By Alison Loomis | Thursday, 10 April 2008
With fuel prices expected to soar to $4 a gallon this summer amid massive industry profits, the top 5 U.S. oil companies defended their tax breaks before Congress and refused to commit to investing 10% of their profits in renewable energy solutions that could help relieve financial burdens for American consumers.
But should oil companies be the ones responsible for changing our energy economy, or should they be trying to keep prices as low as possible? Whose responsibility is it to develop long term energy policies?
Tax Breaks and Tough Breaks
In a new report by the Energy Information Administration, gasoline prices are projected to top $4 a gallon in 2008, up 55 cents from last year.
While high prices are damping demand in the U.S., petroleum consumption remains strong in China, India, Russia and the Middle East. “The combination of rising world oil consumption and low surplus production capacity is putting upward pressure on oil prices,” the EIA report said.
All the while, the five largest U.S. oil companies - Exxon Mobil Corp., Shell Oil Co., BP America Inc., Chevron Corp., and ConocoPhillips - reported a total of $123 billion in profits last year. With OPEC supply predicted to remain low and global consumer demand high, the oil industry will continue to make record profits.
So why should a polluting, and highly profitable industry be getting taxpayer assistance?
In an April 1st Congressional hearing, Rep. Edward J. Markey (D-Mass.), Chairman of the House Select Committee on Energy Independence and Global Warming, claims, “The prospect of $4 a gallon gas is the result of the Bush administration’s policy of tax breaks for Big Oil and tough breaks for American families.”
The New Meaning of "Manufacturing"
When President Bush took office seven years ago –-gas prices were about $1.75 in the Bay Area. In 2004, in a federal effort to keep factory jobs from going overseas, Congress gave tax breaks to manufacturing companies. The oil companies were able to "redefine" oil drilling as a form of manufacturing, the same as building cars or computers, and every year since they've reaped billions and gained record profits from "producing" oil.
Every time gas prices rise, oil companies get called before Congress to explain the situation. Yet despite declining returns in oil supply, and the rapid changes in the global energy market, they continue to make similar arguments.
In the April 1st hearing, the oil companies’ executives, peppered with questions from skeptical lawmakers, said they understood that high energy costs are hurting consumers, but deflected blame, arguing that their profits were in line with other industries.
"Our earnings, though high in absolute terms, need to be viewed in the context of the scale and cyclical, long-term nature of our industry as well as the huge investment requirements," said J.S. Simon, Exxon Mobil's senior vice president.
The Big 5 oil executives claim that even though they earn tens of billions of dollars, they also invest tens of billions in exploration and oil "production" activities. However, given that the wide majority of easy-access oil reserves have been exhausted or are in decline, many argue it would be more sensible to divert resources from increasingly expensive oil exploration and spend that money investing in clean energy.
Big Oil: "It's Going to take Decades"
"We have to move to a renewable energy economy.... We can never get out of this trap as long as the oil companies want to hold us hostage to this old agenda," says Markey.
Representative Jerry McNerney of Pleasanton also challenged the oil executives to spend more on renewables. "The companies represented today have at their disposal the resources necessary to move forward, securing our nation’s long term energy future, and what we need now is a commitment and vision to make that happen," says McNerney.
The Big 5 respond that they are investing millions in renewables and alternatives. On average the 5 invested scarcely one percent of their profits in alternatives last year. Exxon alone made more than $40 billion in profits, while spending just $10 million on research into alternatives to oil.
Shell Oil is fighting the transition to alternative energy by threatening to freeze investments in Europe if the EU moves forward with a plan to auction emissions permits as part of their effort to combat global warming.
Speaking on a recent panel at the Aspen Environment Forum, Gale Norton of Shell Oil Co. was asked what percentage of Shell’s portfolio was invested in renewable alternatives. She testified that she didn't know. Another panel member, efficiency expert Amory Lovins, questioned why Shell would continue to explore costly, risky, environmentally damaging sources of energy, when investing in efficiency is so much safer, cheaper, and more productive.
The answer, says Shell, is they're trying to keep options open. "From our perspective it's going to take decades to move the transition to a more renewable world," said Norton.
Global scientific consensus, however, affirms that we don’t have decades, and many economists agree with the UK's Stern Review that the sooner we invest in this transition, the better and cheaper it will be.
"Tremendous Conflict of Interest"
At the hearing, Chairman Markey called on the companies to drop their defense of billions in tax breaks, and to invest 10 percent of their profits into renewable alternatives to oil, noting that the bottom 20 percent of wage earning families in America are now spending 10 percent of their income on gasoline due to the current high prices.
Despite these well-intentioned efforts, Professor Bornstein, an oil industry expert at U.C. Berkeley, questions the wisdom of asking oil companies to invest in alternative energy.
"There's no good reason to think that they're the ones to come up with the good alternatives. They don't have the best incentives, since they're in the oil business and I think it's also sort of a fantasy about blaming oil companies for this problem."
In an interview with Arcwire, SolarCity executive Lyndon Rive says there's a "tremendous conflict of interest" in asking oil companies to push renewables. "When the environmental part of your company is only generating 1% of your business, and everything else is 99% – it’ll take a certain individual to truly want to make a change, and I’m not sure if all of them have those types of individuals running their companies."
Congress is trying to help that change by shifting the $18 billion in oil industry tax breaks towards renewable energy. The House last year and again on Feb. 27th approved legislation that would have ended the tax breaks for the oil giants, while using the revenue to support wind, solar and other renewable fuels and incentives for energy conservation.
However, the measure is still a few votes short of passing the Senate.
Proper Role for Government?
Academics and business people alike also believe government is bad at legislating alternatives, as demonstrated by the federal government's corn ethanol mandates which are driving up food prices, and actually raising greenhouse gas emissions. Groups like The Carbon Tax Center argue that a federally-imposed carbon tax would do a better job of forcing the market to adopt a clean energy agenda, but the government won't be passing that law any time soon.
So despite the tongue-lashing from Congress, little is likely to change as a direct result of the hearings. Nevertheless, says Tyson Slocum, director of the watch dog group Public Citizen's Energy Program, “We're closer than ever to actually repealing these billions of dollars in tax breaks that big oil companies currently enjoy.”
Whether that will drive a meaningful change in our energy economy remains to be seen. But, says professor Bornstein, there is no good reason to give oil companies tax breaks.
"And getting that issue out in front of voters in an election year? That's the real reason for the April 1st hearing."
Photo courtesy of CBS News.