Oil companies: Invincible or not?

I spent this weekend slathered in oil.

Not tanning oil—the naked L.A. sun on my balcony is sufficient to generate a ~quaran-tan~. No, after the recent shock to the global oil system and sudden vulnerability of its most feared champions, I couldn’t resist pulling my energy tomes off the shelf, flipping Netflix to There Will Be Blood, even playing a board game where you harvest oil to power mechanical troops around a post-WWI Eastern Europe. 

It’s easy to get the idea that the biggest oil companies, or “supermajors,” are invincible, as they themselves believe. “The industry had to exist,” legendary Exxon CEO Lee Raymond says in Daniel Yergin’s energy saga The Quest. “If you were the best of the lot, you’ll always be there.”

Environmentalists narrate another version of oil company invincibility, in which the primary obstacle to addressing climate change is oil giants’ money and influence.

This week on Bright Ideas, I’ll talk about how the biggest oil companies are looking considerably more, well, vincible.

Not a subscriber? Hit this button to get Bright Ideas in your inbox weekly!

Big bets vs. small bets

In big structural terms, clean energy is already cheap in much of the world, and getting cheaper. In contrast, the easiest oil was extracted long ago; the supermajors have looked to increasingly remote and tricky mega-projects to expand their reserves. 

These projects cost billions of dollars and take decades to pay off. Clean energy plants, conversely, get built in a couple years or faster and they’re cheap! That gives them the benefit of flexibility: because the way we use energy is changing rapidly, it’s less risky to make a bunch of smaller, quicker bets, than to sink all your money into a few massive, super long-term bets.

Incidentally, that was the rationale the Republican utility regulators of Arizona used to freeze new gas power plant construction in 2018: Let’s hold off on the expensive purchases right now until we see how these new technologies shake out.

That’s not to say clean power plants directly compete with oil companies. The energy matchup goes something like this:

• Wind/solar/grid batteries take on electricity sources like coal and natural gas

• Electrified heating takes on natural gas and heating oil

• Electric cars take on oil, refined into gasoline or diesel

The oil companies aren’t worried about solar farms. But if electric cars charged with plentiful cheap solar and wind take over the automotive world, that cuts right into demand for oil.

Party while it lasts

So how are the oil giants slipping? Turns out, for the last decade, Exxon, BP, Chevron, Total and Shell paid out more in dividends to shareholders than they earned from doing business—to a collective deficit of more than $200 billion. The dividends keep investors happy, so supermajors don’t want to turn off the tap, even if it’s hard to afford. 

It’s the business equivalent of borrowing money to charm your friends with the finest Champagne and creamy cheeses four times a year. Good way to make people like you, while supplies last.

But the sudden drop in demand from coronavirus sent oil prices well below what these companies need to cover dividends and other big expenses. 

That’s going to be particularly hard on Exxon, which has increased its dividend for 37 years running. But Exxon isn’t what it used to be.  

“Once the undisputed king of Wall Street,” Bloomberg reports, “Exxon today is worth less than Home Depot Inc., which has less than half the revenue.”

Ouch, Bloomberg!

And last Friday, Exxon decided to keep shelling out its dividend despite suffering its first quarterly loss in over 30 years. Exxon’s strategy depends on the world using even more oil in the decades to come. But the world just learned how possible it is to get by while using way less of it.

The Energy Stream

I rewatched P. T. Anderson’s There Will Be Blood this weekend. My main memory of it was cinema’s most famous discussion of milkshake consumption, but it really captures all the key structural elements of oil discovery.

There’s the knowledge imbalance imbued in negotiations for access to oil. Seasoned and duplicitous oilman Daniel Plainview attempts to buy the rights for a big find by telling the religious homesteaders that he wants to use their land for quail hunting. Early global oil extraction arose from similar structural imbalances, as Western companies backed by imperial war machines took control of resources in subordinate territories.

After Daniel gets oil flowing—a messy and deadly business—he hits a bigger challenge: distribution. Without a path to market, he’s sitting on a sea of oil that can’t make him any money. Standard Oil attempts to pressure him into selling, because they control railroad shipping, (along with almost all U.S. oil production, before the monopoly was broken up by the Supreme Court in 1911). So Daniel set off on a new endeavor: building a pipeline to the sea.

Those days of easy-to-reach conventional oil are long since gone, just like Eli’s milkshake.