Why a Fracking Ban Will Weaken California's Economy

Why a Fracking Ban Will Weaken California's Economy

The U.S. has been mired in a low-growth economy for more than a decade that is, arguably, the weakest national economic performance for the entire postwar era. California’s economic performance has been even worse, and California can only aspire to grow at the dismal national rate.

It was not always this way. 

California was once the driver of the nation’s economy, but California has moved to the economic back seat thanks to anti-growth policies that are sapping the state’s economic vibrancy. California now has the highest top personal income tax rate in the country (13.3%) and, according to the Tax Foundation, the 4th highest overall tax burden. Regulatory studies find that California’s policies, such as imposing-high cost zoning and labor regulations, further reduce the attractiveness of the Golden State. And now there is a movement to ban “fracking.”

Fracking, or more technically hydraulic fracturing techniques, injects fluids into the cracks of rock formations, allowing more oil and gas to be extracted. Thanks to fracking, the natural gas industry is experiencing an economic renaissance that is a rare bright spot in the otherwise lackluster U.S. economy. A Merrill Lynch research note estimates that the new energy extraction technologies, and the resulting increase in energy supplies, contributed 2.2 percentage points of growth to U.S. Gross Domestic Product (GDP) between January 2010 and the end of 2011. 

And that growth has been a major job creator. As a recent Investors’ Business Daily (IBD) story noted, “Employment is up 40% in the oil and gas fields since the recession began in late 2007.” The IBD story also noted that the industry is investing hundreds of billions of dollars into state-of-the-art production facilities. 

But all of this economic activity, investment, and jobs, are drawn to the states embracing the fracking technology revolution. It is no coincidence that the states experiencing the highest growth in jobs since the Great Recession ended are the states that are blessed with large natural gas reserves, and which are implementing policies that encourage the production of those reserves.

Two states that exemplify the combination of both plentiful natural resources and policies that embrace the fracking revolution are North Dakota and Texas. Like North Dakota and Texas, California has the natural resource base. Leveraging that base, California is already a major energy producer. The total production of California’s crude oil industry is the third largest compared to all other states–and California’s proven oil reserves are also the third largest among the 50 states. California is also blessed with bountiful supplies of natural gas. Perhaps even more beneficial for the economy, California’s proven reserves continue to grow.  

The fracking revolution promises even more benefits to California. For example, it is estimated that the Monterey Shale could yield 15.4 billion barrels of oil. For perspective, the Bakken shale, which has transformed North Dakota’s economy and made North Dakota the second largest oil producing state in the nation, is only one-half the size of the Monterey Shale. Profitably extracting the oil from the Monterey Shale will require advances in fracking technology that are progressing, but which will cease to advance without a stable political environment supporting the technology.

Unlike North Dakota and Texas, however, California’s policies are lacking. The economic results speak for themselves, as California’s economy has significantly under-performed North Dakota and Texas. Based on the latest state GDP data, North Dakota and Texas saw the fastest pace of economic growth since the end of the Great Recession–ranking first and second, respectively. California’s economy was the 14th slowest growing economy during the same time period.

The same patterns hold for jobs. While California still has not recovered the total number of jobs lost during the recession, the employment markets in North Dakota and Texas are up 25.1 percent and 7.7 percent,respectively.

California could be benefiting from the same trends driving the economies of North Dakota and Texas. Unfortunately, pressure is mounting in the opposite direction. The movement to ban fracking in California increases the regulatory obstacles to growth, shuts California out of one of the strongest drivers of the current U.S. economic recovery, and further disadvantages California compared to its key competitors.

As California’s recent performance illustrates, the state does not need additional obstacles to growth. Instead, California should implement policies that responsibly embrace the economic benefits that the fracking revolution has created. Such policies would be an important start in reversing California’s politically-induced economic slowdown, and help return the Golden State to its historical position as a major driver of the U.S. economy.

Wayne Winegarden, Ph.D. is a Senior Fellow in Business and Economics at the Pacific Research Institute.