Can Big Oil Balance Shareholder Interest Against National Interest?
Earlier this week I had written an article reviewing the proposal to increase the tax Big Oil companies pay on their profits, if they do not invest in alternative and cleaner energy resources. This article dwells further into that issue, especially with regards to the role of Big Oil companies and their ability to balance their shareholder’s interest against our national interest.
Government's Role in the Free Market
Free market advocates (I am one), believe the government should have a minimal role in managing how any market operates. The winners and losers in any market should be determined purely by market forces, with the government not taking any sides. However, in the real-world, there are very few markets which are truly free of the influence of the government.
The world’s financial markets provide a striking example. Even though the restrictions on the movement of capital across the globe are perhaps at the lowest level ever, the sentiment in the financial markets is heavily influenced by the decisions of central bankers. Bonds issues by the United States Treasury continue to be safe-havens of last resort with the 10 year bond yielding around 4% even when inflation threatens to explode. The Federal Reserve continues to play a vital role as a lender of last resort, trying its best to prevent a collapse of the financial system.
All over the world, industries deemed to be vital to national interest are under some form of government control. In the United States companies providing basic utilities like electricity, natural gas, telecommunications, public transportation etc. are regulated by Public Utility Commissions [PUC] of individual states to provide ensure a reliable supply and stability in prices. These industries are deemed to be essential to the basic functioning of a modern economy and protecting them from the extremes free-markets can take is considered essential. Reducing the uncertainty associated with their availability and pricing, allow other segments of the economy to function better, and increase our overall prosperity.
Oil and Government Regulations
Though oil plays a critical role in our national economy, and shaping our foreign policy, the oil industry is not heavily regulated and does not come under the purview of the PUCs. Since we import a bulk of the oil we consume, our energy security is closely tied to maintaining access to the sources of foreign oil. As a result oil companies are the 800 pound gorilla when it comes to our energy policies and thanks to national interest our foreign policy. Our energy policies are designed to help our oil companies in providing us with reliable supply at stable prices. The United States offers a variety of incentives and subsidies to oil companies to achieve their goal.
Federal Assistance
Oil companies get leases to Federal lands for the purpose of exploration and development of new fields at a minimal cost. A report published in 1999 (.pdf) (when oil was near a long term bottom), by the International Center for Technology Assessment, a non-profit, bipartisan organization with the goal to provide the public with full assessments and analyses of technological impacts on society concluded that:
“…Together, these external costs total $558.7 billion to $1.69 trillion per year, which, when added to the retail price of gasoline, results in a per gallon price of $5.60 to $15.14…”
Some of the subsidies mentioned include:
· The Percentage Depletion Allowance
· The Nonconventional Fuel Production Credit
· Immediate expensing of exploration and development costs
· The Enhanced Oil Recovery Credit.
Since 1999 the Congress and the Bush Administration has added more programs to help oil companies maintain our energy security, while some of the credits have become inapplicable as the price of oil soared in recent years.
The Cost of See-Saw Oil Prices
Though the US Government provides incentives to ensure reliable supply at stable pricing, the price of crude-oil has gone through significant gyration over the past few decades. On an inflation adjusted basis the price of oil has varied from the $20s/gallon in much of the 50s and the 60s, with a spike up in the 1970s which peaked in 1980 with an average price of $98/gallon, followed by the Saudi led glut in the 1980s with oil falling as low as $16/gallon in 1998 and the current super spike with average oil prices not projected to be well above $100/gallon in 2008 (EIA estimates $122/gallon in 2008 and $126/gallon in 2009).
The massive swings in the cost of oil have a huge impact on the economic well-being of our country. Any long-term project with a significant energy component becomes much riskier: Do the planners use oil at $20/gallon or $130/gallon in their planning? A study sponsored (.pdf) by the US Department of Energy (published December 2000) and conducted by the Tennessee based Oak Ridge National Laboratory’s National Transportation Research Center, tried to measure the impact of the gyration in oil prices on the US economy. The study came up to the following conclusions:
“Estimates of the total economic costs to the United States of such oil market upheavals during the last 30 years are in the vicinity of $7 trillion, present value 1998 dollars, about as large as the sum total of payments on the national debt over the same period. Transportation is at the center of the oil dependence issue. More than 25 years after the first world oil crisis in 1973-74, the U.S. transportation system comprises 67% of U.S. petroleum demand (25% of world oil demand) and relies on oil for more than 95% of its energy needs.”
Energy Policy: Expediency Wins
The decline and fall of the former Soviet Union and the military stability provided by the US presence in the Middle East in the 1990s resulted in two decades of low oil prices from the mid 1980s to the early 2000s. During this period the United States dependence on foreign oil increased significantly. The availability of inexpensive foreign oil resulted in pressures from environmentalists to limit exploration and drilling in the United States.
Why Drill in the US When The World Is Awash?
The low price of oil meant that Big Oil companies had very little incentive to explore newer oil fields. For a long time Big Oil used oil price value at $20/barrel to determine the viability of any new project. As shown in the chart below (taken from this link) a result the replacement rate for Big Oil’s has been in a free-fall since the 1990s.
Missed Opportunities
While Big Oil’s proven reserves where falling faster than they were being consumed, the economies of emerging markets in Asia were cranking up. It did not take much to figure out that the energy demand from these economies would increase as more than 2.5 Billion people emerge from a subsistence lifestyle to the consumption focused lifestyle we export to the rest of the world.
It was in this period of lull that the United States missed a great opportunity to wean itself off foreign oil and establish itself as the leader in more sustainable energy technologies which are not completely dependent on discovery of relatively scarce natural resources.
It was not for the lack of trying; California passed an initiative to encourage the use of Electric Vehicles in 1990. However, the initiative failed due to strong opposition, primarily from the US automobile and oil industries, which feared an erosion of the dominance of internal combustion engine in the US’ transport system.
