Unexpectedly Intriguing!
March 15, 2018

California's economy struggled in 2017, to the point where it was quite reasonable to ask if the state was experiencing a recession.

In answering that question, we found that economic and employment data from multiple sources were consistent with recessionary conditions being present within the state, which is to say that some sectors of California's economy were indeed experiencing elevated levels of distress during 2017, where one or more sectors would almost certainly have to be going through at least some degree of significant economic contraction.

Further, since much of the negative impact that was clearly evident in the data for the state's employment levels was concentrated in the early months of 2017, that economic distress had to have really taken off in 2016, since changes in employment tend to lag behind changes in economic circumstances for employers.

Around the same time that we did those bits of analysis, we began playing with some new tools for assessing the health of the economy within a given region, which would potentially provide some insight into the nature of the economic distress that was clearly occurring within California using an unconventional metric: the imagery of nighttime lights within the state as documented by NASA's Black Marble project in 2012 and 2016 through the space agency's Worldview application.

So we focused on California's nighttime lights and compared the changes we found between 2012 and 2016. In doing that, we discovered that the most significant changes were taking place in California's Central Valley, where we found numerous lights dim or disappear in that region between 2012 and 2016, which would be consistent with a diminished level of human, and thus economic, activity occurring throughout much of that region between those years. The following animated image shuttles back and forth between the satellite images of California's Central Valley from 2012 and 2016 every three seconds, where the dimming of nighttime lights in the region from 2012 to 2016 becomes clearly evident.

Animation: NASA Black Marble - California Central Valley - 2012 vs 2016

It is almost axiomatic that geography has a profound influence on the composition of a region's economy, so knowing where the lights went out in California's Central Valley between 2012 and 2016 could tell us quite a lot about what sectors of the state's economy were experiencing the greatest amount of distress. So we matched where the lights went out to the communities closest to them, as shown in the following map:

Google Maps: California Central Valley, 2018

In doing this exercise, we couldn't help but notice that some of the most noticeable changes occurred in the part of the region that is to the west of Bakersfield, California, in the western portion of Kern County, which was something of a red flag because, as Wikipedia describes it, "the city is a significant hub for both agriculture and oil production. Kern County is the most productive oil producing county, and the fourth most productive agricultural county (by value) in the United States."

That's important, because California experienced both a severe multi-year drought that officially ended in April 2017 and also the negative impact of oil prices collapsing in mid-2014, where they didn't hit bottom until February 2016 before going on to stabilize and partially recover.

Of these two industries, the evidence of the dimming nighttime lights between 2012 and 2016 in California's Central Valley prompted us to focus more closely on the state's crude oil production, where we hypothesized that most of what we're seeing is a reduction in natural gas flaring at the state's major oil fields. We then extracted both the state's crude oil field production numbers and its price per barrel from the U.S. Energy Information Administration's databases. In the following chart, we're presenting the trailing twelve month total of its crude oil production along with the state's monthly crude oil prices, mainly for the sake of showing how the rolling annual production level of crude oil in the state changed, where we're capturing data over a 10 year period, from January 2008 through December 2017.

Trailing Twelve Month California Crude Oil Field Production and Prices, January 2008 through December 2017

We opted for this presentation because it provides a quick way to compare California's total crude oil production from one year to the next by looking at the values recorded in December each year, while also providing an indication of how the monthly production numbers were changing.

Looking at the period from 2015 through 2017, we see that the California's trailing twelve month total crude oil production was 201 million barrels in December 2015, which declined to 186 million barrels in December 2016 (92.4% of December 2015's value), which then went on to decline more to 174 million barrels in December 2017 (86.3% of December 2015's level).

In very real terms then, we confirm that the California's oil industry contracted by nearly 14% from December 2015 to December 2017. In nominal terms, the picture is much worse. The state's crude oil production sector has shrunk from being an annual output that was consistently worth about $20 billion in the period from 2012 through mid-2014 to an annual output of $8.3 billion at the end of 2017, which works out to be a reduction of 58%.

Trailing Twelve Month California Crude Oil Field Production and Prices, January 2008 through December 2017

We confirm that California's economy most certainly experienced recessionary conditions in 2017, with the state's oil industry experiencing a recession that in real terms, was hopefully finally reaching its bottom at the end of that year. It is still very early in 2018, where time will tell if that proves to be the case.

That also makes the experience of California's oil production very different from the experience of other U.S. oil producing states, which have seen their crude oil production rise sharply in 2017 as oil prices have risen off their 2016 bottom, which indicates that factors unique to California are responsible for the continuing recession in the state economy's crude oil production sector.

If it hadn't, California would have turned in a stronger economic performance than it did in 2017. Instead, California finds itself in a schizophrenic situation with two economies, where one is not progressing, to paraphrase one of the many politicians seeking to become the state's next governor. What the data for 2017 makes evident is that California cannot count on the "coastal and thriving" portion of its economy to fully offset continuing economic distress in the state's interior. That kind of worked in 2015 and 2016, but wasn't enough to keep the state's economy from being knocked off its growth trajectory for those years in 2017.

There's a very human cost that comes from the sustained distress in the state's interior, which is showing up in the growing population of homeless Californians, particularly in the Central Valley, where limited resources to support the displaced are being strained, but also in the state's major metropolitan areas, where many of the displaced are going.

It's the kind of distress that the economics equivalent of a climate change denier might try to sweep away or dismiss by deceptively presenting statistics that conceal the widespread economic pain being felt by those who have been negatively impacted in their communities, but which most certainly is there, in a uniquely Californian way, all the same. It is even visible from space.

References

U.S. Energy Information Administration. California Field Production of Crude Oil [Monthly]. [Excel Spreadsheet]. Accessed 28 February 2018.

U.S. Energy Information Administration. California Midway-Sunset First Purchase Price [Monthly]. [Excel Spreadsheet]. Accessed 1 March 2018.

Oil & Gas 360. How Big Is California's Oil and Gas Industry? OilPrice.com. [Online Article]. 11 June 2017.

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