Part V: Running, Not Walking, Off the Face of the Cliff
In light of recent developments in Ukraine, the U.S. State Department has pushed for increased production of oil and gas in the United States to drive the pricing of fossil fuel commodities lower to hurt Russia. This may make great sounding bullet points in political discourse but most oil analysts don’t expect U.S. production to really drive oil prices down at all. Saudi Arabia is expected to give up market share to keep oil prices relatively the same, above $100 a barrel. Yes, oil prices briefly dropped from that range to around $50 a barrel around 2009, but that was due to the impact of the Great Recession which slashed demand. There has been a huge flow of funds to managed futures and exchange traded funds that invest in the oil futures market to help keep oil prices in a higher range, and for a good reason. It appears that we have hit a curb in terms of cheap access conventional oil. Now the oil that is being pulled out of the ground is being captured at a greater cost, be it with fracking or deep sea oil drilling. That means you want a higher price commodity so the profit margins make sense. If the cost of oil drops, profit margins shrink, and at some point, it becomes unprofitable to go after the oil.
Last week, House Energy & Commerce Committee reported the bipartisan bill HR 6, the Domestic Prosperity and Global Freedom Act, to the floor of the House of Representatives. The goal of the bill is to encourage a further increase in domestic fracking of natural gas and convert it to liquefied natural gas (LNG) for export, with the goal of selling the LNG to Ukraine. Again this came from State Department recommendations, and that’s a department that has been acting more like a corporate contractor and less like a department of diplomats for decades. None of these threats of competition have put any scare into Russia’s stock market, which continually goes higher anyway.
Our domestic and foreign energy policy seems to be firmly based solely on keeping a firmly entrenched oil and gas sector highly profitable. That’s the sole factor that is driving the fracking boom. Get the oil out of the ground and into the market as soon as possible at all costs regardless of the consequences.
Originally it was believed that the singular goal of a business is to create a customer. The jobs of a company’s management is to focus on their primary constituents, their employees, their vendors, and especially and foremost, their customers. There was a popular phrase ‘the customer is always right.’ So if management is able to properly execute on its business plan, and grow its customer base, the shareholders will ultimately be rewarded via higher stock valuations.
Since the late 1970s, when the Chicago School of Economics began to dominate economic thought, and that idea completely changed. The singular goal of management is to maximize shareholder value, and the theory of finance focused on building mathematical models of companies using spreadsheets to calculate all the different ways this can be achieved. The idea is that shareholders are taking all the risk and are the true owners, thus deserve consideration over all the other constituents. Bizarre as it may seem, the idea that the goal of a business is to create a customer is now considered radical liberal thought, even though a business can not exist without customers. The focus on shareholder value maximization by corporate management is the accepted doctrine. The result is corporate management being caught in an institutional trap. The CEO of an oil and gas company has to focus on short term profits. If a CEO focuses on longer term issues like investing in research and development for renewable energies, and shifting resource mix to take less out of the ground, the shareholder valuation could be punished and the CEO becomes replaced. Actually, since the 1980s, corporate management is compensated primarily through stock options to make sure their interests are aligned with that of shareholders, so they easily keep in line.
The current economic doctrine and structure of our financial markets primarily encourage laser targeted focus on the short term only. If short term profits mean greater costs for society in terms of environmental damage and harming the health of people, so be it.
The amount of wealth in the oil and gas sector is so large and concentrated, that it easily influences and effectively controls the politics on the local level and on the international level. Consider for example the largest publicly traded oil and gas company, ExxonMobil, which has revenues in excess of $420 billion a year. ExxonMobil’s revenues are greater than the gross domestic products of entire nations, like Denmark or Venezuela. As the country is transnational, it has more influence than those entire nations as well. The multinational oil and gas corporations make sizable political campaign contributions and have their own army of lobbyists, and are able to easily influence regulatory agencies. Hence the politics can be easily influenced to insure legislation will always be favorable to achieving higher short term profits, billions of dollars of tax subsidies continue to shower the sector, and big multinationals in that sector manage to pay next to nothing in taxes. ExxonMobil’s effective tax rate continues to be around 16%, well below the 35% standard for companies. ExxonMobil’s CEO Rex Tillerson continually advocates for little regulation on fracking and states those concerns are overblown. In 2012, ExxonMobil acquired one of the largest of the natural gas focused fracking companies, XTO Energy based in Fort Worth, Texas.
This past February, Rex Tillerson joined a class action lawsuit to stop Cross Timbers Water Supply from building a water tower that will supply water for fracking projects. Why did he sue the company? The water tower is outside the development where his $5 million home is located. He has continually screamed that regulation on fracking will hold back America’s growth and global competitiveness, but of course, “not in my backyard.”
ExxonMobil has doled out money to the conservative think-tank, the Heartland Group, which basically focuses on shaping public opinion by promoting denial of global warming/climate change. The Heartland Group sends talking points to anchors of Fox News, publishes articles in major publications, have their own group of speakers, and so forth. However, CEO Rex Tillerson, himself, does not deny global warming at all. Last year, in front of a group of elite peers, he gave a talk to the Council of Foreign Relations, and stated: ”As a species that’s why we’re all still here: we have spent our entire existence adapting. So we will adapt to this. It’s an engineering problem, and it has engineering solutions.” He went on to give examples suggesting that areas of crop production can easily be relocated. Unfortunately, this is a sharp disconnect from reality. We typically think of areas of crop production as farms, and as activist Bill McKibben points out, the ice in the tundra may be melting, but there is no soil there.
At the last shareholder meeting of ExxonMobil, Rex Tillerson told an assembled group that it would do no good to stop and try to cut carbon emissions. We are already headed on a specific course, and then asked: “What good is it to save the planet if humanity suffers?” In other words, enjoy what we can, and let’s not try to prolong the agony of the world as it dies. He’s pulling a minimum of $40 million a year in annual income, so at least his days and his children’s will always be comfortable, and everyone else is expected to fend for themselves. At that same meeting, over three quarters of the shareholders voted down a resolution that would require ExxonMobil to set goals for reduction of greenhouse gas emissions from using the company’s products. The major shareholders are hedge funds and other financial institutions.
Swiss American psychiatrist Elizabeth Kubler Ross described what she saw as the phases that people go through as they face that they are going to die of a terminal illness. The first was denial, the second was anger, the third was grief, and finally, an acceptance phase as one came to peace with facing death. It almost appears that CEO Rex Tillerson has fallen into a type of acceptance stage in terms of what we face due to his industry’s behavior.
One has to wonder if other corporate leaders in the oil and gas sector seem to have fallen into this acceptance phase. Based on the behavior of the industry, some most likely have. Others, such as Charlie and David Koch of the privately run Koch Industries, still seem trapped in the denial stage. Whatever state they appear to be in, they certainly should not be in a position to make a decision on behalf of the population.
What is clearly certain is that we have a calcified out of touch corporate elite that have too much influence over the politics and effectively wiped out democracy. Unless some major changes can be made to regulate the industry enough to prevent further environmental damage, short term profits will come first and the children of the world face a bleak future.
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