Big Oil Needs to Step Up

By Joseph P. Kennedy II & William F. Achtmeyer

Notwithstanding a shift by big business to become more socially responsible over the past few decades, Big Oil prides itself in being an island of bull headedness and smugness.

In a capitalistic system, we understand that the rewards of success go to the shareholders. However, great companies successfully balance attention to four other constituencies -- employees, customers, suppliers and the community. But Big Oil has an additional constituency that is the most important of all, the citizens of the United States. As a nation, we have granted Big Oil the rights to extract what sadly have become our nation's most strategic natural resources: oil and gas. In return, we expect them to act as responsible fiduciaries.

What is abundantly clear is Big Oil thinks first and foremost about its shareowners and top executives. A recent study done at the request of Citizens Energy by The Parthenon Group, a strategic advisory firm, found that since 1996, Big Oil has increased dividends and stock repurchases by 700 percent -- three times the increase in capital spending to find and extract new pools of oil and gas. Exxon Mobil, our country's largest energy company, increased shareholder compensation by 260 percent over the past five years while boosting capital investments merely 34 percent. In a telling move, the company actually cut investments last year in domestic exploration and production by 11 percent while recording the single largest annual profit in history.

Furthermore, the top five domestic producers paid their top executives more than $1 billion in total compensation over the past five years, including a staggering $300 million last year alone to their top 25 employees.

Given the chance to offer real solutions, Big Oil showed its true colors last month by marching into Congress and lecturing the American people on the virtues of supply and demand, while failing to acknowledge that global oil markets, long manipulated by cartel collusion, are not as "free-market" as one might think. The overall supply of oil has remained relatively constant over the past four years at 85 million barrels of oil produced daily. Demand has also remained constant at nearly the same level. What has changed is the perception that demand will outstrip supply down the road and the exacerbation of this perception by speculators. So, prices have skyrocketed to over $140 a barrel. As a result, Big Oil has reaped a windfall of profits that has nothing to do with their management capabilities or talents.

Given the chance to make a balanced distribution of these "unearned" profits, Big Oil chose instead to reward shareowners and management versus their customers, many of whom are now stretched beyond their means just to afford gas for their daily commute or heat needed to keep their families warm in the winter.

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Every year Citizens Energy petitions Big Oil for a handout for the poor to allow them to purchase heating oil at a sharply discounted price. Every year, Big Oil says no.

When it comes to investing in future sources of energy for the country, the story is no different. The oil and gas industry's current $100 million public relations campaign, which touts commitments to find new sources of energy and support the development of renewables, leaves out such inconvenient truths as the fact that Big Oil's 2007 investments in alternative energy sources averaged less than 3 percent of total capital spending and two-tenths of one percent of revenues.

The time to wait for Big Oil to voluntarily act on behalf of all its constituencies is over. Oil companies must be legislatively compelled to re-shape their investment priorities. Taking a page out of our long history with public utilities, Big Oil should be permitted to earn a fair return based on its cost of capital, which has been about 8% over the past decade. Below this cost of capital, Big Oil would qualify for development credits currently granted by the U.S. government to incentivize the industry to find new sources of energy. Above the cost of capital, this credit would be denied.

Furthermore, for every profit dollar greater than the industry cost of capital, Big Oil must put aside 25% of its profits into two buckets. One-third would go to fuel assistance fund for the poor, while the remaining two-thirds would fund development of alternative energy or investments to drill for new domestic pools of oil and gas. A ratchet provision would be applied for every 100-basis point increase in returns so that ultimately 90 percent of every incremental dollar of return on assets would be allocated to these two buckets.

Had this system been in place over the past three years, The Parthenon Group estimates roughly $30 billion would have been available to be distributed to the poor, alternative energy development and new domestic production. Over the past decade, the oil and gas producers would have been subjected to the "tax" in just six of the ten years (2000, 2003-2007) -- years when their returns exceeded their cost of capital.

These funds are desperately needed. We must provide aid to families in cold-weather states who could pay as much as $7,000 for fuel this winter and assist millions of electric and natural gas users who face utility shut-offs with little hope of clearing the balance. Hundreds of renewable energy projects across the country, particularly wind, solar, and hydro, could become economically sustainable with an infusion of investment from Big Oil. For example, the Dakotas, long hailed as the Saudi Arabia of wind, will never see enough spinning blades to produce electricity for hybrid electric cars without investments in turbines and transmission to carry the juice to markets.

Our approach pivots off the essence of good capitalism -- which is to achieve or exceed the cost of capital. It works in both boom and bust times. It is a bi-partisan solution to a bi-partisan issue. The oft-proposed no-strings-attached windfall profits tax would only result in higher prices at the pump and increase our dependence on foreign oil.