Big Oil’s off-course did not want our reliance on the gasoline to end and tried their best to kill electric vehicles. The big automakers were afraid of the electric vehicle since they have much lower wear and tear and hence last for a longer time, while requiring much lower maintenance during their life-time. The brakes in electric cars use regeneration technology to convert the kinetic energy of the car into electricity which recharges the battery, instead of expending the energy as heat in the brakes. There is no high-temperature engine where gas is exploded in a controlled environment.
The NiMH battery patent lock-up was an egregious example of how the Big Oil and GM colluded to push back the development of electric cars by at least a decade.
Electric-Only Cars, NiMH Batteries and Big Oil
During the 1990s Nickel Metal Hydride batteries were considered the ideal candidate for plug-in electric cars. Their reliability and ability to store a lot amount of energy make them especially valuable for vehicles which do not have a gas-powered engine to supplement the battery power. These batteries powered the first generation of electric cars launched in the US, including the EV1 (GM) and RAV4-EV (Toyota).
In 1994, GM acquired controlling rights of the company, Ovonics, which invented and patented NiMH batteries. It sat on the patent for a few years, while the first generation of electric cars met their pre-destined end. In 2001 it sold that stake to Texaco which was then acquired by Chevron. The battery venture was spun off as a 50-50 venture, Cobasys, between Chevron and the original owners, Ovonics-Energy Conversion Devices.
Cobasys has been following a policy which prevents the use of large-format NiMH batteries in transport applications in the US. It sued Panasonic EV Energy (PEVE), a joint venture between Panasonic and Toyota, which supplied large format NiMH batteries used in RAV4-EV for patent violations, which resulted in a sealed settlement.
The terms of the settlement involved a compensatory payment to Cobasys, licensing of some patents, and above all some unspecified restrictions on the size of NiMH batteries which could be sold to the transportation industry. Right after the agreement, PEVE stopped selling large-format NiMH batteries targeted towards the transportation market in the US.
Toyota’s RAV4-EVs are running great, but may have to be moth-balled since there is no legal way for Toyota to provide new batteries to replace the 10 year old NiMH battery packs, if and when they need replacement. RAV4-EVs owners have to contact Cobasys for replacement batteries; Cobasys has refused to deal with anyone in non-OEM quantities. Under the terms of the settlement, Toyota can use small-format NiMH batteries in hybrid vehicles like the Prius which have an Internal Combustion Engine to burn gasoline and supplement the electric power.
To complete the picture: Cobasys, the firm which refuses to sell large-format NiMH batteries to RAV4-EV customers, or license its technology to other manufacturers, is on GM’s list of distressed suppliers in poor financial condition. I wonder why a firm in financial distress is unwilling to generate extra revenues by addressing the needs of an existing market.
Detroit should be thankful that the horse and carriage industry of the 19th century did not have the protection of the US Patent Office to prevent the Internal Combustion Engine from being used in cars.
Opportunity Cost of the EV Failure
The opportunity cost of the failure of electric cars is not only in terms of what we lost in the US (less pollution, reduced dependence on foreign oil) but also the message we sent to the emerging markets. When China and India develop their transportation system, they do not have a working model based on electric vehicles to look at. Distances travelled in those countries are typically much less than the average American commute, and our ideal for electric vehicles.
Further, we lost the chance to be the leader in a technology of the future. America’s prosperity is built upon being innovators; in the future we will have to work much harder to maintain the edge as the rest of the world catches-up. By missing the boat on the next wave of transportation systems, the American economy has lost billions in economic benefits.
Towards a Cogent Energy Policy
It is clear that our energy policy needs a radical overhaul to wean us of foreign oil. Our new policy should be multi-pronged; while in the short term we continue to seek more oil, especially domestic oil, in the medium to long term, we have to focus on weaning our self off oil, and fossil fuels in general. Our nation will pay a high strategic cost for the enormous amount of wealth we are transferring to oil exporting nations, which more often than not, are not amicable to our national interest.
Restrictions on domestic drilling and refinery capacity have to be reviewed to come to terms with reality. Similarly the NIMBYs of Cape Cod, who are afraid of wind-farms spoiling the view from their vacation homes, need a reality check. More significantly, we need to take charge in becoming the leader in developing alternative energy resources.
Big Oil’s Financial Strategy: Wait and Watch
In 2007 Exxon-Mobil spent $31.8B in stock buybacks and another $7.6B in dividends. Big Oil in total increased their share buy-back programs from $10B in 2003 to $60B in 2006. The return of capital though laudable, also indicates that Big Oil companies are unable to find better alternatives for investing capital to drive future growth.
The irony of the situation is mind-boggling: In the past five years, the price of crude oil has gone up 4x, the replacement rate of Big Oil companies has plummeted to below 100%, but Big Oil companies are unable to find better alternatives for investing their capital?
Purely from a financial point of view this seems like a prudent move: if the importance of oil declines and prices fall, not making investments in new fields will turn out to be a wise decision. On the other hand, if oil continues to be important, the rising crude oil prices will ensure huge amount of profits from the existing resources Big Oil has. It is a win-win for the investors in Big Oil. But what about the interest of a nation, which has hitched its wagon behind oil?
Big Oil, National Interest and Renewable Energy
Big Oil’s decision to limit the growth of capital invested in discovering new oil fields puts the United States in a precarious position. Our transportation system, economy, and way of life, depend on oil. While Big Oil fiddles with its wait and watch approach, the global economy is on the cusp of falling into a major recession. Big Oil has wielded tremendous power in shaping our energy policy and now they seem content to watch while our economy unravels, and we ship our wealth to countries amicable to our national interest.
The best way of unshackling ourselves from the vagaries of the international oil market, and gaining technological leadership in the energy market, is to focus on renewable sources which are not dependent on fossil fuels. This is where Big Oil companies can pay a leadership role.
If history is any guide, initiatives to drive the adoption of renewable energy sources, will face a big political challenge by Big Oil. As long as the interests of Big Oil companies’ are completely opposite to those of renewable energy companies, the growth of renewable energy companies will be stinted. However, if the Big Oil companies develop a stake in the progress of alternative energy projects, they are likely to show less opposition.
