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Restoration Calls / RESTORATION CALLS: MARKETS

A Bumpy Ride

Bakersfield, Calif., sits in the middle of the largest oil-producing county in the U.S. But that offers no relief to residents tethered to an increasingly volatile and unpredictable global fuel market.

Close to the margins: Keith Lutrel with the company’s fleet.(Michael Fagans)

photo of Coral Davenport
June 28, 2012

BAKERSFIELD, Calif.—As February crept into March, it became harder for Kristi Lutrel to sleep through the night. She was waking up at 1 in the morning, her stomach in knots. She’d stare at the ceiling, rise, and check the computer, go through the numbers again, trying not to wake her husband, Mark. She didn’t want him to know how bad things were getting.

As the accountant for Lutrel Trucking, the family business started by Mark’s father in 1975, which she and Mark hope to leave to their son, Keith, Kristi Lutrel lives every day on the razor’s edge, managing fuel costs that account for about 40 percent of the company’s operating budget. In January—usually the month when oil prices are at their lowest—the numbers began, unexpectedly, to climb. Fast. The cost of fuel to haul a load of wheat about 165 miles from Bakersfield to Colton, Calif., went from $19,000 in January to $26,000 in February to $38,000 in March. Lutrel keeps 34 trucks on the road seven days a week, hauling grain to Los Angeles, fertilizer back to Bakersfield, cattle feed to Phoenix. For a small company with a profit margin of only 2 to 3 percent, those spikes in fuel costs—which quickly ate more than $100,000 from Lutrel’s bottom line—brought the company to the brink of catastrophe. The Lutrels added fuel surcharges to their customers’ fees, delayed payments, and took out loans, but they still couldn’t stay ahead of the rising prices. Their drivers were calling from the road in the middle of the night. Their gas-station credit cards had tapped out.

“I’m thinking, how are we going to make it?” Kristi Lutrel recalls, anxiety etched in her face. “I’m thinking, this is going to do us in.”

 

Kristi and Keith have the same blue-green eyes, and the same Excel spreadsheet minds. They can immediately calculate the difference that a 10-cent, or 12-cent, or (the case this spring) 40-cent per gallon change in the price of fuel makes in their company’s weekly, monthly, and yearly bottom line. But Keith, a 6-foot-2-inch hulk of a man who wears steel-toed boots and carries a shotgun in the back of his pickup and a tin of chewing tobacco in the pocket of his jeans, can also tell you the very worst part of watching fuel prices shoot up 80 cents in three months: “When you have to watch your mom cry because you can’t pay your bills.”

The Lutrels have weathered plenty of run-ups in fuel prices in the 37 years they’ve managed their business. Lately, however, the spikes and drops have come a lot more frequently, each time bringing the company closer to ruin. It was teetering in May, when, suddenly, prices started to fall.

“I didn’t think this time it was going to stop. It just kept going up, and up, and up. And then one day, it went down. But you have no way of knowing when that will happen. It will go back up again—but you don’t know when. There’s no way to plan,” she says.

Infographic

Lutrel’s business appears to be ideally located: Bakersfield lies in the southern tip of the San Joaquin Valley, the breadbasket of California. The company’s dusty yard of cobalt-blue trucks is set within a wide expanse of crops—hay, corn, cotton, potatoes, onions, and world-famous carrots—all of which need to be hauled: to bakeries in San Diego, to restaurants in San Francisco, to the port of Los Angeles.

On the other side of town are miles of fields producing the region’s other famous commodity: oil. Bakersfield sits over a literal lake of oil: the Kern River Reservoir, one of the biggest oil discoveries in history. The city is the seat of Kern County, the largest oil-producing county in the United States, which alone pumps out about 10 percent of the nation’s crude. Oil permeates the land, economy, and culture of Bakersfield. Drive through the west side of town, and the fields of black oil pumps, rocking back and forth against the dry earth and the blazing sky, stretch as far as the eye can see. The football team at Bakersfield High is the Drillers. Local dignitaries join the Petroleum Club.