Big Oil has shown its cards. Major oil companies will take every step necessary to funnel all the wealth that Lady Luck and American taxpayers have given them into their own bank accounts. The time for thinking exclusively about financial stakeholders is over. It's time now to treat every American as a shareholder and to strike a just balance between private profit and public interest.

Joseph P. Kennedy II is founder, chairman, and president of non-profit Citizens Energy Corporation in Boston. William F. Achtmeyer is chairman & managing partner of the Parthenon Group, a strategic advisory firm headquartered in Boston.

Comments

[Paige Donner - Huffpost Blogger]

Always pleasant (NOT) to hear about all the ways the oil companies are sticking it to us! Suggestion, Dr. Joe:
Can you attach a GRAPH illustrating the numbers you discuss (for us numerically challenged). Yes? Thank you! huffingtonpost.com/paige-donnner

[MGhamma]

Big Oil won't support anything that they can't monopolize and control.

[darthdarcy]

Joe I know but the answer is to Nationalize the American Oil Industry...

That's the only way you can access these obscene profits they make..it's a national security matter...

If we Nationalize them then we can cut costs by 30-33% and still have no less than $50-60 billion for Alternate energy development and new technologies and we'd create a huge economic boom...

All energy major Energy should be Nationalized..it makes sense..

We can't leave our vital asset of energy to market manipulation, this will promote commerce and propel us in the 21st century and we can still trade it on the stock market people can own and trade shares as they do in China, the most successful oil entities as all state owned and run...

Remember the Oil industry is not in the business of putting itself out of business..!

[mlaiuppa]

Big Oil won't step up to any of this without being dragged, kicking and screaming under threat by the Federal Government.

And who's going to vote for that? They own D.C.

[NL207]

Mr. Kennedy, you are now flying your true colors:

"The time for thinking exclusively about financial stakeholders is over. It's time now to treat every American as a shareholder and to strike a just balance between private profit and public interest."

very similar to:

"From each according to his ability to each according to his need."

This failed ideology financially ruined Eastern Europe and left Russia the most polluted country on earth. You want to enact these prinicples here. I think the outcomes of these principles in the former Eastern Block were not an acvcident but the direct result of these policies. There is no reason to believe that your implementation of similar philosophy here will lead to any better results.

[RoloTomassi]

Jeez, your silly spiel might draw some interest if you had a single clue....

Please refrain from making comparisons that you're ill-equipped to make about concepts you don't understand. For all such simpletons if we're not hardline promoting Friedmanite Feudalist doctrine, then it must be Communism, and that is just pure idiocy.

[sheila]

Hurrah! Citizen's Energy wants to help!! We already proposed it to you, but it probably didn't reach up the chain to you, Mr. K. We would like your "investment strategy" (as you suggest it is intended to help low income people) be a large capital fund which loans money to low income people to install solar thermal (heating), solar PV (electricity) and/or micro-wind (electricity) on their properties, and partner with municipalities to use the property tax system for repayment.

Hundreds of thousands of low and middle income people could achieve their dream of ENERGY INDEPENDENCE if they could just get past the start-up costs of running their own power plants. No more handouts to Big Energy! Including subsidizing people's bills that are paid to Big Energy. Which is already getting massive govt and ratepayer subsidies (including Big Renewables).

No, let's stop the cycle of poverty, engage low and middle income people in the environmental/conservation process, and let them EARN money from doing the right thing, by encouraging strong feed-in tariffs like Germany and Spain.

I look forward to you lending your power and voice to this grassroots campaign which will really make a difference in the long run. Local, point of use renewables are our only hope for the future. Are you with us?

[drkazmd65]

I would personally hope to see Big Oil NOT stand up,...

What 'we' don't need is another cartel controlling wind, solar, and power movement.

What we need is a co-operative, controlled regionally, capturing and distributing these diffuse and relatively free energy sources among the citizens.

Big Oil can get stuffed in my book.

[joebhed]

This is the best comment on the subject, dr. k.

Hard to believe the Kennedy-think of reforming global corporatocracy to being more human-natured.
Gee, joe, Come on !

WHERE DO THE OIL COMPANIES GET THE MONEY?
From the consumers.
The Consumers are paying for everything.
RIGHT NOW.
If you are looking for a potential trail of capital that flows from the consumers to the community, you have it in the carbon tax.
Then you have it in the government who can set up a financing mechanism, a la the REA and FPA and TVA and public power, and they can lend it to the renewables entrepreneurs - I hate that word.

Put a carbon tax in place.
we need n it not only for all those sexy renewable projects, but the less sexy energy efficiency programs, as well as the technology needed for carbon sequestration.

Big oil can get stuffed in my book too.