One is tempted to argue that Big Oil companies have no business dabbling in alternative energy and by returning capital they allow their existing shareholders to determine where to invest. If they feel that alternative energy has as future, let them invest in that sector. Though this sounds good in principle, the dynamics are quite a bit different in real life. The percentage of investors who will sell their Big Oil holdings and then invest them in alternative energy resources is going to be small. Since many alternative energy companies are private, most investors can not invest in them. Since the total market capitalization of alternative energy companies pales in significance with Big Oil, a rush of capital into those companies results in speculative equity valuations, which will deter the buy and hold big-cap buyer who invested in Big Oil.
Any potential capital reallocation of investment from shareholders of Big Oil companies to alternative energy companies cannot be as effective as direct investments by companies which are already major players in the energy industry. With the precarious situation we are in, we do not have the luxury to see whether the capital reallocation will occur in a timely fashion.
Last but not the least, Big Oil has benefited immensely from the patronage of the United States foreign and military policy. At a time when the industry is making mind-boggling profits, it behooves it to help the United States and her residents, and not just the short-term interests of her share-holders.
Government Spending and Big Projects
While no one likes to pay taxes, it is easy to forget that the government has a big role to play in spurring major innovation and increasing the adoption of newer technologies. The Manhattan Project, the Apollo moon-landings were all government funded projects which have transformed the world as we know it. The technological superiority of our armed forces is a result of massive government spending.
Right now ensuring our future energy security is of vital national importance. Due to our extreme dependence on foreign oil, we have put our self in a situation where traditional free market mechanics will be unable to fix the situation quickly enough; the fact that Big Oil is not keen on spending capital to find new oil does not help the situation either. To set things in perspective, the head of the state-owned Russian oil company Gazprom, greeted us on our Independence Day with a restatement of his view that oil is likely to hit $250/barrel and natural gas will trade at $1000 per 1000 cubic meters.
Encouraging Big Oil to Invest in Renewable Energy
The next question which arises is that where we will find the money to fund initiatives to accelerate the adoption of renewable energy. I feel that ensuring that Big Oil companies participate in that project is a key to its success. If Big Oil does not have a skin in the game, they are unlikely to change their ways and will use their financial and political muscle to defend oil’s share in the US energy markets.
This is where the current proposal to force Big Oil companies to invest in alternative energy resources comes into play. The crux of the proposal is that unless Big Oil invests in alternative energy resources, they will have to pay 25% windfall profit on excess profits; the level of excess will be determined by looking at the current oil price versus the oil price in the recent past.
Comparison with the Carter-Reagan Era Bill
The knee-jerk reaction to any windfall profit on oil is to compare with the failed windfall profit tax imposed by President Carter’s administration. A comprehensive analysis of that tax is available from the House Republican whip’s Office. The Carter era tax was passed as a quid-pro-quo for deregulation of the energy markets in an era of high oil prices, to pass on some of the resulting profits back to the people of the United States who are the eventual owner of its national wealth.
Critics of the Carter-era windfall profit bill say that the bill succeeded in reducing domestic oil production since it reduced the incentive for Big Oil to explore domestic oil fields when they could import foreign oil which was exempt from the tax. The critics ignore the fact that domestic oil production had already been declining since reaching a peak in 1970 of 3,517,450,000 barrels. It had dropped to 3,146,365,000 by 1980 when the windfall profit tax was initiated. In fact, Oil production actually rose to 3,274,553,000 barrels in 1985 before starting another downward trend which has continued till today.
Further the critics discount the fact that the 80s and the 90s was the era of cheap Saudi oil flooding the world market reducing the incentive for domestic oil exploration. President Reagan replaced President Carter in 1982, but he did not see any need to repeal the act which continued till extremely low oil prices made the tax meaningless in 1988.
The current bill is dramatically different from the Carter-Reagan era bill both in its structure and goals. Specifically:
1. Oil companies can avoid paying these taxes by investing in renewable energy and refinery expansions.
2. The tax rate on excess profit is 25%, and not as high as 70% as it was on the Carter Era Bill.
3. The money collected from the new tax will go to a fund focused on expanding renewable energy sources and reduce our dependency on foreign oil
4. Any profits gathered by Big Oil from investments in renewable energy will be exempt from the tax
Further, the world energy situation is dramatically different today. Saudi Arabia no longer has the capacity to flood the world with cheap oil, while demand for energy is sky-rocketing as billions in Asia integrate with the world economy. The price of oil has gone up so much that even if companies pay a 25% excess tax, they will still reap huge profits on every barrel they are able to extract.
Boarding the Alternative Energy Train
With the dramatic growth in world energy demand, it is almost a foregone conclusion that fossil fuels cannot continue to be the primary source of the world’s energy needs. However, on June 11, 2008 when sponsors of the bill which would tax windfall profits could not get enough support to bypass a Republican filibuster, another bill which would have extend expiring tax breaks in support of wind, solar and other alternative energy projects, and for the promotion of energy efficiency and conservation also failed to progress. If nothing else, the failure to extend existing credits on alternative energy and conservation points to the immense power wielded by Big Oil (and of course partisan politics), highlighting the need to co-opt the oil industry in our pursuit of alternative energy.
Four decades ago, the area now famous as the Silicon Valley, was full of fruit orchards. Now it is home to the highest median home prices in the nation, which continue to rise even in the current housing downturn. There is nothing which prevents the current centers of the oil industry in becoming the Energy Alley to the world, if Big Oil is willing to take a longer term view.
Right now Google with its RE<C and RechargeIt initiatives has pledged tens of millions of dollars per year to support the development of renewable energy; ExxonMobil has pledged to spend $10M/year over the next decade on alternative energy. Clearly something is wrong with this picture.
Disclosures: The author holds both long and short positions in futures, equities and options in the oil industry. He does not have any positions in alternative energy sector except those in general (non-sector specific) mutual funds.
