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.
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.