California's Next Oil Blunder

I don’t have any delusions regarding California’s full-blown war against its oil and gas industry, and neither should you. 

Make no mistake, dear reader, Governor Newsome is going to win his war against the evil and greedy oil companies that so much as step foot within The Golden State… or god forbid, attempt to operate within its borders. 

Last week, we took a trip down memory lane to the first successful oil strike in the state. The Pico Canyon #4 well kick-started California’s oil rush and pumped crude out of the ground for more than a century. 

The end of that historic well portended the irreversible decline in oil output that took place in California since the late 1980s.  

Today, the state’s oil production has fallen to around 285,000 barrels per day. 

Then again, the departure of Chevron from its long-standing home of California is an even greater warning to what’s about to happen. 

And to understand just how bad things are going to get, look no further than what happened in the city of Richmond. 

Richmond may not ring a bell for most of you.

The city is nestled just north of San Francisco, right across the bay from the San Quentin State Prison. 

However, Richmond isn’t known for drilling. Instead, the city is home to a 2,900 acre refinery that processes approximately 240,000 barrels of crude every day. Up until now, it was known as the Chevron Richmond Refinery. 

This wasn’t some new construction, either. The Richmond refinery began its operations way back in 1902, and was first operated by none other than Pacific Coast Oil. Yes, the same Pacific Coast Oil Company that stole the attention of John D. Rockefeller and was swallowed by Standard Oil Company of California. 

To put a little perspective on this, the refinery in Richmond is the third largest in the state, behind Marathon’s Carson facility and Chevron’s El Segundo facility. In fact, the Richmond refinery accounts for about 14% of the state’s total refining capacity. 

It’s safe to say that California’s anti-oil and gas legislation was the root cause for Chevron’s departure. And things would have gotten even worse for the company if it had stayed. 

Back in June, an initiative was placed on the ballot in Richmond that would tax Chevron $1 for every barrel processed within the city. 

If you hold any contempt for the oil and gas industry, then this would be a huge win for you, right? After all, what better way to get back at the greed and evil of those dirty fossil fuel companies than to pilfer their pockets and squeeze them dry?

Well, it turns out that Chevron didn’t have enough left in them to put up a fight. The company threw up its hands and offered the city of Richmond $550 million to take the refinery off its hands. 

If you’re against Big Oil, it doesn’t get any better than that. Not only did you run Chevron out of the state, but you took half a billion dollars from its pockets too… just be careful what you wish for. 

So you might be asking, “How things can go bad from here, especially now that they’ve essentially created a playbook that’ll defeat Big Oil every time?” 

The real question is how long do you think the city government will be able to keep those operations running. When I think of how ineffective California’s government has been running things so far, I wouldn’t be surprised to see the situation deteriorate further… And with it goes 14% of your state’s refining capacity. 

Anyone want to take bets on how high fuel prices will get in a few years? California already imports nearly 60% of its fuel from outside the state!  

Meanwhile, you just freed up Chevron to pursue its interests elsewhere. 

Do you think it’s a coincidence that the company acquired PDC Energy nearly a year ago? That purchase strengthened Chevron’s presence in the Permian Basin, and it cost them nearly $8 billion. 

These acquisitions have dominated the Permian region over the last year, led by Exxon’s buyout of Pioneer Natural Resources. 

Thing is, Big Oil hasn’t closed their pocketbooks just yet, and companies are more than willing to pay more per acre than ever before. 

For me, the real value isn’t just in the acreage, but also the ability to extract that crude in the most efficient and cost effective way possible. 

And for that, this is the Permian Oil Stock I’d start with.