This article has 53 comments:
As far as imported oil goes I think there should be a large import duty on imported oil. This would encourage both conservation and development of domestic sources (oil sands, deep water gullf drilling). It is a no brainer. The higher percentage imported oil we use would drive up the price and reduce the profits of the oil refineries that are run by big oil thus encouraging domestic production and alternatives. No one ever talks about this. This method is used to protect many US industries and produts!
I have another article on SA which goes deeper into Big Oil and their profit margins.
seekingalpha.com/artic...
But there's no talking to you, so I won't try. Either you don't see what's REALLY going on in Washington, or you don't want to. When will you all wake up? I already know the answer -- AFTER the coming DEPRESSION you and your fellow travelers cause, and then try to lay at the feet of those who warned you about it!
The smaller oil companies operate under the umbrella of policies strongly influenced by Big Oil; hence the focus on Big Oil since they determine the industry environment.
sharksm and paulk8756:
Oil is the largest industry in the world and that kind of money brings in immense amount of political power. Big Oil has shaped our energy, and specifically transportation policy; they have successfully killed alternatives which challenge the internal combustion engine. Our dependence on foreign oil also meant that oil plays a key role in determining our foreign policy; whether it is engineering successful coups (Iran in 1953) or failed coups (Venezuela in 2002) or permanent military bases in the Middle East, oil industry is backed by the full diplomatic, and military muscle of the United States.
Big Oil in the US works with many of the benefits of nationalized oil company, with few of the responsibilities that comes with it. Over the past decade oil companies from other parts from the world went out to seek new oil fields; on the other hand, Big Oil has seen its reserves deplete as it refrained from making investments in new exploration. While oil prices jumped up 4x in the past few years, Big Oil keeps on returning capital to shareholders.
Big Oil has put us between a rock and a hard place: one hand they have tried their best to kill any threat to internal combustion engine, on the other hand they have reduced their investments in finding new oil. Big Oil has essentially dumped the American people at the altar, while they wait and watch how energy markets develop.
Big Oil has reduced spending for lots of good reasons, the primary one being the lack of good, profitable opportunities!! When given access, they are quick to dump billions into the chase. Just look at the last Deepwater GOM lease sale and the Alaska Chukchi Sea lease sale. Billions of dollars were paid just to have the opportunity to spend billions more on exploration. If California, the East Coast or ANWAR were ever opened, you'd see a similar feeding frenzy. Billions upon billions would be spent. Big Oil has armies of people working to get access to good opportunities around the world. These are profitable oil accumalations that BIG OIL is pursuing.
In the US, unfortunately, those big profitable accumalations are generally off limits. Yes, there are lots of acres available but not drilled. But generally, these are just not that attractive, even at today's prices. That's why we are out chasing other plays in 3rd world countries!
68% of the oil produced in this country is produced by smaller companies, not Big OIL. As a shareholder, I want these companies to deliver a sustainable profit and to pass on any cost or tax to the end user. So you and your Demoncratic Socialist Republic friends in Congress need to realize that taxes are costs and they are paid by people, not companies.
What a sown together mishmash of misleading and downright figure altering hogwash.
Big Oil works for their Shareholders. As Publically traded Companies, this is their Mandate.
The Public Good is The Government's Mandate. Energy Policy is the Government's duty to set up and maintain for the Future. Big Oil does not have that responsibility, nor do they have the reponsibility to be anything other than what their name implies.
If I were in charge of Chevron, for instance, I would sue the Government for MISREPRESENTING the Leases that the Company purchased for Oil Drilling purposes. What good is a Lease if you can't even begin to drill because the EPA wants extensive studies on enviromental concerns which you have to pay for beforehand. This occurs wherever you wish to drill. Since the EPA is a Governmental Agency, the Government misrepresented what was actually being purchased. Lets say the EPA finally gives the Go ahead after a few years of study, here come other Environmental groups who tie up your Lease for another multiple amount of years.
Don't blame big Oil for misguided Public Policies.
Stop buying products which use more energy than their preceding counterparts, Like Plasma and LCD HDTV's which use twice the Energy of your always on Refrigerators.
About those oil industry profits? Take a look at the profit margins of other industries before demonstrating that you fail to comprehend - or are intimidated by - large numbers.
Good article, on several fronts.
Maybe, as soon as "We the people..." demand change of ourselves first and then of others to our selfish desires, we will get new energy efficient modes of transportation, a worthwhile transportation policy and an energy policy for the people.......etc.
It possibly could, and then maybe not, take a new Government "by and for the people" to stop the greed and power of big oil and big auto (and, not so big auto - note the trend big oil!), should big oil not wish to be part of the solution (again, big oil, note that Detroit is already out of the picture; due to alternatives!!!).
Alternatives could crush big oil as well as it did Detroit; just as alternatives crushed the unions and manufacturing in the USA. We went offshore to alternatives. Alternatives even came onshore (right, big auto? - not to mention that most US manufacturing that was not closed down was sold to offshore entities). As I speak, we are already going offshore for even the alternatives to the US services industry which just replaced the US manufacturing industry.
Folks, free markets just may end prosperous life in the US as we have come to know it, for all but the very wealthy. Other countries will do what's right and here the common Joe will suffer for it; due to poor, incapable, greedly LEADERSHIP.
The better alternative will be employed elsewhere. We will become subserviant to the ROW, and the only thing to keep us free will be military might. But what's going to be worth fighting for. The ROW will look like a better place to be.
The US will appear Neanderthal.
Today, we could stop focusing on the source of energy and emphasize the misuse of hydrocarbon energy (70% waste!!!).
We could emphasize the electrifcation of the steel-wheeled railroads to easily eliminate the use of rail-transportaion hydrocarbon. Then, using available technology and resources, we could implement electrified interstate highways, bi-ways and beltways to replace rubber-tired transportation hydrocarbon use. By this I mean, electrified steel-wheeled rail ferries for express intrastate transport of poeple, cargo containers, container-trailers, rubber wheeled autos/trucks; express interstate ferrying of the same, and then local electrified rails and/or electrified rubber-wheeled trolleys for people; all, this along with the push for hybrids and various electrics, be they battery, fuel cell, solar, etc.
