April 5, 2018
Energy Communities in Transition: Central California and Eastern Kentucky
By David Livingston and Kayla Soren
In 2012, two of the most economically distressed regions in the United States were Eastern Kentucky and the San Joaquin Valley of Central California. Thousands of miles apart, the regions shared a key characteristic: economic dependence on the fossil fuel industry amid rapidly shifting energy markets. In Eastern Kentucky, a coal-based economy was threatened by the shale gas boom, while in Central California, the oil sector was threatened by dwindling supplies of crude oil. In 2010, the San Joaquin Valley even earned the moniker “Appalachia of the West” due to severe levels of poverty amid a sunsetting extractive industry. Learning from how each of these economies have dealt with the transition away from a fossil-fuel based economy provides key lessons for the energy transition.
After peaking in 1985, California’s oil production has experienced a downward trend since 1995 amid gradual depletion and no new significant oil discoveries. California’s oil fields are mature—some of them have been pumped for over one hundred years—and the state’s crude oil production has decreased 7 percent from 2010 to 2016. Since 1995, six major refineries have been permanently shut down due to insufficient appropriate crude supply for long-term production. There are still seventeen operating refineries as of 2018, down from an all-time high of forty in 1985.
Despite steady incremental declines, oil from Kern County in the San Joaquin Valley still made up about 70 percent of the state's oil production and 10 percent of US production in 2013. However, as oil production elsewhere in the United States increased as a result of the shale revolution, oil production in Kern has since decreased by over 22 percent, due in part to the sharp fall in global oil prices from late 2014 onwards, with implications for the economic fortunes of the region.
The San Joaquin Valley’s economy has in recent years been closely tied to the fortunes of the oil and gas industry. Between 2001 to 2011, the oil and gas sector doubled its contribution to the region’s gross domestic product (GDP), mostly due to higher oil prices, and the GDP growth rate from hydrocarbon extraction and supporting activities averaged 10 percent per year. Oil companies also account for about 30 percent of the county’s property tax revenues, which in turn constitute around two-thirds of the county’s total revenues.
Declining production and lower global oil prices have accordingly had broad economic impact. Total economic output from the hydrocarbon industry in Kern decreased from $10.725 billion, 25 percent of GDP, in 2012 to $6.3 billion, 20 percent of GDP, in 2017. The assessed property value of oil and gas properties for the county decreased from 35.4 percent to 21.8 percent between 2012 and 2016. Notably for the region’s residents, oil and gas employed 50,000 people in 2015 and sharply dropped to 40,000 in 2017.
Coal’s struggles in Kentucky have followed a related, though unique, arc. After enjoying many years of robust domestic demand, the emergence of China as a significant coal importer created additional demand and made Appalachian coal exports economic in international markets. Although China’s coal consumption grew by an average rate of nearly 9 percent from 2000 to 2013, it began to fall precipitously starting in 2014, and China’s coal imports fell by 30 percent in 2015 alone. At the same time, Kentucky’s coal production faced many of the same domestic pressures faced broadly by coal across the United States, including the impacts of lower-than-expected demand, competition from falling natural gas prices, and growth in renewable energy. From 2011 to 2016, coal production plummeted from 109 million to 42.9 million tons, and by July 2016, an estimated 6,465 persons were employed by Kentucky coal mines—the lowest level recorded since 1898.
Despite its strong association with the state of Kentucky, coal mining today comprises only 1.33 percent of total employment and 1.9 percent of Kentucky’s gross domestic product. While the effects of the atrophying coal industry are small relative to the overall economy, the communities where these jobs are concentrated have been hit extremely hard, with over two-thirds of Kentucky coal workers losing their jobs since 2011. However, coal’s contribution to the state economy has at times been overstated—even when coal production in the state was close to its peak in the mid-2000s, the industry generated less tax revenue for the state than it received in subsidies. A 4.5 percent severance tax has been in effect since 1972, generating more than $7 billion to date, and yet the funds are neither allocated to a long-term managed endowment (such as Alaska’s permanent fund) nor to a coherent economic diversification strategy.
While both oil-reliant San Joaquin and coal-reliant Eastern Kentucky have faced idiosyncratic challenges in recent years, including declining production for the former and increased competition and falling demand for the latter, their fortunes began to dramatically diverge around 2012. Eastern Kentucky and San Joaquin adopted opposite strategies in adjusting to the upheavals underway in the energy sector. Smart policies and strategic investments have catalyzed San Joaquin’s economic progress, though are far from solving all the region’s challenges. Unfortunately, the same cannot be said for Eastern Kentucky—which by some estimates is currently the most economically distressed region in the United States. This divergence was not inevitable and it underscores the critical role that policy interventions can have in arresting decline and catalyzing new drivers of economic vitality.
Future posts in this series will explore the strategies employed, or avoided, by both Eastern Kentucky and the San Joaquin region, as well as the broader policy environment in their respective states. With the transition to an advanced energy economy only still in its infancy, there are numerous lessons—many of them painful—to be learned rather than re-lived in years to come.
David Livingston is deputy director for climate and advanced energy and Kayla Soren is an intern with the Atlantic Council Global Energy Center. You can follow David on Twitter @DLatAC