But even though oil runs through its veins, Bakersfield is, surprisingly, home to the nation’s highest gasoline prices. It’s true that, nationwide, prices have dropped since their peak this spring. But although the national average price for a gallon of regular gasoline is about  $3.50 a gallon, at the Chevron station at the intersection of Route 119 and Interstate 5, it’s $4.79. While you fill your tank—a painful $78 for a Ford Crown Vic—you can look across the highway to yet another field of oil rigs.

“We live here in a town that pumps it. It makes you angry,” Lutrel says. “But you’re held hostage. There’s nothing you can do.”

“I don’t believe in government policy as punishment.”—Rep. Kevin McCarthy, House majority whip

Perhaps no other place in the United States so vividly illustrates the fact that, no matter how much oil is produced locally, the economic fate of the nation, like that of the Lutrels, is shackled to the rise and fall of oil prices set by a global market far beyond the borders of any oil field. It doesn’t matter whether the oil is pumped out of the ground in Bakersfield or Saudi Arabia, or out of the sea five miles off the coast of Brazil. It all goes to the same place—a single, international ocean of oil, where price is determined by, above all, global supply and demand, where the output of the massive Kern River Reservoir is not much more than a drop.

That the U.S. economy is dependent on the rise and fall of oil prices as determined on a world market is not new. That has been the case since the early 1970s. However, that market, which has seen steadily rising prices over the past two decades, is entering a new era of volatility. Unpredictable surges and plunges are becoming more frequent. A new oil landscape marred by sudden price peaks and valleys could eventually put companies like Lutrel Trucking out of business; make it nearly impossible for households and energy-dependent businesses to budget for the future; and plunge the fragile U.S. economy back into a recession.

The Lutrels are feeling the whiplash every day, and they see no relief in the future. As Keith Lutrel says, “It’s like, buckle up, get your picture taken, you’re going for a ride.”

RIDING SPACE MOUNTAIN

As it happens, many economists say that his warning is, unfortunately, accurate: The U.S. economy faces a future of roller-coaster oil prices over which American policymakers and oil producers have little control. Two prominent energy experts—Republican Robert McNally, who served as the top energy adviser to President George W. Bush and advised Mitt Romney’s 2008 presidential run, and Democrat Michael Levi, director of the program on energy security and climate change at the Council on Foreign Relations—say that one way to understand what’s happening to global oil prices is to think about Disneyland.

McNally and Levi say that for most Americans, from the late 1970s until just a few years ago, following the price of gasoline resembled the Disneyland attraction “It’s a Small World”: The ride was “a shifting but gentle, basically unremarkable experience,” McNally and Levi wrote in a 2011 article in Foreign Affairs. “But over the past few years, it has felt more like ‘Space Mountain’—unpredictable, scary, and gut-wrenchingly uneven.”

The first signs that we were boarding Space Mountain, they say, came between January 2007 and July 2008, when the price of a barrel of oil rose from $50 to more than $140; by the end of 2008, the price had crashed to just over $30. Less than a year later, it had once again shot above $80. By early 2011, the tumultuous events of the Arab Spring helped send oil back up over $120 a barrel. In October of last year, a barrel of oil was $75; by March of this year, it was $108, and now it’s back down to $83.

And no one knows what will come next. “If you ask where oil prices might be in December of 2012, they could be $30 higher or $30 lower than where they are now,” says David Goldwyn, an energy consultant who was formerly the Special Envoy for International Energy Affairs in the Obama State Department.

Energy analysts say that the Organization of Petroleum Exporting Countries needs to maintain oil reserves amounting to 5 percent of the global market to cushion the impact of events that can cause wild price swings, such as a supply cutoff (if Iran, for example, blocks the Straits of Hormuz, a major oil shipping route), a breakout of violence in a major producing country, or a spike in demand. But since 2005, OPEC’s production has stayed flat, while global oil demand, driven by surging economic growth in China and India, has soared. OPEC’s unchanged production paired with roaring Asian demand means that the 5 percent spare-capacity cushion is shrinking to about 4 percent or even 3 percent.