Now, for all this new electrical power demand we need to employ new solar, wind, tidal, etc., and wean ourselves off hydrocarbons (oil, diesel and gasoline; yes, nat gas, too - use electricity for homes, etc.). Ane as we continue to install these free energy sources, gradually replace the coal generation of electricity.
We could be there in less than 30 years, and 10 years with the emphasis of a Moon Program or Manhattan Project; hence, the Government role called LEADERSHIP!!
Save our Nation - to hell with the salmon, owls, wetlands, whales, etc. Worry about them when it's really necessary. But, since we can't fix SS, build a fence, etc., there's not much hope.....
In the article I have mentioned clearly that our current policies regarding drilling have to be reviewed. However it does not absolve the BigOil from their behavior over the past decade where the successfully blocked new transportation technologies, while they continued to cut down on their own exploration efforts.
There is an article published by McKinsey Quarterly which is available at
www.mckinseyquarterly.... (you will have to register)
The striking fact which stuck out was that while Big Oil reduced spending on exploration and continued to harp about the lack of drilling access in the US, nationalized oil companies across the world, significantly increased their reserves on foreign lands. Between 1998 to 2004, the percentage of reserves from foreign lands went to (from):
Petronas (Malaysia): 27% (13%)
Statoil (Norway): 21% (16%)
Petrobras (Brazil): 11% (4%)
CNOOC (China): 29% (0%)
ONGC (India): 21% (0%).
Note how Indian and Chinese nationalized companies who did not have any presence outside their borders significantly increased their exposure outside their borders, while BigOil fiddled.
sharksm:
It will really help if you could focus specifically on the issue at hand instead of the problems associated with the welfare state. Right now we are in a situation where 60% our oil expenditure goes to countries like Iran and Venezuela. The economy is in a tailspin; clearly such a situation is not in our interest; we need reduce dependency on oil. Why shouldn't BigOil which enjoys patronage similar to nationalized companies, but in return has stymied efforts to strengthen our nations energy security, share a part of the burden? Note that they will not have to pay the new tax if the start investing in new refineries, alternative energy, or simply boost their capital expenditure (hence reduce profits which can be taxed).
Bush leave's quite a legacy. The next president will have quite a task set before him. It seems to me that eventually the rate at wich the USA can addapt to new challenges for ex. in energy will eventually be very important and crucial for it's future. So there is quite some room for reflexion on what the faults are in the American economical and political system that led to this situation.
Sorry if i sounded very pessimist. I think what the USA needs is a new wave of dynamism, a fresh hausse that leads to growth and better economic effeciancy. It's just a matter of mindset and everyone knows it, and i guess most know what the next big thing will be too.
Big oil has failed miserably when it has tried to work in areas outside of producing and refining oil and gas. They do not have the technical expertise or experience or mindset. Examples - Exxon in office automation, in which they invested over a billion dollars to diversify. Mobil in the packaging business. Both investments failures. The money invested in alternative energy needs to be made by folks with the expertise and orientation and passion for it. Use Big Oil for what it is good at - fiinding a producing large multibillion dollar oil projects, refineries and petrochemical plants.
SBLK?
US should tax imported oil because it would
-encourage US oil companies to drill on the many leases they already have here.
-raise money for tax credits in investment in alternative energy.
And vilcam's data on the profitable and oil-rich companies sponsored by governments shoots holes in the "logic" of the idiots spouting the free market rush limboisms. I can't believe they they think expensive oil is good and the US would benefit by a depression. They must not have any grandchildren.
The reason our highest government officials are not doing anything about the price of oil is because they own oil wells and are making millions per day at these prices so are their friends in the oil business.
The more Americans cut back on our use of oil the more our reserves drop. Am I the only one who thinks that a little strange?
But then if I was in control of supply I would cut supply as demand decreased, it's good business.
Classify oil as a utility and regulate the price. Require that all oil pumped out of the U.S. stays in the U.S. Require oil companies to build storage tanks.
But there is something called price gouging. Oil pumped out of the ground in the U.S. using new steam injection only costs $16 pb, Saudi oil costs $2.
Originally, Matsushita only had a license from Ovonic Battery to make consumer NiMN batteries. When they started supplying Toyota with large format transportation batteries out of their PEVE joint venture, Ovonic demanded increased license fees. That dispute was settled with by a $179M payment from PEVE to Ovonic for past royalties. In return for licensing their own NiMH related IP to Cobasys, PEVE got a royalty free license to continue manufacturing their batteries for the Japanese market until 2014. Cobasys had a license from Ovonic as exclusive seller of NiMH transportation batteries in North America, so any PEVE batteries sold here would have to be imported by Cobasys. Shortly after, this was amended to allow PEVE to sell here, but they would have to pay royalties.
Since then, PEVE HAS sold batteries in North America to both GM and to Toyota USA for use in the Hybrid Camry, but currently, they have committed their entire manufacturing capacity for the next few years. So why would they divert capacity to make a few replacement batteries for RAV4-EVs when Toyota is clamoring for more Prius packs?
Dag
0. The first thing to worry about is why Chevron which sells oil, wants to acquire ownership over a key component of a competing technology.
1.Till recently (at least) Cobasys has refused to license large-format NiMH batteries destined for the US and Chinese transportation markets. The current agreement restricts the largest size of the battery which can be sold to the transportation sector. The goal is to kill plug in cars, while continue to tout their green credentials for much less effective hybrids with a gas engine.
2. Capacity: NiMH does not require any thing which needs to be mined and shipped from the moon. The capacity to supply batteries does not exist simply because Big Oil has created IP and political restrictions which clearly were designed to limit plug in cars. Even Matushita knows that there is no point going into a duel with BigOil; they will not invest in new capacity till they know that Washington has given the green light.
