11/06/2013 09:08 pm ET Updated Jan 23, 2014

A Pincer Movement Aimed at Big Oil

Big oil's third successive bad quarter in 2013 drew none of the spectacular headlines of its dismal second quarter results -- no Economist cover stories about "the twilight of the SuperMajors." Perhaps weak oil profits are no longer news.

But there is still plenty to wonder about. Chevron, Shell, Total and Exxon Mobil all came in with lowered profits - mostly blaming refining margins, but cheerfully announcing that they were pumping more oil. But, of course, if you pump more oil and make less money, this is not a good business to be in - which seems to be where things are headed. There was considerable evidence that the Supermajors themselves don't quite know where they are going. Shell had used its abysmal second quarter results to gracefully exit from the endless black hole that the Chukchi Sea exploration had become. It used this quarter's results -- a third below last year's - to announce that its new slogan was "Once more into the breach dear hearts" and that it would resume exploring and drilling in the Chukchi. Well, if it goes anywhere in Alaska -- the company said it had not finally decided but would be filing exploration plans.

This is hardly the kind of hard-eyed, decades-in-advance planning that Big Oil has sold to investors - and it raises the question of whether the pursuit of steadily more expensive and difficult to produce crude reserves, yielding smaller and smaller refinery margins, on the premise the there will always be a sufficient shortage of transportation fuel to sustain a $100+ market for extreme oil is warranted. Bloomberg sounded a cautionary note: "Energy producers on average need oil prices around $96 a barrel to break even on wells drilled in Permian layers known as the Cline Shale and the Northern Mississippian Lime," according to Mike Kelly, an analyst at Global Hunter Securities LLC. That compares to average break-even prices of around $78 a barrel in the Eagle Ford Shale a few hundred miles east of the Permian, and $84 in the Bakken of North Dakota.

Oil companies clearly hope they can keep the escalator rising. Faced with uncertainty about when -- or if -- the Keystone XL pipeline will ever carry additional tar sands oil from Alberta to the refineries on the US Gulf Coast, Canadian oil companies have busily invested in relying on rail shipments as a substitute. The increasing flexibility that rail has given North American production companies, in both the Bakken and the Tar Sands, is one of the reasons refinery profits are down -- and oil majors bleeding profits. But that flexibility also locks in an added $5/barrel premium shipping cost, and in many cases denied producers the access to surplus US refining capacity they had counted on to bring down their costs.

But as long as oil stays above $100, the tar sands are still a good investment.

Will sky high prices remain? Only if oil can retain its monopoly in transportation. In reviewing the last 40 years, BP's chief economist, Christof Ruhl, points out that since 1973 "expensive oil lost out where it faced competition from cheaper fuels....where oil faced competition from other fuels, its market share faded away: In 1973, oil's share of global power generation peaked at 22 percent; today it is just four percent."

And transportation alternatives are breathing down oil's back. Oil alternatives like electric cars already cost less than oil to buy and operate. Oil's only defense is its ability keep the market share of its competitors from getting to competitive scale.

But the world's fifth largest economy -- the Pacific coast stretching from California through Oregon and Washington to include British Columbia, spent the last month making clear its intent to challenge this oil monopoly.

First these states and provinces -- joined by 5 others in the Northeast -- launched a major new initiative to remove anti-competitive road-blocks hampering electric vehicles market share. "The goal, they said, was to achieve sales of at least 3.3 million vehicles that did not have any emissions by 2025." Their interventions would include more and standardized charging stations and supportive building codes and electricity rate structures, and state fleet purchase commitments.

Then, having dangled an electrification carrot to disrupt the oil monopoly, the West Coast tier - California to British Columbia - also committed themselves to using a low carbon fuel standard stick, to mandate that increasing shares of their transportation fleets by powered by fuels that are cleaner than -- and hence other than - oil.

The states in the electric vehicle initiative account for 25 percent of auto sales. The northeastern player -- Connecticut, Maryland, Massachusetts, New York, Rhode Island and Vermont -- are highly likely in the next few years to join the West Coast in creating a market mandate for non-petroleum transportation fuel. When they do, this combined, bi-coastal effort to explode the market share of both electric vehicles and alternative fuels, will have launched a powerful and disruptive pincer movement at the heart of oil's monopoly power -- the US motor vehicle market.

There is a lot of pressure on the big oil companies to recognize that their future is as smaller players -- shareholders demanding that today's profits be returned to the owners, not squandered on oil exploration to add stranded assets to the reserve accounts. The new state initiatives suggest that shareholders might be well advised to demand, not plead, that the profits their investments have earned be returned, not wasted.

A smaller oil industry is an unavoidable outcome of a weakened oil monopoly, lower oil prices and climate security. Which doesn't mean you may not be buying a lot of fuel from a company called Exxon in 30 years. But most of it wouldn't be fossil carbon.

A veteran leader in the environmental movement, Carl Pope spent the last 18 years of his career at the Sierra Club as CEO and chairman. He's now the principal advisor at Inside Straight Strategies, looking for the underlying economics that link sustainability and economic development. Mr. Pope is co-author -- along with Paul Rauber --of Strategic Ignorance: Why the Bush Administration Is Recklessly Destroying a Century of Environmental Progress, which the New York Review of Books called "a splendidly fierce book."