Meanwhile, China’s thirst for oil is increasing. Today that populous nation boasts only one passenger vehicle per 30 residents, compared with one vehicle per 1.3 residents in the U.S. But as China’s economy grows, so does its citizens’ desire to drive cars. China is already the world’s biggest new-car market, and its 6.3 growth rate for oil consumption puts it on track to double U.S. oil consumption by 2033—with every one of those new drivers competing with the Lutrels’ trucks for the same oil supply.

TAMING THE WILDCAT

On the opposite side of Bakersfield from Lutrel Trucking sits the subdivision called Oildale, a dozen blocks of low-slung metal buildings surrounding acres of oil rigs. The buildings house the field offices of hundreds of oil companies, from giants such as Chevron to small, family-run companies such as Hathaway, a 15-person operation operated by Chad Hathaway, a 36-year-old fourth-generation Bakersfield oilman. Hathaway’s office stands out among the rows of parched metal and cement: He’s got a little green front yard planted with rosebushes, and his mailbox is shaped like an oil rig with a tiny gusher atop.

“I think about China and India a lot,” a sunburned Hathaway says, sitting in his office. “I believe in China, and I believe in India. If you look at my retirement portfolio, it’s mostly made up of Asian stocks. When all these Chinese people want to drive, that will be good for us.”

“Our family has been at it for almost 50 years. And this is absolutely the hardest time to make a profit.”—Mark Lutrel

Hathaway also thinks about Saudi Arabia, Venezuela, and Nigeria, the countries producing most of the oil that lands in gas pumps in Bakersfield. He knows that the oil he is pumping probably doesn’t end up here, because California imports about 70 percent of its oil. “I’m essentially a farmer in a world market,” he says, “and I have no control over what the price is. None.”

(Hathaway literally is a farmer as well; his enormous house, a hollowed-out foreclosure property that he bought in 2009 after the real-estate crash, sits on 200 acres of rolling wheat fields, studded with about a dozen oil pumps.)

Things used to be different. Hathaway’s grandfather, Jesse Elworth Hathaway, was a true wildcatter. He drilled for oil in Bakersfield and across the West in the 1950s, when the U.S. produced millions of barrels more oil than it consumed. Jesse Elworth knew that the oil that his company, Pyramid, pumped from his wildcat wells would go to fuel American cars and build American cities. One Sunday afternoon, an employee left a valve open on a tank on his Santa Maria wells, and the oil spewed out violently. Jesse died of a massive heart attack trying to plug the well.

That year, 1983, Chad’s father, Jesse Benjamin Hathaway, took over the company. By then, the oil industry had undergone a dramatic shift. In 1970, the United States, for the first time, pegged its oil prices to the global oil market. Most Americans didn’t notice the change when it happened, but they were rudely awakened to the new reality in 1973, when OPEC nations cut off supplies to the U.S. and ratcheted up prices. For the Hathaway family, the painful reality of their new dependence on the global oil market came in the ’80s and ’90s, when prices sank to record lows and they struggled to get by. Jesse Benjamin went for weeks without a paycheck; the strain ultimately contributed to his divorce.

In 1998, global oil prices hit bottom—below $10 a barrel—and so did the Hathaway family fortunes. Chad received a leukemia diagnosis and had to drop out of college; his mother, a teacher, took donated leave from her colleagues to stay home and take care of him. In 2001, with a $5,000 loan from his mother, Chad started his own oil company. He loves the business, but he reminds himself every day how little control he has over his fate.

Like his house and the other oil fields he owns, Hathaway bought his biggest oil field, named Jasmine, used, and he decided long ago not to waste his time looking for new oil. “My grandfather was a wildcatter. My dad wasn’t as much of a risk-taker. He was just trying to survive. To me, losing money’s not fun. I’d rather be the guy who hits singles and doubles all day long,” he says. “I think I’m more uncomfortable with high prices than with low. I’m not comfortable when gas prices are too high. It’s not good for the economy. It means there’s going to be another bust.”

Instead, he’s doing what a lot of the most successful oil producers are doing—buying old oil fields that have had about 30 or 40 percent of their reserves extracted, and using steam and other technologies to get out the rest. “That’s the future,” he says. “Going back and squeezing out what’s left. With steam, we can get out 70 to 80 percent.” After spending his entire life in the business, Hathaway is pretty sure that the planet is running out of oil. “I’ll keep my mouth shut about it with my peers, but I thoroughly believe in it. Oil’s not a replenishable resource,” he says.