3. Over the past decade where GM and Cobasys sat on the NiMH patents, alternative technologies have emerged which migh be better than NiMH. However we lost a decade in the process. Further we lost the chance to become a leader in the EV technology and use EV technology as the primary driver of the growth in Asia. Asia is starting pretty much from a scratch and if EV had been successful here, they would have likely adopted that instead of being captive of the world oil market.
I agree with you that the government tends to screw things up and they are not the best investor of capital.
However, a knee-jerk opposition to any proposal which involves the government is not healthy. When it comes to driving truly radical transformations, it is only the government who has the power to lock horns with an industry with hundreds of billions in revenue and tens of billions in profits. Especially in the case of oil, which gets immense political patronage because energy security in America has become a synonym for cheap oil.
Big Oil wants to be in a heads I win, tails you loose situation; they want the patronage enjoyed by nationalized oil companies but in return would rather not think about our national interest. Think about oil at $140 and Big Oil, every time Chavez tries to spread his socialism in latin America or Ahmednijad threatens to send the Mid-East into deep turmoil.
All Big Oil has to do is to stop thinking in terms of oil and start thinking broadly in terms of energy. If a 25% tax on massive profits is what it takes, let it be done. Remember, the tax is on excess profits which are not reinvested in alternative energy or new refineries.
fireball - Amen.
We don't need to tax the or force the oilers into renewable energy anything!
Have you seen the amount of money and the wall of brilliant people the venture capital community is throwing at this? Staggering.
Vinod Khosla tried this route and got pounded. He wanted a wind fall profit on oil to fund renewables. Then somebody pointed out how it would make him another billion.
It works like this.
1) Venture capital is funded by limited partners. These are the organizations that put up the money for the venture deals.
2) The VC then choose which idea gets money.
3) They then push the company to a liquidity event. IPO, acquisition etc.
4) The VCs return 80%* of the proceeds of the sale back to the limited partners. The VCs keep 20% *approx.
Now if this windfall profit tax was taking the place of the limited partners, when the company funded by this tax on big oil were to have it's liquidity event, then the VCs didn't have any limited partners to repay! They (VCs) would keep 100% of the proceeds from the venture funded by this tax. This is why Khosla sheepishly backed away when the gig was up. They wanted to use billions in oil tax to fund renewable companies and keep the proceeds! There never was any plan to repatriate any of the proceeds to taxpayers or oil etc. They thought people didn't understand the venture model (which is true) and nearly got away with it.
I think your ideas are best taken on a warm breezy day with a glass of lemonade because they are a disconnect from the full contact of everyday business life.
You allegation about Khosla are another spin on the tactics used by the Oil Industry agains Prop 87, which would have taxed oil companies operating in California in the same manner they are taxed in Alaska, Texas, Lousiana etc., but at a significantly lower rate. You can read the official structure of the proposition at:
www.sos.ca.gov/electio...
Out of the total funds collected ($4B over 10 years), less than 10% would have gone to fund what is called Commercial Acceleration which would have funded venture activities; the bulk was in direct help to consumers moving to alternative energy (57.50%) or univesrity research (26.75%). So the total amount available to ALL VCs would have been less than $40M/year; peanuts in the big scheme (and less than ExxonMobil's CEO's annual compensation).
Further there is absolutely nothing which prevents the government to become the limited partner (investor) while partnering with private VCs to help channel the investments. In fact many states have funds which take equity stakes along with VCs to fund promising startups; the VCs do the due dilligence and put up some portion of the capital, and the state chips in with another portion at the same terms as the VCs. California itself created a $3B fund (approved by tax-payers 60-40 via Prop 71) funded by the state's GO bonds to help stem-cell research via the tax-payer funded CIRM (cirm.ca.gov).
And in response to those allegation, this is what Mr. Khosla had to say:
venturebeat.com/2006/0.../
"Mr. Khosla, in an interview, says he wouldn’t accept the seat on the proposed California Energy Alternatives Program Authority if it were offered to him. He also says that if any energy companies he backs receive money through the initiative, he will donate his profit on those investments to charity."
Big Oil uses its political and economic muscle to prevent the growth of alternative technologies especially in the transportation sector. A lot of their campaigns use half-truths (like the one you referred to above). On other hand, if they have some skin in the game, their outlook might be a bit different. Currently BigOil is busy returning billions in capital to its shareholders, while the percentage they spend in exploring new fields is dropping along with their reserves. Even though energy is on the front burner right now, the alternative energy industry is struggling to get the senate to agree to extend existing subsidies and credits. I am afraid that once and if oil falls to $100, it will be business as usual.
As I mentioned Khosla sheepishly backed away from the windfall profit tax -- after -- people peaked under the sheets. Yes he said he would donate the profits to charity but not until after he was called on this. Furthermore, he said he wouldn't accept a seat on the board of this new entity created. How very nice of him considering he wouldn't be asked because it is clearly stated he can't be considered for a board seat because of conflict of interest.
Where does it say only $40mm would be used? The Commercialization Acceleration Account was 9.75% of the total funding. 9.75% of $4bn is $390mm. A far cry from $40mm which is a lot of money on its own. for sake of argument. Consider 40 separate bets on start ups each seeded with $1mm. The venture model is 90% failure so that means 4 start ups with profitable exits at say $100mm = $400mm to the venture guys without any limited partners to payback. But anyways your numbers are off. 10% of $4bn is $400mm and not $40mm. Look at in totality and not annualized which makes it seem benign.
The other part your missing is not just on the capital inflow on the venture side but use of funds by the companies already funded. In other words, this money would be used as guaranteed revenue for companies already funded which would again, make for some very valuable exits. 57.5% of the funding would be used for "Gasoline and Diesel Use Reduction Account". EXACTLY what Khosla is funding -- ethanol. How convenient that a touch over $200bn would be used for buying ethanol or other diesel replacements -- from companies Khosla had already funded...
Another thing. 26.75% of the funding would have gone to "The Research and Innovation Acceleration Account". Basically academia producing RE solutions. Fine. But notice in the fine print that the State of CA wants in on the intellectual property on this funding/results? As it should be. But notice again on the venture side the VCs and their portfolio companies keep the IP. Nice one...
