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How the global price slump is affecting Southern California's oil and gas production

CULVER CITY, CA - APRIL 25:  Car lights are seen streaking past an oil rig extracting petroleum as the price of crude oil rises to nearly $120 per barrel, prompting oil companies to reopen numerous wells across the nation that were considered tapped out and unprofitable decades ago when oil sold for one-fifth the price or less, on April 25, 2008 in the Los Angeles area community of Culver City, California. Many of the old unprofitable wells, known as ?stripper wells?, are located in urban areas where home owners are often outraged by the noise, smell, and possible environmental hazards associated with living so close to renewed oil drilling. Since homeowners usually do not own the mineral rights under their land, oil firms can drill at an angle to go under homes regardless of the desires of residents. Using expensive new technology and drilling techniques, California producers have reversed a long decline of about 5 percent annually with an increased crude flow of about 2 1/2 million barrels in 2007 for the first time in years.  (Photo by David McNew/Getty Images)
David McNew/Getty Images
A global slump in oil prices stimulates companies to suspend plans for new wells in Southern California, like what happened in the City of Carson this week.

Slumping global oil prices might slow oil production in Southern California, but they won’t stop it.

In the last two weeks, two companies have shelved plans for new or expanded drilling operations.  California Resources Corporation pulled the plug on a proposal for 200 new wells in the City of Carson Earlier, Freeport McMoRan withdrew its application to drill one new well and redrill two others. Each company said falling oil prices made the projects uneconomical. 

A barrel of oil on world markets is worth about half what it was since last fall. So you might think the hundreds of active oil facilities in Southern California would pull back on production. But that’s not likely, says Severin Borenstein, a researcher at UC Berkeley Haas School of Business. 

Before sinking a well, oil producers sink a lot of money into upfront costs. Borenstein says oil companies must research where to drill, get the rights to drill, and then install equipment to extract the oil.

“Every time the make an investment they have to look at these high upfront costs – to find oil and drill the well, and of course the possibility that it will be a dry well and they won’t get oil out at all – against the long run return of being able to pump oil, generally at a pretty low costs once you’ve drilled the well,” Borenstein said.

Relatively lower operating costs keep pumps going even when the price of oil is low. As for new wells, Borenstein says you can hear the sound of those projects getting dropped all around the country - not just in Carson.