NEW SUPPLY, OLD PROBLEM

Even geologists who don’t necessarily believe that the world has entered the era of “peak oil”—the point at which the finite resource has been fully exploited and production can only decline—agree that we’ve probably reached the end of “easy oil.” Drillers are discovering new sources of oil, but they’re finding it in evermore difficult places—shale-rock formations; ultra-deepwater wells, such as the Gulf of Mexico’s exploding Macondo; and treacherous new frontiers, such as the Arctic Ocean. This kind of drilling comes preloaded with its own volatility, and the risks of trying to find oil in increasingly unstable places will also get priced into the market.

Infographic

That new oil won’t be nearly enough to make the United States oil-independent, because Americans consume almost twice as much oil as we produce, ensuring that our nation will be a net importer of oil for decades to come. And the new oil won’t do enough to pull people like Lutrel and Hathaway off the roller coaster they’re riding.

“The only way booming U.S. production changes the basic volatility picture is if there’s lots more OPEC growth in supply and a big reduction in demand—and I wouldn’t want to bank on that,” says Levi. “The new U.S. production might keep a cap on prices at the margin, but it doesn’t come close to insulating the economy as a whole.”

The travails of Lutrel Trucking offer a preview of what’s to come. When prices go up, the Lutrels add surcharges to the loads they carry—wheat, grain, cattle feed, and fertilizer—which will have a cascading effect on the price of bread, milk, beef, and other commodities. “Everybody’s affected by the cost of transportation,” says Mark Lutrel. “All the goods and services in this country are transported in some form or other.”

Keith Lutrel breaks it down further: As a trucker, he’s always thinking about the ripple effects on the costs of the goods that his company hauls. “When gas is $5 at the pump, that $2 Snickers bar is going to cost $5. That $5 loaf of bread is going to be $10.”

Blow those individual and small-business decisions up to the size of the whole economy, and you’ve got the makings of another recession, says James Hamilton, an energy economist at the University of California (San Diego). Hamilton is the author of a study noting that 10 of the 11 recessions in the United States since World War II were associated with a surge in oil prices. The most recent downturn occurred in 2008, when a spike in oil prices that summer was one of the causes of the economic crash that came later that year.

“Those long-run forces that sent us into record-high prices in 2008 are still there,” Hamilton says. “We could well see a replay of that in years to come.” If prices hit historic highs (which Hamilton says is likely), it will curb consumer spending, send up the price of everything from bread to plastic, and put a freeze on long-term investments and decision-making.

That, in turn, will start the Space Mountain effect anew, McNally notes. “If ratcheting-up oil prices contribute to recession, it will cause demand for oil to evaporate, and prices will crash again; we’ll be in a constant cycle of boom-bust.”

EYES ON A PRIZE

The facts on the ground in Bakersfield—that its oil production doesn’t have any meaningful effect on gasoline prices—seem to be lost in translation in Washington. Bakersfield’s member of Congress to be one of the most powerful men in the House, Kevin McCarthy, the majority whip. Like most Republicans, McCarthy, who heads the House Energy Action Team, regularly berates President Obama over his energy policies and argues that more drilling will help keep fuel prices low. With his silver pompadour and bright smile, he’s a featured player on Fox News Channel.

Still, in an interview, McCarthy agreed that his district, and the country, are in thrall to a global market over which we have no control. “We watch the price go up and down…. The economy is growing, but the fast rise in oil prices can slow it and stop it and reverse it, and we can’t control it,” he says. “And I’m worried when anybody has control to affect what we’re doing.”

McCarthy says that the U.S. should go back to producing as much oil as it consumes. “I think it’s possible to do that,” he maintains.

Many economists disagree, because the United States consumes so much oil; 1947 was the last time that the nation pumped as much as it used. And even when the U.S. reached its peak oil production in 1970, when we produced 3.5 billion barrels—that didn’t come close to the 6.9 billion barrels we are consuming today. To get to the point where we produce as much as we use, wouldn’t we also have to reduce how much we use?