The stem cell thing is apples to oranges. It was a proper partnership and this is a one way street. A giveaway basically. The way it should be done is what just happened. Khosla made the State of CA a proper LP by taking a $640mm investment from the CALPERS. A proper limited partner opportunity for the State.
Look, I'm from the SF Bay Area and I know plenty of venture guys, plenty of RE guys and everybody was scratching their heads how he was going to get this done. EVERYBODY knew he was relying on everybodys hate for the oil companies and would do anything to strike out at them. But we are smarter than that. When the deal points came through and then this legislation "promised" to shield us from rate increases at the pump everybody knew it was BS. I'm sorry but you are just off base on this one. I'm just like everybody else wanting a new eneergy frontier, but if it is based off of intellectual dishonesty from the get go we will NEVER get there.
Let the existing venture model work and everything will be just fine. No damned handouts based on peoples hatred for big oil.
SB $2bn and not $200bn.
This is an article about BigOil and not VCs. However, you continue to make insinuations which are based on half-truths.
1. There is a time value of money. You do realize that the $100M lottery all winner gets much less when they take the amount lump-sum (about 30-35%). What is the current discounted value of the future cash, especially if interest rates go up? Prop 87 would have allocated less than $400M over 10 years, which works out to $40M/year without discounting.
2. Where was it written that it was Khosla Ventures who would get a bulk of the $40M/year available for new investments? That is your presumption. The valley is full of VCs who want to get into alternative energy.
3. Where does it state that state of California would not take any equity stake and will simply donate the money to VCs who can then invest it any way they want? You stated that this would have worked differently then the stem-cell initiative. Could you point to a definitive source which says so?
4. You need to better understand how gas prices work. The price of oil is determined by the marginal barrel; what the last buyer is willing to pay. It has little to do with the cost of production of oil except that the cost of oil production is the floor on oil prices. The marginal cost of producing oil varies but is rarely higher than the teens; that is how oil companies could make a profit when oil was selling in the $30s/40s. Since oil is traded all over the world, a slight increase in the marginal cost of oil (due to a new tax of a few dollars) at one source will not change the price of oil, since the pricing is not based on the cost of production at all. Thing about it: has the cost of production of oil has not gone up so much to justify the $140/gallon prices we see today. The price of gas typically follows the price of crude though there are variations based on short-term supply/demand adjustments.
5. Big Oil companies outspent the supporters of Prop 87 by 2-3x. They got teachers and fire-fighters to support them since the tax collected would have gone to a separate fund and not to the general state fund. As a result the revenues from the tax could not be used to increase the compensation of unionized state employees (teachers, fire-fighters etc.). The higher gas price story was a bunch of baloney too. Do you think that oil companies currently pumping in California would stop pumping because of a few dollars of taxes when the sale price of the pumped oil was at least 2-3x times their marginal extraction cost? They pay similar taxes in TX, AK and LA at a higher rate but they continue to pump there.
6. You original argument was about VCs getting free money. In the next post you point to the incentives to move away from oil will help VC funded companies. What is your point you are trying to make?
-Should VCs not fund alternative energy companies?
-Should the state not encourage the usage of alternative energy?
-Should lobbying for friendly government policies by limited to Big Oil and VCs not be permitted to further the interest of companies they are funding?
-Or should we continue to rely on oil and ship our wealth to Iran, Venezuela and Russia?
BTW, I too spent more than a decade in the valley and have worked with multiple VCs. I have also raised capital from state sponsored funds who take an equity stake at the same terms as the VCs.
I think in the end when big oil makes money off clean energy we will go green!
Let's go over this one at a time
1) Time value of money? Who cares because you are missing the point. The point is that the venture community at large would be getting funding of nearly $400mm without any limited partners to pay back. Your obfuscating simple truths by talking about lotteries and time value of money. It is completely inconsequential or germane to the conversation at hand.
2) I never said Khosla would get the bulk. I said the VCs at large would get the money but of course Khosla was front and center considering he put this thing together and was the main proponent.
3) Read the wording on the legislation. You have it. It clearly states the distribution of IP when the money goes to a research grant. The start-up/seed funding which the VCs would facilitate is conspicuously absent regarding the distribution of the IP. Interesting don't you think. Why don't you go find out otherwise or fill everybody in with some other info you obtain elsewhere. I'm just reading the text and wording of the legislation.
4) I need to understand how the price of gas works? Actually you've done a good job of distorting what I'm trying to say into something completely different -- again. The FACT is this legislation would have purchased purchase approx $2bn worth of "gasoline and diesel" replacement. What are you even talking about with this "need to know how the price of gas works" nonsense. Khosla ventures has 11 different portfolio companies classified (per Khosla) as cellulosic ethanol, corn/sugar fuels and future fuels. The sole reason these companies exist is to -- wait for it -- replace gasoline and diesel. How many gallons would this funding go into the pockets of Khoslas portfolio companies? Who knows, but he's got 11 different companies and there sits $2bn to buy their goods. Is it just me or does this seem like a monumental conflict of interest? Actually a lot of people thought so...
Anyways, if you were inferring that this legislation would have directly caused the price at the pump to go up or down then you are off your branch. I fully understand the fungible oil market from origination through the chain. That still doesn't mean I have any idea why the price REALLY moves. And neither do you for that matter. Every industry expert and pundit are all completely clueless to why oil and gas are actually priced where they are. We all know the mechanics but the "magic numbers" can never be explained other than theory. I use real money at the pump and not theory. So if this legislation passed and over the course of six months the price at the pump went up .45 to $1.00 HOW WOULD YOU KNOW AND WHAT COULD BE DONE ABOUT IT? A big fat no and nothing. So when these guys came out and said that we will protect you at the pump if you vote for this, every single person I know laughed out loud. If we (the citizens) could be protected at the pumps from pricing shenanigans then why is it $4.75-5 today? C'mon lets get real...
