Strategy and Policies of the Oil Industry

Over the last several decades the issue of global warming has been increasingly brought to the forefront. Part of the reason for this is the changes in the environment that are being seen around the globe worldwide. A good example of this would be the in the North Pole, where during the summer the polar ice caps are melting at a faster rate every single year. Where, a study conducted by the Danish Meteorological Institute found that within ten years the Arctic will be ice free during the summer months. (Terril 2010) This is problematic because the ice is warming based on a phenomenon known as global warming. Simply put, the overall amounts of emissions that are released into the atmosphere (from cars / trucks / factories) contain carbon dioxide. This interacts with oxygen in the ozone layer, (which protects the Earth from the ultra violet rays of the sun) causing it to deplete. As the Earth is becoming warmer from these rays hitting the surface, this has meant that dramatic changes are occurring in the environment (such as the polar ice caps melting). As a result, many scientists and environmental activists have been calling for a shift in the way energy (oil / natural gas) is produced and consumed. Where, many of these environmentalists will claim that the various large oil companies should be engaging in strategies that will help effectively respond to the changes that are occurring because of global warming. To fully understand how the oil industry has been responding to these calls requires a careful examination of: the polices that were used in the past, present and possible future. Together these different elements will highlight how the oil industry is responding to the various challenges being presented by global warming.

Most Common Strategies of the Past

When you talk about the most common strategies that are used in the past, it is important to note that many industry groups and trade organizations are still embracing one basic principal, deniability. This is where the various players within the industry will question the overall science of what is taking place. As they will often cite various statistics and information that they have collected through equally qualified scientists to show that they are not the culprit. A good example of this can be seen with Exxon Mobil, where a report released by the Union of Concerned Scientists highlights this campaign of disinformation. According to the report, the company spent $16 million between 1998 and 2006 on funding 43 different lobbying groups, with the intention of causing confusion on the issue. (Scientists Report Documents Exxon Mobil 2007) This is significant because if the company can be able to create confusion on the issue, they can slow any kind of regulations that may hurt their bottom line.

Yet, when you look further at what is taking place, it is clear that this policy is continuing to be utilized as a way to scare the public about the issue. Meaning that if the big oil companies can create fear about sharp increases in energy costs by such actions or seeking to reduce / limit various laws, they were successful in achieving their objective. An example of this can be seen in California, where they have imposed regulations that will require all of the major oil companies to reduce the overall amount of carbon that they are emitting into the atmosphere. However, the oil industry has been continuing to support those groups that are opposed to this law. Where, they recently provided such organization with a $930 thousand cash injection. This is designed to help to promote gathering enough signatures on the ballot, that the law could be over turned by the voters. Commenting on what is taking place Oxydental Petroleum spokesperson, Richard Klein said, “Implementing this law in the teeth of the most significant recession in the last 60 years would be foolhardy.” (Roosevelt 2010) This is important because it underscore the overall fear tactic that is used to sway opinions on the issue. Where, the large oil companies will claim that the various environmental laws will cause prices to rise sharply, as they have added expenses in following the new regulations.

To Drill or Not to Drill

The solutions that big oil companies have had in the past has been to increase the overall amounts of drilling that would take place. The idea was that they have the technology to extract and transport oil from proven reserves to various markets around the world. According to these companies, the ability to effectively locate and extract the oil / natural gas from the various field, will ensure that there is enough supply to meet demand. This will keep prices low, by ensuring that there is an adequate amount of supply on the market. As a result, there has been a push by the industry to increase the amounts of drilling that are allowed in areas, such as the continental shelf. The problem is that opening the various parts of the continental shelf to oil / natural gas exploration, inevitable environmental damage that would occur. Where, environmentalists claim that it could damage many different areas of habitat (used by the wildlife). A good example as to how heated the issue has become can be seen with President Obama’s decision to open up part of the Atlantic Shelf for exploration. This is a challenging decision because you have those politicians who support the ideas of unlimited drilling and are pushing for a removal of these restrictions. While many environmentalists feel, that such a ban should remain in place, to ensure that the various natural resources are not destroyed. (Broder 2010) the overall effects of open drilling (they claim) can be seen in Valdez Alaska, where the industry resisted for years using double hull tankers because it would cost too much. However, once a tragedy occurred they began implementing such policies. This, the environmentalist say, is why there should be a restriction on the where oil companies are allowed to drill. (Exxon Valdez Facts 1999) What this shows, is the constant tug of war that is taking place on the issue. Where, it is important to ensure adequate supplies of oil and natural gas. Yet, engaging in an irresponsible manor (such as what occurred in Valdez, Alaska) can not be tolerated. This is the challenge that policy makers struggle with, as they want to maintain a balanced approach when it comes to energy strategy.

