Exxon keeps trying…

While European oil majors like Shell, BP or Total all have committed themselves to increase their production of renewable energy and reduce their carbon footprint, the two biggest US oil companies Exxon and Chevron remain adamant that they have no need to change. 

To be fair, oil demand is likely to grow for another decade or two globally. The OECD thinks that in developed countries we have already come close to peak oil demand, but thanks to countries like China and India, global oil demand will only peak in 2040. The IMF expects global peak oil demand to happen in 2040 or sooner. Meanwhile, the 2020 Global Energy Outlook of BP put peak oil demand as soon as 2030. 

As demand growth slows, oil companies can follow different strategies. The European oil majors all try to follow in the footsteps of the former national Danish oil company Ørsted, which has completely divested its fossil fuel operations in 2017 and has by now become one of the largest wind power producers in the world (and dominates the wind production market in the UK, for example). 

The American oil majors, together with Petrobras and other oil companies in emerging markets try to be the last man standing with the lowest production costs possible. Both are viable strategies, but the cost reduction strategy is likely to be unsustainable in the long run. Just like an excessive focus on costs instead of technological innovation has driven US airline companies and US car manufacturers into bankruptcy or the brink of irrelevance outside their home market, so too, seem the US oil majors on their way to irrelevance. 

Exxon has recently been kicked out of the Dow Jones Industrial and, depending on the day is only the second-largest oil company in the world after Chevron. But it certainly isn’t the largest oil company anymore. That honour belongs to Nextera Energy, which produces wind and solar energy.

The largest energy companies in the United States

Source: Bloomberg

The Rockefeller family, whose ancestor created Standard Oil, the successor of Exxon, led a campaign to convince Exxon management to prepare for a post-carbon world. When that was unsuccessful, they divested from Exxon and other fossil fuel companies in 2016. Since then, shareholders of Exxon have had plenty of reasons to fire the executives and board of Exxon. Since the beginning of 2017, Exxon’s share price has declined by 18.6% per year (total return), while Chevron has declined by 7.8% per year. Meanwhile, Nextera’s shares climbed by 31.1% per year and Ørsted by 49.2% per year in US Dollars (44.8% p.a. in Danish Krona).

Exxon is on its way to becoming the next Chrysler, United Airlines, or TWA. 

So, one should be grateful when the company supports organisations like the climate leadership council. Exxon has publicly endorsed an introduction of a $40/tonne carbon tax. But here is the catch. In return for the introduction of this tax, the company wants to see “significant regulatory simplification”. And what that means should be clear. Get rid of the state’s plans to reduce carbon emissions and tighten fuel emission standards. Get rid of initiatives favouring electric cars. Essentially, get rid of all the environmental regulations introduced in California to foster the transition towards a greener economy. 

If you ask me, we can do all that. But then a price of $40/tonne of CO2 emission is not going to suffice. That price would about $0.35 per gallon of fuel in the United States – hardly an incentive to reduce the use of fossil fuels. Instead, if one wants to achieve the Paris Climate Accord goals the price of a tonne of CO2 emissions has to be around $100. Or you can introduce a carbon tax in the range of $60 if it is flanked by an increase in income taxes.

But what Exxon supports is essentially an end to all climate action, just neatly wrapped in a pro-environment statement.