[drkazmd65]

Thanks for the complement RE: my comment. Once in a while I manage to hit things on the mark.

You also - are right on the ball as well.

Why on earth do we (the consumers) need to pay our money to some big-ass cartel to collect, add a significant middle-man markup, and redistribute to us (at a massive profit) an essentially free set of resources?

It makes no sense to do so. In fact, one of the reasons there has been no big push by big industry to invest in solar and wind technology IS that they know they can't make as big a profit on it.

If we all were just to erect a windmill (where practical), or add solar panels to our roofs, wire our neighborhoods together, invest in some good conservation measures, and figure out a better way to store the electrical power that is generated - we could tell the corporations to get stuffed.

They know it - and they want "us" to stay in the dark about it as long as they think they can make some bucks and control the resource.

[Synoia]

Good luck with your suggestion. Don't hold your breath.

[jdmccl]

How about opening the other 90% of our oilfields for extraction in exchange for the promise of billions in renewable energy development by mean 'ol Big Oil?" Problem solved, wildlife saved.....green platform demolished. That might be the real root cause, keep building that strawman.

[MyOwnPerson]

My only comment on this is...you can't just push for a higher MPG threshold from vehicle manufacturers as it doesn't matter how many miles per gallon a vehicle gets if you can't afford a gallon of gas.

[squeezer]

The horse is out of the barn Mr. Kennedy.
It's not big oil that has caused the recent spike in oil, it is international speculation. No matter what we do to ExxonMobil we can not control the banks in France or the Singapore markets. Sure I'd like to take the big oil money grubbing corporate scoundrels out back for a hiding but that will not solve the problem. Only by moving away from oil with an eye to not repeating our present financial circumstances with a different energy source will we find an answer.
That and reading.......
www.squeezingbucks.com

[NL207]

Since you have just implicitly admitted that normal market forces over which neither you nor Kennedy can exert fascist control are responsible for the present high price of oil, perhaps you can face the fact that another normal market force, that of increased suppplies, can ease prices.

No less an authority than Sen. Schumer of NY has stated before the Senate that increasing the supply of oil by 1 million barrels per day would reduce the price of gasoline 62 cents per gallon.
source: http://www.clarionledger.com/apps/pbcs.dll/article?AID=/20080617/OPINION02/806170378/1309

ANWR alone will produce 780,000-860,000 bbls per day if developed. The oil shales of the Green River formation are capable of producing MILLIONS of bbls per day. These we have control over, unlike the Saudis whom Schumer wants to bully. Want more war? Try to solve this problem with government force like Schumer and Kennedy want to do.

[joebhed]

Maybe I misread the comment, but i didn't see any reference to "normal market forces".

I thought sqeezer said it was speculation that drove up the price.

And if we're going to use the doctrine of implied powers to the reader, then what i read was "organized manipulation", where he wrote speculation.

So, in my opinion, the price of oil is not set by supply and demand forces at all.

Since we Enron-abled the manipulation of oil prices back a decade and a half ago to get to this point, my solution is to re-establish true market forces of supply and demand price-setting by the market players who actually own, and hold, the products they are buying and selling.

End commodity trading, speculation, manipulation, future-betting, hedging and derivatizing of the Enron variety.

And, by the way, Senator Shumer, yeah, he's the authority on oil prices.

[mergina]

Just think of what you are suggesting. You are asking the Dick Cheney's and Bush's of the world to step up? Can you imagine anyone as wretched as Cheney stepping up to anything but another pile of oil profits?

Someday someone is going to step up and finance a means to put oilmen out of business for good.

In the mean time, turn off that light you're not using.....;)

[ilovemydoggy]

Amen! The greed of the oil companies is unspeakable. Why don't we hear more about "earthships" the new architecture, in the mass media? Earthship owners spend only $200-$300 per winter on heat. Oh, I forgot the media is owned by the corporations.

C'mon folks let's ignore our so-called "leaders" and LEAD OURSELVES. "They" aren't going to do enough. V. Cornue has some good insights today at http://www.Vaboomer.com on big oil and the middle east.

[HeevenSteven]

The oil companies aren't gonna do it. No way. Your former colleagues in DC are the ones who have to step up to the plate. Fat chance; eh?

[Cathexis]

This is the difference between long-term and short-term Business.

A long-term Business would do exactly as Mr kennedy suggests, pushing to be first to market and establish a prime place at the table of the new energy era.

Short-term Business is only interested in continuing to milk today's Cash Cow.

[mergina]

Yes, but what this country, indeed this planet is about to find out in the not too distant future, is that business will not matter. We as a species are truly facing the greatest challenge of our existence, keeping this planet in balance enough to sustain us as a species.

[DBMAC]

I find it odd that no one has commented on this article yet. Maybe it makes too much sense.