The Present Energy Policy / Strategy

The policy of the past (deniability) is slowly evolving, where the major oil companies are starting to embrace the fact that they play a role in global warming. Part of the reason, that is helping to push them in this direction, is the stricter environmental regulations that are taking place around the world (such as the Kyoto Protocol). Then, when you combine this with increased amounts of activism from environmental groups and improvements in technology, means that many incidents that are occurring are broadcast around the world within minutes. This has added to the overall amounts of information that has been collected from these different groups. Where, it can be used as evidence to show that the industry is responsible for what is occurring. A good example of this can be seen with various environmental groups accumulating evidence which can be used to eventually sue the major oil companies for damages that they caused because of global warming. (Fanola, 2005 p 112) This is significant because it underscore how the approach of denying, what is occurring and encouraging increased amounts of drilling are only contributing to the problem. As these various groups are able to collect evidence to show, how the industry is colluding to prevent significant changes from occurring. Over the course of time, the increased amounts of pressure have begun to highlight to many executive the overall futility of engaging in the practices of the past.

A New Approach

Contrary to what many people think, developing new forms of energy that can be used to help reduce dependence on fossil fuels is: time consuming, expensive and requires utilizing all of the different resources. This is because the overall energy structure is dependent upon fossil fuels for all of the different energy needs. In order to make the alternative forms more viable there needs to be a constant focus on developing a wide variety of technology. The problem begins with the fact that no one single energy solution can completely replace oil. A good example of this can be seen with the electric car. Back in 1911 it was widely thought that the electric car would revolutionize the automobile industry. With the New York Times saying, “The electric car has long been recognized as the ideal because it is cleaner, quieter and much more economical than its gasoline-fueled cousins.” However, the problems that existed with this technology still exists, mainly it is not as reliable and can not hold as much energy as the internal combustion engine. This is important, because physics has allowed the combustible engine to provide the world with a cost effective solution for traveling long distance. Sadly, the electric car can only be used for short to medium distances. Then, there is another potential problem that could be developing with the lithium batteries that are used, where China control 95% to 100% the resources for these batteries (lithium). This is problematic because they could restrict how much they are exporting (which they already have) to ensure that there is enough supply for the country to meet its own internal demand. (Bryce 2010)

Despite this dire news, there are increased effort within the industry to support the use and development of such new technologies, to work in conjunction with the combustible engine. An example of this support for such technologies can be seen by the fact several oil companies hold the patents on several different batteries used in the electric car. (Newby 2009) Then, when you combined this with increased research and development funding that the federal government is giving to the auto industry (such as: $8 billion invested in various programs last year); highlights how the attitudes are changing. (U.S. Banks Billion on Electric Car 2010) This is significant because it underscores that the various oil companies are playing an inactive role, where they allow for various improvements to be made upon their patents, to be used in future automobile design. With enough research and development the overall life and resources that are used in the different batteries can become more common. Once this takes place, is when you will see the overall dependency on fossil fuels decline.

