Business

Saturday, Jul 07 2012 08:00 PM

Kern economy pulling through dip in commodity prices

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    By Casey Christie / The Californian

    Daniel Kellick, shop manager at Dan Stotler's oilfield equipment, loads oilfield equipment onto a trailer in their yard in Bakersfield with the help of fellow workers.

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  2. 2 of 6

    By Casey Christie / The Californian

    Dan Stotler's oilfield equipment sales and leasing company shop manager, Daniel Kellick works with (BOP's) blow out preventers in the shop before sending them back into the oilfields.

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  3. 3 of 6

    By Casey Christie / The Californian

    Workers at Dan Stotler's oilfield equipment sales and leasing company in Bakersfield including Rick Lilley, left, Andrew Rodriguez, forklift operator, and shop manager, Daniel Kellick, right, load a heavy (BOP) blowout preventer onto a trailer as part of their daily routine. It's a safety device to prevent oil from spewing. Here they maintain and re-certify BOPs before delivering them back into the oilfields.

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  4. 4 of 6

    By Casey Christie / The Californian

    Forklift operators are on the move this summer in the cold boxes at Titan Cold Storage as they move huge crates of potatoes into storage until it's time to ship them out to various locations.

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  5. 5 of 6

    By Casey Christie / The Californian

    Carl Els, vice president of Titan Cold Storage, holds a handful of potatoes Titan is storing in the cold storage area until shipment.

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  6. 6 of 6

    By Casey Christie / The Californian

    Carl Els, vice president of Titan Cold Storage, holds a handful of potatoes that are stored in cold boxes until it's time for shipment.

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BY JOHN COX AND COURTENAY EDELHART Californian staff writers jcox@bakersfield.com, cedelhart@bakersfield.com

Oil field equipment supplier Dan Stotler is just the sort of businessman you'd expect to wince at the 18 percent drop in local barrel prices since February.

After all, the oil industry has long risen and fallen according to the whims of the commodity market -- much like the rest of Kern County's heavily energy and agriculture-dependent economy.

Stotler insists he isn't worried in the least.

"We haven't slowed down in orders at all," he said. If anything, business is growing in spite of recent prices, he added.

That may sound like misplaced optimism, especially considering the hundreds of jobs lost during the last big oil price collapse in late 2008.

But if Stotler's wrong, so is a chorus of economists and other observers of the local economy, several of whom expressed confidence that the county is well positioned to withstand a downturn in commodity prices.

Their reasoning reflects a variety of unrelated trends, from a continuing crude oil bottleneck in the Midwest to a shift in crop selections at local farms to recent strength in construction and emerging industries such as logistics and food processing.

Across the country, the sluggish economy has caused commodity prices to slip, and not just oil. Milk prices slid about a quarter over the past year, copper has fallen about 7 percent since early May and in May, cotton was down by nearly half from a year earlier.

No one is saying the region is immune to market shifts or a general decline brought on by new weakness in China and Europe. What many here find encouraging, though, are signs that the local economy is adapting to changing conditions and benefiting from fortunate circumstances.

For instance, Kern County's agricultural sector is remarkably diverse, producing everything from citrus to wheat to melons. Falling prices in any one crop are unlikely to hurt a large share of the industry locally.

Even where there has been substantial investment in a single category -- tree fruit, for example, or table grapes -- sustained demand overseas has allowed growers to sell to a spectrum of international and domestic consumers.

There is something of a turnaround evident in expectations that the local economy is stable and diverse enough to endure slumping commodity prices. Business and government leaders have often worried that the county had too many eggs in too few baskets.

Some of these concerns remain, even if they are pushed aside when prices rise, as happened in oil and ag during much of the recent recession.

"When the times are good and the prices are high, we just celebrate and move on," Cal State Bakersfield economist Abbas Grammy said.

"As long as we are into raw materials production, we will be at the mercy of the market."

Broadening the economic base

A logical strategy to combat such dependence is diversification. This has succeeded to a degree as a number of industries reach a level of maturity that could offset job losses in other sectors.

Many say alternative energy, with its wind turbines in need of regular maintenance, is one of these areas.

Similar hopes apply to local food processing, also known as value-added agriculture. The idea is that it's more efficient to process food near where it's grown. That's partly why Bolthouse Farms, Frito-Lay and Dreyer's have local plants.

But some are dubious about the prospects for bulking up value-added agriculture in agricultural regions.

Among them is Richard Sexton, chairman of the Agricultural and Resource Economics Department at UC Davis.

As long as fuel costs are reasonable, food processors like to locate manufacturing plants close to the urban centers where the products will be consumed, and where there is a larger labor force to draw from.

The exception is products that aren't easy to transport, Sexton said. Tomatoes often are processed near where they're grown because they're easily damaged in trucking, and the cost of refrigerating milk on the way to plants provides an incentive to put those plants near dairies.

