The Boston Globe
July 2, 2008
The costs of waiting for Big Oil to do the right thing
Joseph P. Kennedy II and William F. Achtmeyer
Notwithstanding a shift by big business to become more socially responsible, Big Oil prides itself in being an island of bullheadedness and smugness.
In a capitalist system, rewards of success go to shareholders. But Big Oil has virtually ignored an equally important constituency -- the citizens of the United States -- who have granted Big Oil the right to extract the nation’s most strategic natural resources. In return, they expect them to act as responsible fiduciaries.
A recent study done at the request of Citizens Energy by the Parthenon Group found that since 1996, Big Oil has increased shareholder compensation by 700 percent -- three times the increase in capital spending to find and extract oil and gas. ExxonMobil, the nation’s largest energy company, increased shareholder compensation by 260 percent in five years while boosting capital investments merely 34 percent. Last year, the company cut investments in domestic exploration and production by 11 percent while recording the single largest annual profit in history.
But as energy costs continue to spiral out of control, Americans continue to suffer.
Worldwide oil supply and demand has remained relatively constant the past four years. What has changed is the perception that demand will soon outstrip supply and the exacerbation of this by speculators allowing prices to skyrocket past $140 a barrel and Big Oil to fill its coffers. Given the chance to make a balanced distribution of these “unearned” profits, Big Oil has chosen to reward shareowners over their customers, who struggle to afford gas for daily commutes or heat to warm homes during winter. Every year Citizens Energy petitions Big Oil to provide a small slice of assistance to help keep the poor warm. Every year, Big Oil says no.
When it comes to investing in future energy sources, the story is no different. The industry’s $100 million public-relations campaign touting commitment to new and renewable sources of energy leaves out such inconvenient truths as the fact that big Oil’s 2007 investments in alternative energy sources averaged less than two-tenths of one percent of revenues.
The time to wait for Big Oil to act voluntarily and make investment decisions on behalf of all its constituencies is over. Similar to public utilities, Big Oil should be permitted to earn a fair return based on its cost of capital -- about 8 percent over the past decade. Below this point, Big Oil would qualify for development credits currently granted by the US government to incent the industry to find new energy sources. Above this, the credit would be denied.
Twenty-five percent of every dollar of profit about the industry cost of capital would go into two buckets. One bucket, using one-third of the funds, would go toward fuel assistance help to the poor. The other bucket 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.
The Parthenon Group estimates roughly $30 billion would have been available for the poor, alternative energy development, and new domestic production if this system were operating over the last three years. Oil and gas producers would have been subjected to the “tax” in six of the last 10 years (200, 2003-2007).
These funds are desperately needed to help families who could pay as much as $7,000 for fuel this winter and assist millions of poor households who face utility shut-offs with little hope of clearing the balance before winter. 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.
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’s a bipartisan solution to a bipartisan issue.
Left to their own devices, Big Oil companies will take every step necessary to funnel al the wealth that Lady Luck and American taxpayers have funneled into their bank accounts. It’s time now to treat every American as a fiduciary to strike a just balance between private profit and public interest.
*Joseph P. Kennedy II is founder, chairman, and president of nonprofit Citizens Energy Corporation in Boston.
William F. Achtmeyer is chairman and managing partner of the Parthenon Group, a strategic advisory firm headquartered in Boston. *