10.5.2020

Rhetoric and Reality With Exxon, BP, and the Future of Fossil Fuels

By William English

When asked why he robbed banks, Willie Sutton famously replied, “Because that’s where the money is.” Social change activists tend to view corporations the same way. While it’s commonplace for activists to call on corporations to support social movements, economists have generally cautioned that this is a mistake. We’re all better off if companies stick to what they do best, namely producing a good or service in a profitable manner. According to Milton Friedman’s classic formulation, corporations shouldn’t spend money on favored social causes, as that money will otherwise go to shareholders, employees, and customers. Those individuals are perfectly capable of using this money to support whatever causes they value, and this is both more efficient and more democratic. Of course, social activists who only care about furthering their own cause are seldom persuaded by this logic. They would rather co-opt the power of a few corporations than go through the difficult work of persuading members of the larger public to make financial sacrifices that support activists’ goals.

Time has shown that Friedman was wrong on one point. There are circumstances in which companies can address a social problem more efficiently than any other entity due to their unique expertise and market position. As another Nobel Laureate, Jean Tirole, observed, Starbucks is better positioned to help coffee farmers than well-intentioned individuals who want to donate to this cause. More generally, corporations may be able to deploy resources within their market niche more effectively than outsiders. This is the truth that animates the most valuable Corporate Social Responsibility initiatives – cases where companies are able make a positive impact at a fraction of the cost that it would take any government, non-profit, or other company to accomplish the same thing. However, it also follows that the least valuable thing a company can do is make cash donations to other causes or pursue social projects outside of its core areas of expertise. In these cases, corporate money brings no efficiencies to the table, and anyone’s money is as good as everyone else’s.

A failure to grasp this distinction has led to muddle thinking by otherwise smart and well-intentioned people, including many in the financial press. For example, under the headline “Exxon Used to Be America’s Most Valuable Company. What Happened?” the Wall Street Journal’s Christopher Matthews recently suggested that Exxon, the nation’s largest fossil fuel company, should abandon its core business to pursue green energy. This exhortation was shrouded in the cloak of dubious economic analysis with Matthews intuiting that “Investors are fleeing and workers are grumbling about the direction of a company” because of its “out of touch and stubborn” commitment to fossil fuels. While “Exxon doubled down on oil and gas,” we are told that its competitors, BP and Shell, “have begun to pivot to renewable energy,” with the suggestion that this path makes the most economic and environmental sense.

On its face, the economic argument is unpersuasive. Exxon’s stock price is down because of the COVID crisis, which has led to the greatest global decline in energy since World War II, according to the International Energy Agency. Indeed, major energy sector index funds such as The Energy Select Sector SPDR Fund and Vanguard Energy ETF’s have lost nearly 50% of their value since January. Even worse for Matthew’s argument, in terms of stock value, Exxon has actually outperformed BP and Shell in 2020!

However, what are we to make of the environmental argument? While a company claiming to shift its entire business model may not win over investors, it certainly leads to more favorable news coverage. The Washington Post recently published a gushing piece by Steven Mufson on how BP is “trying to reinvent itself as an energy company in the age of climate change.” In sum, BP aims to “eliminate or offset its carbon emissions to a net zero level by 2050” by diverting much of its fossil fuel business towards solar and wind power. Are these sorts of aspirations to embrace alternative energy a promising approach to the climate crisis, even if they are a bad deal for shareholders and all of us who consume energy?

The key question is whether fossil fuel companies have any special advantages with regard to their ability to innovate technological breakthroughs in alternative energy. Or, is their comparative advantage more likely to lie in innovating cleaner and more efficient ways to harness fossil fuels? The answer is almost certainly the latter. For example, aside from noting that offshore oil rigs could provide some expertise in developing offshore wind power, the Post gives no tangible idea of how BP’s assets and institutional knowledge could transfer to renewable energy. Indeed, Mufson acknowledges that this market is heavily saturated. By contrast, Exxon’s strategy appears to be focused on making fossil fuels as environmentally friendly as possible—such as investing in natural gas, carbon capture, and methane reductions – and there’s good reason to believe they are positioned better than anyone else in the world to be able to accomplish this. Put simply, the greatest positive environmental contributions that Exxon can make likely involve using its resources and expertise to improve how fossil fuels are extracted and used. No one else can do this as well as fossil fuel companies, while these companies have little, if any, advantage in developing new forms of alternative energy. 

In exhorting fossil fuel companies to devote resources to alternative energy, environmental activists are still impressed by the Willie Sutton argument. Exxon’s where the money is; and their proposal is ennobled by a whiff of retributive justice. If Exxon’s industry helped cause global warming, shouldn’t Exxon be required to foot the bill for developing alternative energy? Not only does this fail to appreciate the environmental benefits of greening fossil fuels while it overestimates Exxon’s ability to fabricate alternative energy breakthroughs, it also obfuscates the true beneficiaries of the fossil fuel industry, which is all of us. Every time we fill up our car, turn on the air conditioning, or heat our home during winter, we have these companies to thank, but we also have ourselves to blame. As many have argued, the most efficient and ethical way to deal with the collective action problems presented by global warming is through policy reforms that affect everyone in a transparent manner, such as a carbon tax. These can provide incentives for everyone to minimize their carbon footprint while also harnessing market forces to discover what mix of fossil fuel technologies and alternative energy breakthroughs can ultimately deliver the cleanest energy at the lowest price.  

Time will tell whether BP or Exxon’s strategy is better suited to adapt to potential technological and policy changes around fossil fuels and competing energy sources. However, recent coverage of COVID driven troubles in the energy sector reveals little beyond whom the business press is rooting for and the enduring allure of the Willie Sutton mindset.  

William English is a professor at Georgetown’s McDonough School of Business. 

This article appeared on the RealClearMarkets website at https://www.realclearmarkets.com/articles/2020/10/05/rhetoric_and_reality_with_exxon_bp_and_the_future_of_fossil_fuels_579528.html

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