Logistics and distribution work is another big hope for broadening the local economic base. But while there have been recent successes, notably the Caterpillar and Dollar General distribution centers coming to the foot of the Grapevine, some say Kern's potential as a logistics hub won't be fully realized until available space in Southern California fills up.

So said the dean of CSUB's School of Business and Public Administration, John Emery. It's simply too much trouble sending trucks up and over the mountains to Kern County "until the volume builds back up," he said.

Construction is a brighter spot, fighting its way back after having taken a sound beating in the housing market crash. It's still not where it was during the boom years, but it's definitely looking up.

Separate studies by the Brookings Institute and The Associated General Contractors of America have found that the Bakersfield area is among the top markets in the nation for the highest number of construction jobs added since the end of the recession. In the last year alone, the county added 3,000 construction jobs, according to the California Employment Development Department.

Diverse crops

There's been more progress in diversifying agriculture.

Compared with other parts of the country where growing is highly concentrated in a few key crops, Kern has a wide assortment of products that help spread risk, Sexton said. The Midwest is almost entirely corn, wheat and soybeans, so that market would be much more sensitive to price fluctuation in, say, ethanol.

"You're protected more because of what you grow," he said.

There's even differentiation within commodities. Price changes will affect some varieties of a crop differently than others, and research has increased the productivity and resilience of successive generations of plantings over the years, along with evening out to some extent the highs and lows of trees that have bigger yields every other year, he said.

Another buffer for Kern agriculture is that people can't choose not to eat during an economic downturn.

"That's the beauty of the agricultural market," said Kern County Farm Bureau Executive Director Ben McFarland. "People always have to eat. If the price or the demand for one commodity drops, another commodity is going to pick that up. If it's not grapes, it's citrus. But there's always going to be something to provide that sustenance."

It also helps that some 40 percent of the food produced in Kern is exported, so another country can pick up the slack when consumption falls off domestically or elsewhere, McFarland said.

"You really have to base where you're going in the future on global demand and population growth, and there's nothing deterring either of those at the moment," he said.

One exception is the dairy industry, which has yet to rebound from the triple whammy a few years ago of historically low milk prices, very high feed prices and soaring fuel costs.

California had 1,668 dairies last year --including about 55 in Kern -- but about 60 have closed so far this year with more expected, according to Western United Dairymen, a Modesto-based trade group.

Feed accounts for about 65 percent of the cost of producing milk, said CEO Michael Marsh, and competition with ethanol producers has put devastating pressure on already thin profit margins.

Large dairies that can take advantage of economies of scale are weathering the crisis best. It's mostly smaller dairies that are going under.

Comparisons between hiring in oil and agriculture are really apples to oranges, said Agricultural Commissioner Ruben Arroyo of the Kern County Department of Agriculture and Measurement Standards.

"They're price makers," he said of the oil industry. "The agricultural community, they're price takers."

Growers do their best to forecast what prices will be and make decisions ahead of time about what and how much to plant each season, but that's very hard to do, he said.

Also, employment levels vary greatly from crop to crop, Arroyo said. Cherries and grapes are very labor intensive, for instance, but cotton is highly mechanized.

Stability in oil

The local petroleum industry's recent confidence is somewhat unique in that prices are high enough to absorb shock, and factors are at play that put a premium on drilling in Kern County.

Historically, oil producers large and small have reacted to falling prices by cutting back on maintenance, which puts downward pressure on production as well as jobs.

But a build-up in barrel prices over the last couple of years has taken the industry well past the point where most oil producers need to worry about profitability.

The price of Kern County's benchmark oil, heavy Midway-Sunset crude, averaged about $91 a barrel in June. That's 18 percent below February's average but still way above the depths of December 2008, when barrels of Midway-Sunset were going for an average of less than $27.

At the same time, large and medium-size oil producers are gearing up to tap the Monterey Shale, a vast reservoir beneath much of the Central Valley. Pulling back drilling plans at this point could risk losing out to aggressive competition.

"Unless there's a severe drop in the price of oil, ... those plans are still on the books," said Les Clark, executive vice president at Bakersfield's Independent Oil Producers Agency.

Another factor propping up local oil investment is the roughly $20 a barrel price difference that continues to favor West Coast crude over oil produced elsewhere in the country.

Transportation trouble is a big reason for the price gap: A glut of production in the Midwest has been stranded because of inadequate pipeline capacity. That has kept prices down east of the Rockies even as the California market continues to reflect higher, global prices.

Phil McPherson, senior oil analyst at Global Hunter Securities, predicted sustained oil activity in Kern County attributable to producers trying to capitalize on California's higher prices.

"If you're going to choose between (booming North Dakota) and California, you're going to choose California," he said.

McPherson added that he has seen no indication that oil companies are preparing to react to overall lower barrel prices by reducing investment.

"You're not going to slam on the brakes just because of a (decrease) in oil prices," he said.

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