The Pickens Plan

Oil insider T. Boone Pickens has created a plan to reduce the overall amounts of dependency on fossil fuels. Where, natural gas would be used as a way to effectively reduce the overall amounts of oil that is being consumed. While at the same time, we would be using the vast open spaces in the West and Midwest to develop an energy infrastructure, which could reduce U.S. oil consumption by 1 million barrels per day. According to Pickens, world oil production peaked in 2005, with the U.S. importing 12 million barrels a day, while Saudi Arabia only has the capacity to produce 9 million. This is problematic because regardless of how much more drilling occurs, if worldwide production has peaked then we are simply only addressing the problem over the short-term. To effectively counter this situation, the plan calls for switching the majority of America’s energy structure over the medium term to natural gas reserves. This is because America has vast amounts of natural gas reverses. These can quickly be converted and utilized to power everyday cars and trucks. For those vehicles that are engaged in the transportation of various goods and services, such a switch would work to effectively reduce the overall amounts of fossil fuels that are being used. This is because they account for nearly 20% of the total amounts of fossil fuel consumption that is currently taking place. Then when you combine this with the facts: that it is cleaner than fossil fuels is mainly used in the production of electricity and automobiles can easily be converted; makes this an ideal solution over the short-term to address the various environmental issues. (the Plan 2010)

Under the Pickens’s Plan, once the switch has taken place, the overall amounts of fossil fuel consumption will fall. This is because the shift will gradually reduce the large amounts of crude oil that are being consumed. It is at this point, that the government and the industry can work on developing vast renewable energy infrastructure. In this particular case, there would be an emphasis on developing hybrids that could work well with the various forms of natural gas type of engines. This is effectively, keeping the fuel efficiency standards high; while at the same time allowing for increased amounts of innovation in the technology. Over the course to time, this could allow for sufficient infrastructure to be in place to provide a competitive alternative for consumers. This is the biggest reason why many of the different oil companies have been embracing the status quo for so long. For out of fear, as to how expensive such drastic changes could impose upon the industry. If you can encourage such a strategy to be utilized, there is a possibility that the majority of companies would embrace these changes. This is because many of the large multinational oil companies own natural gas properties and assets. (the Plan 2010) for example, Exxon Mobil is one of the largest oil companies in the world that is focused on developing, producing and distributing oil / natural gas. The short to medium term switch would allow them sufficient time, to be able to offset any kind of potential losses that could be experienced from making such a switch. (Exxon Mobil 2010)

Next, the Pickens Plans calls for managing the various forms of energy more responsibly. In this particular case, he believes that all forms of government can help reduce the overall amounts of consumption by encourage manufacturers to develop other technology, beside the electric engine. Where, the plan call for a consistent amount of investment to take place in other areas that can reduce dependence on one particular source, such as hydrogen. The overall amount of research and development can be used to provide a viable alternative infrastructure to electricity. This will give consumers more of a choice as to what forms of energy they will be using. Over the course of time, the overall amounts of fossil fuels will decrease because these two long-term solutions will address the most complicated issues. Once these alternative forms are being utilized, the Pickens plan calls for restricting how government will use their energy. Meaning that they must use their automobiles intelligently to reduce the overall carbon footprint, where electricity can be used for vehicles that are going shorter distances. While a combination of an electric / natural gas / hydrogen vehicle can be able to provide them with an effective solution for long trips. This is important because it underscore how effective the government can be in providing leadership. Where, they can help to teach the public how to effectively utilize the new technology to meet all of their needs, without interrupting their lifestyle. (the Plan 2010)

The Future of Energy Policy / Strategy

The future energy policy will be a combination of the strategy that has been utilized in the past and the ideas put forth by Boone Pickens. Meaning that the issue of deniability will slowly disappear over time; while, the idea of increased amounts of drilling will continue to gain more prominence. This is because a number of different countries around the world have been actively seeking out the various deep water natural gas / oil reserves around the globe. As this competition increases, there will be more pressure placed on politicians to be able to effectively provide access to these different reserves. A good example of this can be seen by looking no further than the various oil / natural gas reserve disputes that Canada and Russia are having over the North Pole. Where, the thawing of the summer ice has allowed for increased amounts of exploration. As this was taking place, it was quickly discovered that there were large amounts of reserves located below the Arctic Sea. Russia claimed that the reserves belonged to them by placing a plaque on the ocean floor. While, Canada had claimed that these different reserves were theirs. (Doward 2007) This is significant because it underscore the competition among the various nations to be able to control the remaining reserves that are discovered. As the overall amounts of proven reserves decrease, this underscores the intensity of the competition that will increase as time goes by. At which point, it is only a matter of time until the various economics will allow for nearly unrestricted amounts of drilling in key areas.

