There are no easy answers to America’s energy challenges, but if there’s any hope of finding anything resembling a solution, it surely begins with an honest assessment and discussion of the facts. And therein lies the problem: coming to terms with reality.
It’s a simple task, really, although in a business as politically charged as energy nothing is as easy as it seems. Yesterday’s affair in the U.S. Senate offered no evidence to the contrary. Consider a few quotes from Wednesday’s Judiciary Committee hearing that heard testimony from executives of the country’s largest oil companies:
“Is there anybody here that has any concerns about what you are doing to this country, with the prices that you are charging and the profits that you are taking?”
–Sen. Dick Durbin
“Yet you rack up record profits, record profits, quarter after quarter after quarter, and apparently have no ethical compass about the price of gasoline.”
–Sen. Diane Feinstein
“Consumers are angry, and they have every right to be. You’re making more money than ever. It doesn’t seem fair, guys. It just doesn’t seem fair.”
–Sen Herb Kohl
There’s also this intriguing colloquy yesterday between Sen. Patrick Leahy and two oil executives about their salaries. The Senator’s point, as far as we can tell, is to alert the American public that high-level oil executives make a lot of money. That’s not unusual, compared with many other industries. But oil, of course, is different.
And, this is a political year and politics is in high gear in Washington, perhaps more so than usual. The problem is that political grandstanding is as irrelevant as ever when it comes to intelligently discussing, much less solving America’s energy problem.

It’s all too easy to use publicly traded oil companies as scapegoats for the high price of oil and gasoline. But if this is a conspiracy, why aren’t futures traders called to testify as well?
In fact, contradiction is everywhere when it comes to talking about energy in America. A few examples:
* On the one hand, some politicians are calling for lower gasoline prices. Meanwhile, others are complaining that America’s “addiction” to foreign oil only seems to go up? News flash: the two are connected. Lower prices induce higher consumption, which necessarily leads to higher imports in a country with falling oil production.
* Despite calls for raising supply, attempts at bringing new energy capacity on line are often attacked. A recent example is Delaware’s successful effort at blocking BP’s plan for building a new liquefied natural gas plant. The Supreme Court decision on New Jersey v. Delaware on March 31, 2008 comes at a time when politicians are complaining that energy companies aren’t doing enough to increase supply.
* Politicians charge that oil company profits are too high, at least as defined in absolute terms. But in relative terms, the profits are more or less middling. As recently pointed out, citing data from Thomson Baseline, the average net profit margin for the S&P Energy sector is 9.7%, slightly higher than the 8.5% for publicly traded companies generally, as per the S&P 500. For comparison, Microsoft’s profit margins are a dizzying 28%, according to Yahoo Finance.
Nonetheless, everyone focuses on the absolute profit levels for oil companies, and certainly the dollar amounts are staggering. But the scale is necessary. Finding, pumping and shipping oil is a business that demands massive up-front investments that may–or may not pay off in the years, perhaps decades ahead. Meantime, there’s lots of expense. Drilling for oil 10,000 feet under the ocean simply doesn’t allow for small-scale operations. Yet this fact is conveniently overlooked. Criticizing the scale of oil company operations, and then asking the same companies to deliver more supply, is nothing if not contradictory. If you want the latter, you need the former.
There are many more examples we could cite that remind us that intelligent discussions about energy can’t be assumed as the natural course of affairs. Granted, oil companies aren’t saints and so we assume that all the usual imperfections that infect human activity in other industries, and government, apply in the energy patch.
Meantime, the fact remains that the supply and demand equation has changed for energy, thus the rise in prices. The idea that it’s a conspiracy is ludicrous. Otherwise, one has to assume that the oil companies engineered the collapse in oil prices in the 1980s, and again in the late 1990s. If they were really in control of price, why allow such extremes on the downside? The answer, of course, is that supply and demand are running the show. Not entirely, not absolutely, and not for each and every minute of the day. But generally, price trends are a function of supply and demand. Yes, the supply is manipulated in some parts of the world, but that tends to occur beyond these United States. But we digress.
When it comes to talking about oil companies, particularly Big Oil–publicly traded Big Oil, that is–reason seems to take a holiday, at least by the standards of discussion that usually hold for chatting about, say, cement manufacturing. Or even coal. When, an inquiring mind might wonder, will there be hearings on “excess profits” earned by coal companies? Don’t hold your breath.
In fact, while we’re dreaming up ideas for Senate hearings, here’s a thought: let’s talk more about boosting energy efficiency, which conceptually represents a synthetic equivalent of finding a new Saudi Arabia. Yes, some of that goes on, but it’s a lot more fun to bash the usual suspects.
Indeed, the debate in Washington is hot and heavy when it comes to passing new taxes on oil companies to penalize their “high” profits of late. Perhaps that’s warranted. But no one should expect that it will solve Joe Sixpack’s problem of paying more at the pump. In fact, if Joe owns shares in the oil companies, either directly or through mutual funds, imposing punitive taxes on oil companies may end up hurting the man on the street.
No matter, since oil habits die hard. Some of the thinking about Big Oil is a legacy of decades past, when the Seven Sisters prevailed.. But the old days are gone. The publicly traded oil companies’ power today pales by historical comparison. Yes, that’s another inconvenient truth, but so be it.
The new Seven Sisters, as the Financial Times dubbed them last year, are: Saudi Aramco, Russia’s Gazprom, CNPC of China, NIOC of Iran, Venezuela’s PDVSA, Brazil’s Petrobras and Petronas of Malaysia. Notably, all of the new seven are government-owned companies. Collectively, they hold one third of the world’s oil and gas production and more than one-third of the world’s oil and gas reserves, FT advises. In the grand scheme of today’s energy markets, the publicly traded oil companies are bit players by comparison with the new Seven Sisters.
Yes, the old Seven Sisters have lost much of their clout when it comes to the price of crude. On the other hand, they’re much easier to drag into Senate hearings than the new power brokers.