California's Dirty Secrets
By: Vanessa Warheit
October 20, 2019
People often say that California is a leader in the climate movement — but we still have a lot of work to do to earn our climate cred. While it's true that the Golden State has made a lot of progress on demand-side solutions (think: electric cars, municipal composting, solar panels), the rest of the world needs to know that California has some dirty secrets. We're still pumping oil & gas out of the ground at a terrifying rate; and we're still investing our public pensions in the companies that are engaged in this reckless behavior. Both of these things are already losing us a lot of money — and they are poised to cause catastrophic losses.
Don't get me wrong — I'm proud of my home state. I've lived in California for most of my life, and I can attest to the huge strides we've made in cleaning up our air and water. I'm proud of the progress we've made decarbonizing our transportation, and now our buildings too. I'm proud of our sanctuary cities, and a host of progressive reforms that leave us all safer and stronger. But driving my electric car through the oilfields of Fresno, Bakersfield, Santa Barbara, and LA, I see another California in stark relief: we are a petro-state. With oil derricks extending to the horizon, Bakersfield's Kern County is in fact the #1 oil producing county in America. For Los Angelenos (especially lower-income Angelenos), the oil derricks are literally in their backyards. For anyone who spends time in southern California, Dirty Secret #1 is really an open secret.
As Executive Director of Fossil Free California, my day job is attending to a less open secret: the fact that America's two biggest public pension funds, both in California, invest billions of our teachers' and public employees' retirement dollars in the fossil fuel industry. CalPERS (the Public Employee Retirement System) and CalSTRS (the State Teachers' Retirement System) have over $15B invested in companies holding carbon reserves. If you count the pipelines, refineries, and additional services that make burning those carbon reserves possible, the number shoots up to over $22B.
At a time when the IPCC has made it clear that averting total global catastrophe will require adhering to a strict carbon budget, the fact that America's two biggest funds are continuing to invest in carbon — like there's no tomorrow — is simply appalling.
Luckily (for the planet), these funds' determination to invest in ecocidal madness has not netted them much in the way of returns. Which brings us to Dirty Secret #3: Fossil Fuels are losing California (and the rest of the world) a lot of money. And if we don't get our collective act together, they're about to lose us a lot more.
I know that's a hard fact to believe — so please don't take it from me. Go to Morningstar and look up Exxon, or Chevron, or Shell, and compare any of them with the S&P 500. You can also look up XLE (an oil and gas ETF); you'll find the same thing.
If you'd invested $10,000 ten years ago, Exxon would have returned a profit of $83, while the S&P would have made you over $18,000. The oil sector is doing so badly, that Exxon was recently dropped from the top ten in the S&P 500 for the first time ever. Sure, Big Oil is still big — but it's shrinking. And it's not your Grandma's blue chip stock anymore. (Remember Kodak?)
There is some poetic justice in saying that the fossil fuel industry is going the way of the dinosaurs. The problem is, even if we can get them to fail fast enough to save the planet, they may still take the economy down with them when they go.
It turns out, investing isn't the only way California's about to lose big on Big Oil. Thousands of the state's oil derricks have been sitting idle for decades, because it's not profitable anymore to run them. It might not ever be profitable to run them (pretty much no one sees prices rising above $100/barrel any time soon) — but the fossil fuel companies keep those wells idle, instead of shutting them down, because that way they can still be counted as an asset.
Once the company finally decides to shut down a well, or is forced to shut it down, that asset suddenly becomes a liability. Something called Asset Retirement Obligations, or ARO's, require companies to clean up each one of those wells, and restore the land back to how it was before the drilling started. And that can get very pricey, very fast. But the oil industry is doing nothing to prepare for its own retirement — which some analysts suggest could happen a lot sooner than many of us think.
So, what's a wily, unscrupulous industry to do, when faced with imminent decline? Why, foist the problem off onto someone else, naturally! Which is what's happening, right now, here in the Great State of California. One immediate example: Occidental Petroleum spun off its California operations back in 2014, with a new (undercapitalized, underinsured) corporate entity called California Resources Corporation (CRC). This new company — which currently owns 20% of all the idle on-shore wells in California — is now facing imminent bankruptcy. And who will be left paying for all that cleanup? The taxpayers of the Great State of California.
And who is invested in CRC? Yes, folks, California's two mega pension funds. Which will be left with bubkiss once all those ARO's are paid off.
Recent legislation has tried to shore up this looming disaster, but the Western States Petroleum Association got their hands on the legislation and watered it down to be far from adequate. Which leads us to Dirty Secret #4: Big Oil still calls a lot of the shots in Sacramento.
While California is somewhat unique, with mega pension funds invested in fossil fuels AND a massive, dying oil industry, many other states also have some combination of these two toxic assets. So let ours be a cautionary tale. We know we need to stop funding this industry before it completely blows up our climate. The smart money is already leaving coal, oil and gas. The only questions are, will we get out fast enough to make a difference? And who will be left holding the bag?
Vanessa Warheit is the Executive Director of Fossil Free California, a non-profit focused on moving money out of fossil fuels and promoting a just transition to a low-carbon economy.