Using Big Guns To Go After Big Oil

Big Investors are battling Big Oil quite effectively. Climate activitists should focus on life after Big Oil.

You may have seen a headline somewhere lately about the Saudi oil minister arguing for “flexibility” in the energy transition. Or maybe some Russian official blaming the Europeans for the own high energy prices, saying it wouldn’t have happened if they’d quit trying to ditch natural gas. Or perhaps seen an oil industry consultant suggesting that energy prices would be lower if oil companies weren’t hounded by investors and environmentalists to cut spending.

These oil interests are keeping up a steady drumbeat of calls for slowing the energy transition and dropping existing constraints on development of new fossil fuel resources. Their claim is that this winter’s run-up in oil, natural gas and coal prices is evidence the oil industry isn’t investing enough. The barely camouflaged message is that mayhem threatens unless we keep lots of fossil fuels around for decades to come.

So far, the argument isn’t working out very well for Big Oil.

European officials have taken exactly the opposite lesson from soaring fossil fuel prices. They say that a four-fold spike in natural gas prices this winter in Europe — brought on in part by Russia in an apparent attempt to demonstrate the importance of its gas supply — and an Opec-driven surge in crude oil prices illustrate the importance of ditching carbon fuels quickly.

The US political establishment is hamstrung on energy and climate policy at the moment by fights over the Build Back Better legislation, with the Biden administration occasionally throwing out words of encouragement on oil investment but mainly tilting in the same direction as the Europeans.

The oil establishment offensive has raised the ire of some climate activists, sparking another round of calls for oil industry nationalization. But that’s politically fanciful — and probably not needed. Wall Street is doing a pretty fierce number on oil companies as it is.

Investor Activists

The industry’s argument for more investment in production capacity isn’t appealing to some key big oil company shareholders. First, because there’s a high risk that most big oil and gas production projects at this late stage in the fossil fuel game will end up losing money on a full cost-recovery basis. These projects historically have required several years to recoup the original investment and start making serious money.

Second, because oil companies in recent years have been notoriously bad at making the kind of money they did in the old days, when they were working on the richest, easiest to access oil fields. And finally, because the big investors increasingly figure that the capitalist structure they sit atop will get blamed and/or stuck with the bills if climate change goes untamed.

A quick perusal of one-time industry leader Exxon Mobil’s standing in the world’s Top 10 companies by market capitalization demonstrates how quickly and definitively oil firms have fallen out of favor with investors. In 2011, Exxon topped the list, with Chevron and PetroChina also included. Although the others had fallen off the list as 2015 started, Exxon was still vying with Apple to be the world’s most valuable company. But by year end, it was №5 and by end-2017, it was gone altogether from the now tech-dominated Top 10.

In 2020, the once proud scion of the John D. Rockefeller’s Standard Oil Trust was summarily booted off the Dow Jones 30 industrial average, and Exxon was forced last year by upstart activist hedge fund Engine №1 — with backing from big fund managers — to put two pro-transition people on its board of directors.

Giant investment managers such as BlackRock, Vanguard and State Street are joining with newer pro-climate shareholder activist groups in continuing to discourage new investment in Old Energy in favor of milking oil and gas companies for every cent they’re worth. Between them, these three investment houses own 15%-20% of the biggest US oil companies, so they can’t be ignored. And dividends and share buybacks are what they want to extract, not oil.

All this ensures that Exxon Mobil, Chevron and the like will be worth less — and able to do less — in the future than they are now. The situation for oil companies is dire enough that few top oil industry executives are joining in that drumbeat of warnings about the impact of underinvestment. They’re mostly cowed into silence.

Climate Activists

For climate activists and politicians alike, there’s a good case to be made for leaving it to the big investors to do battle with the fossil fuel industry. Expending time and political capital trying to beat down Big Oil is wasteful if someone else will do it for you — and probably ineffective.

There are problems with the investor-led approach on fairness grounds: It benefits those who already have — investors milking oil company cows — at the expense of have-nots who keep on buying ever-more-expensive gasoline. But it’s effective. Oil isn’t an industry with a future at all, much less a bright future, and its past is more likely to yield penalty-laden lawsuits than residual wellsprings of wealth.

What’s more, the products these companies make are quickly becoming costlier than renewable alternatives. If solar, wind, batteries and EVs are available and properly encouraged by governments at all levels, the fossil fuel companies will either have to find something else to do for a living or die. It’s that simple. And it’s conceivable the US Congress might succeed at encouraging EVs and renewable electricity, with a little help from federal, state and local regulators.

Whether all this will happen fast enough to keep climate change within livable limits, and whether it will be accompanied by dramatic action on other environmental threats to the planet such as plastics and pesticides is another question. These things require reining in the entire growth-driven economic patterns represented by the same investor class that is battling the oil companies. The big funds and many of the investor activist groups are acting to save capitalism from being pulled down along with oil — not trying to build an equitable and livable world.

But sometimes it pays to take your friends where you find them.