With new drilling technologies playing a major role in an oversupply of crude worldwide, the resulting lower cost of oil and gas in recent months have brought both benefits and negative impacts to businesses across the spectrum of the regional economy.
Refined gasoline prices did rise dramatically in California over the course of February and into March, primarily from supply issues stemming from the shut-down of two refineries — the first due to a strike at the Tesoro Golden Eagle refinery in Martinez, and the other after an explosion at an ExxonMobil refinery in Torrance.
“There’s a narrow balance between supply and demand, and if something happens with supply, you get an immediate price impact,” said David Hackett, president of the Irvine-based energy consulting company Stillwater Associates, noting that gasoline prices in California rose about a dollar a gallon in February.
But prior to the relatively quick price hikes, small business owner Rosa Rangel, who owns Montclair Florist in Montclair, was among those benefitting from significantly lower prices in the fourth quarter of 2014 through January.
She recently started producing and delivering fruit arrangements and chocolate-covered strawberries, and the drop in fuel prices helped her company’s bottom line.
“I’m hoping it stays the same so we can continue to save money and start seeing better profit,” Rangel said in mid-February.
Gordon Schremp, senior fuels specialist with the California Energy Commission, said the reopening of Tesoro Golden Eagle refinery may help put downward pressure on California gas prices and increase supply.
“These kinds of significant, unplanned outages in conjunction with low inventories don’t happen very often,” he said. “It is very unusual and can result in a price spike. We’ve seen that here.”
Joe Gershen, vice chair of the California Biodiesel Alliance and a marketer for the industry, said he expects prices to start heading back down.
“I think the spike we’re seeing right now is very short-term and it’s driven by the refinery incident and the strike at the Tesoro refinery,” he said in early March. “We already saw heating oil drop 18 cents between Saturday and Sunday, which also reflect diesel prices.”
The price of crude oil was in the $50-$55 per barrel neighborhood in early March, and experts are divided as to whether the cost will return to $100 or more per barrel during the next year. The U.S. Energy Outlook predicts the price will be about $70 a barrel in the summer of 2016.
New technological advances in production — including horizontal drilling and hydraulic fracturing, or “fracking” — have caused worldwide supplies to rise and put pressure on the price of oil and, subsequently, its refined products such as gas, diesel and jet fuel. Saudi Arabia also was not curtailing its oil production, experts said, in order to bring “discipline to the marketplace.”
“What they’re saying to all of the crude oil producers is, if they don’t find a way to manage the volume of output, then the Saudis will leave the valve open and let’s see where the prices come down,” Hackett said.
Winners from the cheaper oil include consumers at the pump, trucking and logistics companies, and the airlines, according to industry observers. Businesses hurt by cheaper oil include the petroleum industry, which saw a drastic reduction in the number of operating wells, particularly in North Dakota and Texas, and also in California.
“Basically, the collapse in the price of oil due to oversupply has made production uneconomical for many producers,” said Agiimaa Kruchkin, procurement research analyst for the Los Angeles-based IBISWorld, an independent market research firm. “Although overall production rates of oil and gas have been rising across the country, smaller producers are now suffering. It doesn’t make sense to produce anymore because prices are lower than (production) costs.”
Of the 36 drill rigs employed in California last year, the number has been reduced to 15, according to industry data from Texas-based Baker Hughes, one of the world’s largest oil field services companies.
“The price of crude globally declined upwards of 60 percent, and that has caught the attention of anyone who explores for crude around the world,” Schremp said. “What I’ve seen in many announcements within the United States and other parts of the world is that companies that do this drilling have announced reductions of 25 to 30 percent. This is normal. When there is a significant decline in the price of crude oil, there’s a natural contraction of spending plans going forward for the next couple of quarters.”
California Resources Corporation, an oil company that spun off from Occidental Petroleum Corp., recently withdrew an application with the city of Carson to build a 200-well oil- and gas-drilling project at the Dominguez Oil Field.
“Since we continue to produce from our existing wells and typically don’t need to drill wells in order to maintain most of our mineral acreage, there is no need for us to drill new wells during the low end of the commodity cycle,” said Margita Thompson, CRC spokeswoman.
“In this or any other commodity price environment, we prioritize our drilling opportunities based on what creates the most value for CRC shareholders. We would expect to increase our activity level and drilling as commodity prices improve.”
Another group hit by the price dip is California’s biodiesel fuel industry. Raw materials needed to make biodiesel include used cooking oil, corn oil from ethanol production, and animal fat. Biodiesel is used in the trucking industry.
“Our fuel is sold and blended with diesel fuel, so it makes it more difficult to be competitive when the price for diesel fuel drops,” said Joe Gershen, vice chair of the California Biodiesel Alliance and a marketer for the industry. “When the price of diesel fuel or energy drops, the price of our raw materials don’t necessarily drop in the same way, so then we become uncompetitive with diesel.”
Smaller upstart biodiesel companies in recent months have shutdown, according to the industry’s trade association, because of the lower price.
“Last year, I think two or three smaller plants shut down. Smaller plants don’t have the same economies of scale as larger plants, so they’re going to be the first to go,” Gershen said.
While some felt the pinch, others benefitted from the cheaper energy in late 2014 and early 2015. Among them is Stater Bros., the San Bernardino-based grocery chain. CEO Jack Brown said the increase in discretionary income for consumers from lower gas prices may have resulted in a 1 percent sales boost for his company.
“Food is generally the No. 1 way a family uses the income they have available,” Brown said, adding that lower fuel prices also helped the company by reducing what it costs to deliver goods to its 168 full-service supermarkets, which are located in six counties in Southern California.
“Every penny saved in fuel costs enables us to keep our prices lower,” he said.
Staff writer Sandy Mazza contributed to this report.