“Absolutely,” McCarthy says. “You always want to be more efficient.”

But he won’t consider the one tool that Levi, McNally, and a long list of other prominent economic thinkers across the political spectrum say is the best, most efficient means to reduce demand: higher taxes on gasoline. The principle is simple: Raising the price of the commodity drives the market to use less of it. Think cigarettes.

“A gasoline tax when you’re paying $4.20 a gallon? No,” McCarthy snorts. “I don’t believe in government policy as punishment.” Nor does he support the higher fuel-economy standards set by the Environmental Protection Agency that require automakers to build cars with a fleet average of 55 mpg by 2025.

“You don’t need a punishment,” he stresses. “You need a reward. By punishing, you’re the bully on the playground.”

McCarthy argues that alternative-energy sources will ultimately reduce demand. “We have a lot of different resources; right outside my district there’s nuclear and wind, as well as oil.”

That doesn’t have much to do with the price of gasoline, however. Nuclear power and wind power generate electricity, not fuel for cars. But McCarthy says that only the private sector, not the government, can come up with a solution. “Why did Lindbergh fly across the Atlantic? For a prize.… What if the government, instead of punishing with [corporate average fuel economy] standards and high fuel prices, created a prize? And then when someone wins it, you have a ticker-tape parade,” he says. “I watched JFK when he said, ‘Let’s go to the moon’; we set a goal and achieved it. My philosophy is always rewarding, not punishing.”

Hathaway, who defines himself as a political independent and who plans to vote for Romney, breaks with McCarthy on the issue of  gas taxes. “The best way to help our situation is to curb demand,” Hathaway says. “And a tax is the best way to do it. I have no impact on the price of gas, but the price of gas impacts the economy. We’re all in the same boat, so that, to me, is the more logical solution.”

Regardless, the resistance from McCarthy and other Republicans (and many Democrats) to a penalty for using gasoline underscores why the U.S. is likely to remain tied to the unpredictable global oil market for decades to come. In the short term, McCarthy’s vision is likely to prevail, and the private sector will be charged with leading the United States out of its predicament. Yet absent radical steps, any solution is unlikely to be a transformative one.

THAT UNCERTAIN FEELING

So for now, families and businesses are still strapped to the roller coaster—afraid that the next oil price run-up could destroy their livelihood. Mark Lutrel’s father, Roy, founded the trucking company, and Mark has worked hard his whole life to ensure that this business will be his son’s legacy. But as he gets closer to handing it over, he worries.

“I’ve been at this business for 37 years. Our family has been at it for almost 50 years. And this is absolutely the hardest time to make a profit,” Mark says.

He adds, “If it wasn’t for Keith, I would walk away, because of the volatility.”

Kristi Lutrel agrees. “Keith is inheriting something very volatile,” she says. “And I have mixed feelings about that. This is a business Keith’s dad started a long time ago, and that means a lot. You hate not to have it. But what’s the future going to bring? Is there a good enough living for him? Or is he better off working for someone else?”

Kristi pauses. “He doesn’t think so. So we’ll keep on trucking. And, hopefully, he can do it.” 

Behind the wheel of his Dodge Ram pickup, driving through the dusty flats of east Bakersfield, Keith Lutrel looks out on the expanses of corn, cotton, and hay. He ponders his parents’ words and whether it makes sense to take over a business that could be leveled in an eyeblink by a spike in oil prices.

Meanwhile, he has put off buying a house. He lives in a trailer, instead. He thinks about starting a family, but he’s not sure if that’s a good idea, since he’s about to inherit a business with a crazy-quilt bottom line. The stereo in his truck plays “Shoulda Been a Cowboy”—but that’s not an option. Besides, he has something more current on his mind.

“I think about the first or second episode of The Sopranos,” Keith says, “when Tony is talking to his shrink. He says, ‘You worry—am I getting into this thing on the downside?’ That’s how I feel.”

---------------------------

This story is part of a yearlong series that examines America’s crumbling foundations and how to rebuild them. Find more on the Web at nationaljournal.com/restoration-calls.

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