The approach of discovering for oil will be augmented with a strategy that will focus on reducing the overall amounts of oil consumption. This will take place by the increasing the fuel standards and having the government encourage new industries to develop this type of technology. An example of this approach can be seen with the federal government’s decision to increase fuel efficiency standards by 40%, to 35 miles per gallon. This is important because it is the first major step towards increasing fuel efficiency standards in America since 1985. When such a change is taking place, it highlights how an approach is taken on reducing the overall consumption of fossil fuel. This will automatically change the focus of the industry, where there is more of an emphasis on being able to supply alternative forms of energy that will be able to comply with such requirements. Evidence of this can be seen with the 2011 Chevy Volt. This is important because the vehicle is able to achieve 40 miles per gallon fuel economy. In the not to distant past, the parent company General Motors, was not interested in producing such a car. (2011 Volt 2010) as they believed that the market was towards more large sport utility vehicles. Once the market began to change, is when this car would begin to become a relevant part of the company’s future. This is significant because it underscores how a new shift is taking place in the way that various vehicles are constructed. Over the course of time, the higher amounts of fuel efficiency standards and a focus on augmenting them with different technologies will become standard. Within the oil industry itself, the election of Obama as President and the reality that there is change in the perception of the issue has helped to increase cooperation from various executives. With Tony Hayward the CEO of BP saying, “President Obama comes to office with a strong commitment to tackle climate change. Suddenly the challenges many of us have been wrestling with for a long time — the importance of energy security in providing economic security, and tackling the issue of climate change in a way that is commercially viable — are center stage.” (Krauss 2009) This is important because it shows that no one single approach must be used to effectively address the issue of global warming. Instead, there must be a concentrated effort by the major oil companies working with the various government entities and private industry to tackle the problem. As a number of different solutions must be used together, with one other to effectively provide short- and long-term solutions. This will allow for each one of the different aspects of each energy solution to address the various needs in the economy. While at the same time, taking a responsible approach will ensure that the overall amounts of job losses will be reduced. This will help to quite those voices that are concerned about what a dramatic shift can cause.

While no one knows what the future will bring, it would not be surprising to see some kind of combination of different strategies utilized. Where, there will be increase amounts of drilling in undiscovered reserves. While at the same time, there will be an emphasis on switching to vehicles that will run off natural gas, and developing cars that can run off of electricity or hydrogen. All of these different pieces play an important role in reducing the world economy’s dependence upon fossil fuel. Even though many voices are still denying the fact that global warming is occurring. The reality is: that as a business and industry, they must be prepared to effectively work within the increasing amounts of environmental regulations. This is the only way that oil industry can be able to maintain its healthy profit margins that it currently enjoys. Therefore, based upon the principals of greed and the law of survival, it is only a matter of time until the entire industry will begin to address how to effectively reverse climate change.

Clearly, the oil industry is going through a massive upheaval when it comes to climate change. Where, the policies of denial and encouraging more drilling are beginning to fall upon deaf ears. This is because various treaties and regulations have been enacted around the world that are forcing the industry in one way or another address the various challenges. As a result, a shift is occurring where they are disregarding the ways of the past and are embracing new ideas. This involves using increased amounts of drilling, switching to other forms that will reduce dependency on imports and finding long-term solutions that will provide for an effective way to no longer rely on fossil fuels. These different elements are important because they will allow the various oil companies to reduce the overall impact of on their bottom line, which is the biggest reason they were opposing such changes. However, when you give them a way to offset their losses by going into other industries that they are involved in (natural gas), this will provide an effective way of making the change over. At which point, an emphasis can be placed on finding those alterative forms of energy that will reduce fossil fuel consumption over the long-term. This is significant because many industry insiders such a Boone Pickens have been advocating this approach as the best way to effectively address the issue of profit concerns and global warming. What all of this shows, is that the oil industry is slowly beginning to embrace the fact that climate change is occurring and that they play an important role. This is the first step to effectively being able to address the issue of global warming, as the various fossil fuels have been shown to increase the overall amounts of greenhouse gases emitted into the atmosphere.

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