Last week, in a repeat of 2008, reports of fat earnings from the oil majors were met with blame and outrage from American consumers, who are stressed from $4+ gas prices and strapped finances. Exxon Mobil, the 18th-largest oil company in the world, with about 3% of world production (~4million barrels of oil equivalent per day), reported quarterly earnings of $10.7 billion dollars. Americans are upset because they envision such hefty profits as direct transfers from their thin pocketbooks to Exxon, itself the recipient of government oil and gas subsidies to boot.
I am not an oil industry apologist, but recognize that I live in an oil-centric world, own a car, enjoy air travel and partake in the daily smorgasbord of food, services, and novelty made possible in the cheap energy age. To me, given the problems our country and government face, blaming Exxon for high gasoline prices and excessive tax subsidies is akin to complaining about a mosquito bite on your arm when a crocodile has your leg in its mouth.
First, it is a stretch to say that Exxon is under-taxed; last year Exxon's worldwide total taxes amounted to $86 billion, or 23% of its revenue (by comparison, at this country's second-largest corporation — Apple, Inc. — taxes were 6.9% of revenue. Yet Exxon understandably is a lightning rod, because the ~3 cents per gallon it makes as the world's largest refiner add up to very large numbers. And yes they make large sums on their oil production when commodity prices rise more than costs. But these are two sides of the wrong argument, and are not the real story.
Under a lens of ecology and biophysical economics, the vitriol being expressed at the Exxon is misplaced at best and counterproductive at worst. Though our culture perceives dollars and digits in the bank as wealth, in reality they are only markers. Our real wealth comes from the sun, including its direct daily insolation, its role in photosynthesis (which creates biomass, including fossil fuels), and its pushing natural and hydrological cycles that perform vital services to our species and others.
Our primary wealth is our finite endowment of resources, like oil and gas, timber, water, and minerals. We extract resources from this natural "bank account" and combine them with human ingenuity and technology to produce things we can use, such as tractors, houses, and clothing. Our socio-political system then overlays monetary tokens: stocks, bonds, bank deposits and cash that function as markers of our real wealth, markers that are increasingly disconnected from the reality of our natural resource balance sheet.
But energy is different from iPads or Doritos in its impact on our lives. The laws of economics (more like guidelines) state that energy, capital and labor are all substitutable. This turns out not to be true; there is no substitution for energy in our economy — every single economic product created requires first an expenditure of energy.
The amount of human labor that oil and other fossil fuels have been able to replace or allocate to other pursuits is gargantuan. The average human can generate only about 0.6 kilowatt-hours per day from physical effort, which, based on median U.S. salaries, equates to more than $300 per kWh generated by human labor. Oil, even at $110 per barrel, costs us just 6 cents per kWh, or 500 times cheaper than human labor. This replacement of human effort with fossil fuels has been the single primary driver of economic riches of the past couple of generations. For all intents and purposes, on human time scales, oil in our lives is indistinguishable from magic.
And it is depleting. U.S. oil production has been in steady decline since its peak in 1970. World production has been stagnant since 2005, despite a tripling in price last decade. The marginal barrel of oil now costs $85, as we are drilling deeper and in harsher environments, and now having to include fuels with lower net BTUs like tar sands, natural gas liquids and ethanol into the oil category just to stay even.
So when Exxon reports $10.7 billion in earnings, this is the monetary accounting of the chemical and kinetic energy it contributed to society in the form of oil and gas sales. This oil and gas then went on to perform myriad other activities in our economy — and 4 million barrels per day is the equivalent of over 2 billion human-days of useable energy. About equal to the working population of the world. Quite a deal actually, for us.
While high gasoline prices might appear to be the problem, they are only a symptom of our more-complex problem. We have grown debt in this country more than we’ve grown GDP for 45 years in a row. Our borrowing of money to buy cheap shoes, cheap furniture and cheap TVs gives China much (paper) wealth with which to bid up world commodity prices, including oil.
To avert financial ruin in 2008, our government stepped in as lender of last resort in the housing market, spent 12% of GDP each year they didn’t have, and grew the Federal Reserve balance sheet by over $2 trillion dollars. These actions have furthered the U.S. dollar's devaluation, which in turn drives oil prices higher in dollar terms. In the context of these trillions, a focus on eliminating $4 billion in subsidies to an industry that produces the hemoglobin of our economy is much more politic than actually relevant. The Big Problem isn't Big Oil creating energy from fossil fuels, it's Big Government creating money from thin air to cater to an over-entitled population.
This brings us to the biophysical money shot. At issue is not whether we are ‘running out’ of oil or other fossil fuels. The problem is that we are running out of fossil fuels affordable enough to power a globalized industrialized society. As easy (government) money causes commodity prices to rise, this helps Exxon and the other oil companies but is costly to the American public.
If this stimulus goes away, and oil goes back down to say $40-50 per barrel due to recession, this helps the American consumer, but at a cost of significant amounts of oil resources then becoming uneconomic to produce. One can imagine the endpoint of this trajectory, as eventually get to a market price which is both unaffordable to our debt-saturated society, and uneconomic for oil companies to extract the harder to find remaining hydrocarbons.
This is the future we should be planning for. It’s not all dark, but significant belt-tightening of both consumption and aspirations will be required.
For now, its safe to assume that the passing of the credit creation mechanism from the private sector, to the central banks was not only a wealth transfer to the financial sector (via free money), but to the energy and other sectors as well. So again, XOM just reported pudgy earnings, but so did Goldman Sachs, General Electric and a host of other companies benefiting from the reflationary FED bullet. Exxon’s earnings controversy thus really isn't about Exxon. But it should be a reminder that energy not dollars is what we have to spend, and since energy can't be printed, he who has the money controls the energy (for now).
The bottom line is the main drivers of American progress over the past two generations have been cheap energy, and increasingly cheap credit. This era is now over. Perhaps as importantly, it’s beginning to be recognized as over. It turns out that cheap energy and cheap money may not be our God-given rights as Americans. And the secret truth is their availability, in hindsight, was as much a curse as a blessing, given what we see of people’s reactions and expectations today to an increase in oil price from 3cents to 6 cents per kWh.
It was less than two years ago we were squawking about the financial companies bringing the U.S. to the brink of financial ruin. Now it seems we’ve turned our sights on the evil oil companies (again).
They may not be noble, or admirable, or even likeable, but oil companies are providing a critical service to society and playing by the rules created by you and me and the people we voted for. Though gasoline is expensive relative to what we have become accustomed to, it is still incredibly cheap in what it can accomplish for us. In the face of resource depletion, it is time we not only wake up to the realities of our natural resource situation, but also grow up — by making hard choices instead of blaming whomever seems to be the bad guy du jour.
Nate Hagens has a PhD in Natural Resources from the University of Vermont and and MBA from the University of Chicago. He writes at the energy discussion portal, www.theoildrum.com and is on the Boards of Post Carbon Institute and Institute for Integrated Economic Research.