My point is that the venture model is fantastic. It should invest in renewable companies of all sorts and is doing so very aggressively. The other point is that it was completely disingenuous and completely dishonest to put forth this legislation on the back of the hatred of big oil. I'm not an apologist for big oil (I have a car) but for f**K sake, the way they put this together and the millions and billions that would be windfall to the venture guys was just outrageous. Anyways it is all water under the bridge now. Done deal but I think that more than few people look at Khosla now with a certain sleaze. I'm out here and maybe you were at another time but when this all went down locally it was quite the talk.
The real shame is that we don't even need this money for solar. Solar is profitable and the solar guys are simply gaming the system for rebates. Take a look at the 10k/q for SPWR and explain why there is a subsidy. If we got rid of all the solar subsidies these companies would be forced compete and the price per watt drop like a rock. The REALITY is that solar is not more entrenched because the solar industry can't get off of the subsidy crack. The other sad part is how it's paid for. Here in CA the current subsidy is paid for ALL rate and taxpayers like renters and the disadvantaged yet the solar assets end up on a rich guys house. He gets his PG&E bill zeroed because of net metering, he gets an increase in home value and everybody else pays for it. It all makes me sick actually. I'm hoping they all get slammed under a price fixing investigation. Solar 2.0 will be the answer anyways and we are between 3-5 years off. I mention this all because it is just another part of the deceit and dishonesty that is being paraded around by the new "green saviors" that are actually out to make big money -- before -- or in lieu of actually helping anyone or the energy crisis...
Terrible.
e
Saying these companies have an expertise in "Energy" is just a small variation of the argument that drives companies to build conglomerates because their expertise in "Management"... A company does well, and is innovative, when it knows its market, maintains its focus, and performs. Energy is to broad a category. (The old SNL routine about the product that was both a floor wax and a desert topping comes to mind...)
If you really believe that Big Oil is blocking the development of Alternative Energy because it interferes with rent seeking in their current markets, why on earth would you urge them to get more involved in that business? If COBASYS is the answer, then taking it private would be the best route for COBASYS, and the best economic alternative for Exxon would be to divest, not invest.
I will never understand arguments that begin..."The Fox is in the hen coop. Lets create legislation that all Foxes must keep at least 10 chickens at all times...." And the shareholders of Exxon should be up in arms that they are not receiving tradeable interests in the spun-off company...
TobyConsidine
This article is about persuading oil companies to get some skin in the game when it comes to the development of alternative energy sources; otherwise they will continue to block progress. If they are unwilling or unable, let them pay slightly more tax while they enjoy huge profits thanks to the difference between the cost of production and the market price of oil.
It is not just government subsidies or taxes, the Cobasys case illustrates how BigOil can use their financial power to kill promising technologies. Another illustration of their political power is the Bureau of Land Management recent decision (later reversed) to put a freeze on applications for new solar projects on public land in six Western states (Arizona, California, Colorado, Nevada, New Mexico, Utah), while it conducts a 22 month long study looking at the environmental, social and economic impacts of solar energy development. The desert areas of these states are ideally suited for solar power; there are 80 million acres of US land leased to the oil and gas industry and zero acres to the solar industry. The decision was reversed after a massive public uproar, but shows the amount of political support enjoyed by the anti-renewable lobby.
www.nytimes.com/2008/0...
Alpha24seven:
1. Prop 87: Though I do not find it particularly productive to talk about a vote which happened two years ago, I find the misinformation you are propagating worth dispelling.
(a) If you go through the entire text of the proposition (www.sos.ca.gov/electio...), you will find that the term VC is not even mentioned and the term Venture is mentioned only when listing the qualification for Board Membership (use the Search function in Acrobat reader). Though I have repeatedly asked you to post any link which states that the state would not have a stake in the venture investments from the taxes, you have refused to do so. You continue to focus on the absence of language regarding equity stake for an investment via VCs, when there is no explicit statement that the funds will be disbursed via VCs either.
(b) You to fail to take into account is past precedence of state funding of startups and the state agency taking an equity stake. We are not taking about some gullible investors who could be hoodwinked but the state of California which prides itself in nurturing the venture environment and is a veteran in this space. Your conclusions are based on the absence of an explicit statement about an disbursement style which is also not even explicitly mentioned, while you ignore past-precedence. I find them untenable and an egregious example of the distortion of facts to support a particular agenda.
(c) You also fail to see the difference between university research grants and venture investments when it comes to ownership stakes. Typically university research grants do not give significant ownership rights to the industry sponsoring the project; the rights primarily stay with the researcher and the university. This is because the university infrastructure is supported by funding from a variety of sources (public, private etc.). Further there might be multiple companies with grants supporting a particular researcher. Hence the claim of a single company sponsoring a particular project are weak since there are a lot of other players supporting the university and the researcher. If a company really like the results of a project, their typical modus-operandi would be to take an equity stake in a start-up which licenses the technology from the IP holders (the university and the researcher). If Prop 87 explicitly wanted to get the state a stake in these projects, it was because it was going against past precedence regarding external funding of university research. It makes sense for the state to have a stake in the IP too, since in a lot of cases, the university infrastructure is supported by the state.
(d) In your first comment you have explicitly mentioned that Prop 87 would have increased the price at the pump. Though oil pricing is an hard to fathom, the process by which the price at the oil trading pits propagate through the system is not that hard to understand. When the marginal cost of production of oil is significantly less (by almost an order of magnitude) than the price at which oil trades, a few dollars in taxes on locally pumped oil would have little to no impact on the street price of gasoline.
2. VCs: You continue to have a very anti-VC tone in your article. A few things to ponder about:
(a) There is nothing which forces Big Oil has to invest via VCs to avoid the new taxes. They have the resources to hire top experts and set up their own units to invest in alternative energy if they so desire.
(b) Vinod Khosla : The latest issue of Fast Company has a fairly balanced article about his investments. A few takeaways:
a. He formed Khosla Ventures because he did not feel comfortable investing limited partners’ wealth in highly speculative investments; he is putting his own money at risk.
b. He is