pump prices plunging toward levels not seen in more than a decade. But even that consolation prize from the coronavirus pandemic is hurting a significant sector of the Central Valley’s jobs and livelihood.

As oil prices sank to historic lows Monday, industry executives said the plunge is generating a wave of layoffs among the thousands of Californians who work in the state’s own oil patch, much of which is located in the San Joaquin Valley.

“There’s just a huge oversupply,” said Jim Fox, president of Driltek, an oil engineering firm based in Bakersfield, the heart of California oil country. “It’s going to be a while for the glut to dry up.”

Fox said the “vast majority” of his 100-plus employees and contractors have been let go. “The companies are shutting; they’re not going to spend capital money to try to get more oil out of the ground at this point in time.”

By one measure, oil sank to unheard-of levels Monday. Oil futures fell to minus-$37.63 a barrel on the NYMEX exchange, the lowest price on record. That means that oil traders were paying people to take the product off their hands.

The negative pricing was something of a fluke of the financial calendar. Futures contracts were expiring for West Texas oil, which meant speculators and other traders would have to take delivery of oil May 1 if they couldn’t get rid of their contracts. And because space is almost nonexistent at one of the crucial storage sites in the United States, a massive tanker farm in Cushing, Okla., traders went into a panic.

“Everything is full,” said Jeffrey Williams, a UC Davis economist who tracks commodities markets. “If you don’t have any place to put the oil, it’s worth a negative amount.”

A negative futures price on Wall Street didn’t mean motorists get paid for buying gasoline. But it did reflect a genuine decline in real-world pricing as economic activity falters because of COVID-19 and the demand for energy plummets. Oil has been dropping for weeks, and a deal brokered by President Donald Trump with Russia and Saudia Arabia to reduce output hasn’t been enough to end the free-fall in pricing.

The bloodbath continued Tuesday, this time in futures contracts for June delivery. Prices fell 40 percent, to under $12 a barrel.

As crude slumps, retail prices are dropping too. AAA said the average price in California has dropped to $2.80 a gallon, down from $3.23 a month ago. In Sacramento, the average price is $2.66, down from $3.10 last month.

As a rule, retail prices fall more slowly than crude prices, in part because gas station operators “like to hang onto their margins” for as long as possible, said Dave Hackett of Stillwater Associates, a petroleum consulting firm in Irvine. He said the price at the pump will go even lower.

“Retail prices in California can get under $2 a gallon,” he said. “The market is extremely full of oil.” Average gas prices in California haven’t been less than $2 since late 2008 and early 2009, after the stock market crashed and the Great Recession began.

Oil still an big part of CA economy

In a green state where the Legislature is trying to reduce the consumption of fossil fuels, it may surprise many Californians that oil is a significant part of the economy.

Hackett said California produces about one-third of the crude oil it uses. Most of the rest comes from South America, the Middle East and Alaska.

All told, the state pumped 161 million barrels of crude out of the ground in 2018, the last year for which figures were available. That was nearly as much production as Oklahoma.

The vast majority of California’s oil comes from Kern County, at the southern end of the San Joaquin Valley. Aaron Hegde, an economist at CSU Bakersfield, said Kern is among the single largest oil-producing counties in the entire country.

“The county is going to be in serious, dire straits for the next year or so,” Hegde said.

Nearly 10,000 people making a living in the industry in Kern, and the layoffs are well under way.

“‘Nobody is going to produce; there’s no margin there at all,” said Gordon Isbell, vice president at Excalibur Well Services, an oil production services company in Bakersfield.

Excaliber has trimmed more than half its workforce in six weeks, going from 166 employees to 76. “It’s what we call a perfect storm,” Isbell said.

Chad Hathaway of Hathaway LLC, a small oil production company in Bakersfield, said he’s been through dramatic price drops before in his career, but “never before in my life” has he seen anything like this. He’s let 18 of his 30 employees go.

Even so, Hathaway believes that prices eventually will come back.

“It’s a boom and bust industry,” he said.

This story was originally published April 21, 2020 at 5:00 AM with the headline "COVID-19 shutdown is crushing oil prices. Why this part of California isn’t celebrating."