THE TYRANNY OF OIL: THE WORLD’S MOST POWERFUL INDUSTRY—AND WHAT WE MUST DO TO STOP IT
BY ANTONIA JUHASZ
HARDCOVER, 480 PAGES
LIST PRICE: $26.95
Big Oil’s Last Stand
Within days of the New Year, 2008 began with three landmark events. Oil reached $100 per barrel for only the second time in history as gasoline prices began an ascent toward the highest prices in a generation. And on January 3, Senator Barack Obama became the first African American to win the Iowa Caucus. Voter turnout broke records as well, with four times more registered Democrats voting than had turned out in 2000. Senator Obama was reserved yet purposeful as he delivered his historic victory speech. He chose to highlight just a handful of policy issues in the fifteen-minute address, making his focus on oil all the more significant. Obama forcefully declared that he would free the United States once and for all from “the tyranny of oil” and then pledged to be the president “who ends the war in Iraq and finally brings our troops home.” An already raucous crowd met these pronouncements with thunderous applause and waves of cheers.
“The tyranny of oil” powerfully encapsulates the feelings not only of Americans, but of people the world over. Without viable and accessible alternatives, entire economies suffer when increasing proportions of national budgets must be used to purchase oil. And on an individual level, families, facing the same lack of alternatives, forgo basic necessities when gasoline prices sky¬rocket. Communities that live where oil is found—from Ecuador to Nigeria to Iraq—experience the tyranny of daily human rights abuses, violence, and war. The tyranny of environmental pollution, public health risks, and climate destruction is created at every stage of oil use, from exploration to production, from transport to refining, from consumption to disposal. And the political tyranny exercised by the masters of the oil industry corrupts democracy and destroys our ability to choose how much we will sacrifice in oil’s name.
The masters of the oil industry, the companies known as “Big Oil,” exercise their influence throughout this chain of events: through rapidly and ever-increasing oil and gasoline prices, a lack of viable alternatives, the erosion of democracy, environmental destruction, global warming, violence, and war. The American public is fed up with Big Oil. In 2006 Gallup published its annual rating of public perceptions of U.S. industry. The oil industry is always a poor performer, but this time it came in dead last—earning the lowest rating for any industry in the history of the poll.
For a time, it was the rare 2008 presidential candidate who would speak out against the tyrants behind the tyranny of oil. The earliest denunciations came from Democratic senator John Edwards, who came in second and just 8 percentage points behind Obama in the 2008 Iowa Caucus. Edwards repeatedly stated the need to “take on Big Oil,” and decried handing the “keys to the corridors of government over to the lobbyists for the big oil companies.” Statements such as these quickly earned Ed¬wards the title of the “Populist candidate” for president, as did this one made on January 28, 2008, when Edwards announced that there are “two Americas that exist in this country: there’s one for the lobbyists, for the special interests, for the powerful, for the big multinational corporations and there’s another one for everybody else. Well I’m here to say that their America is over!” Edwards took his script from Congressman William Jennings Bryan, who represented the Populist and Democratic Parties for president in 1896 and who declared, “On the one side are the allied hosts of monopolies, the money power, great trusts . . . who seek the enactment of laws to benefit them and impoverish the people. On the other side are the farmers, laborers, merchants, and all others who produce wealth and bear the burden of taxation.”
As the 2008 election progressed, both Obama and his leading Democratic challenger Senator Hillary Clinton went increasingly on the attack against Big Oil, and each was eventually called a “Populist candidate,” their words sounding an alarm similar to one made over one hundred years earlier by the Populist movement against corporate trusts generally and Standard Oil in particular, the company from which many of today’s oil giants descend.
John D. Rockefeller founded the Standard Oil Company in 1870. By the 1880s, Standard Oil controlled 90 percent of all refining in the United States, 80 percent of the marketing of oil products, a quarter of the country’s total crude output, and, in this preautomobile era, produced more than a quarter of the world’s total supply of kerosene. Standard Oil was renowned for both the ruthlessness and the illegality of its business methods. Dozens of court cases were brought against the company, and Standard Oil was broken up by three separate state-level injunctions. Its response was to change states, making federal action imperative. In addition to the producers, refiners, and other sellers of oil that Standard Oil bought out, bribed, bullied, or burned down, masses of people across the country were enraged by its exercise of control over their government.
Standard Oil was not alone. It had perfected the use of the corporate trust, and hundreds of other trusts soon followed. A trust is a combination of corporations in which a board of trustees holds the stock of each individual company and manages the business of all. While the company operates as one giant conglomerate, the individual companies maintain the legal status— and in many cases, including Standard Oil’s, the legal fiction—of independence. At the time, the word trust quickly became synonymous with any large corporation.
A newspaper cartoon from the era depicts the U.S. Senate. Towering above the seated senators, three times their individual size, stand grossly obese men representing the trusts. Each man is dressed in top hat and tails. Standard Oil, the most dominant, is the only company depicted by name among the “copper,” “iron,” “sugar,” “tin,” “coal,” and “paper bag” trusts. Above them a sign is posted: “This is a Senate of the monopolists, by the monopolists, for the monopolists!” Off in the far left corner is a small sign that reads “People’s Entrance,” below which is a bolted and barred door marked “closed.”
A great groundswell of citizen action emerged in response to the power of the trusts. People across the nation came together in what has since been called the Populist and Progressive movements to bring about change. Some groups sought revolution, but what the collective effort achieved were fundamental reforms, including new laws on campaign finance, workers’ rights and protections, public health, and the first national antitrust laws. The intent of the antitrust laws was to break the power of the trusts over the government. In 1911 the federal government used the Sherman Antitrust Act to break up Standard Oil into thirty-four separate companies. Standard Oil would not regain its singular dominance and consolidation of the industry, or the political control it held at the height of its power in the late 1800s.
The 1911 breakup largely failed over the course of the next decade, however, due to the absence of effective government oversight. Primarily to address these failings, new antitrust laws and, most importantly, a new government agency—the Federal Trade Commission (FTC)—were later introduced to tighten the government’s control over antitrust violations by U.S. corporations. The FTC remains the most important government agency in charge of regulating corporate consolidation and collusion. Still, while the nation’s antitrust laws were fairly well applied to domestic oil operations, the largest oil companies functioned in the international arena as a cartel. From approximately World War I to 1970, the three largest postbreakup companies, Standard Oil of New Jersey (Exxon), Standard Oil of New York (Mobil), and Standard Oil of California (Chevron), joined with Gulf, Texaco, BP, and Shell to form a cartel, earning them the nickname the “Seven Sisters.” These seven companies owned the vast majority of the world’s oil and controlled the economic fate of entire nations.
Over the decades, many strategies to rein in the power of the Seven Sisters were proposed, debated, and even attempted in the United States. These included reducing the flow of oil the companies could bring into the United States, state-owned refineries, a national oil company, and massive antitrust action against the oil companies. Some of these efforts were successful, but most were not. It was the oil-rich nations operating as their own cartel, the Organization of Petroleum Exporting Countries (OPEC), which ultimately brought down the corporate cartel. By the mid-1980s, the OPEC governments had taken back full ownership of their oil. The Seven Sisters, which in 1973 earned two-thirds of their profits abroad, turned their attention back to the U.S. market that they had largely abdicated to the smaller “independent” oil companies. Big Oil’s new mantra was “Merge or die,” as the companies first bought up the independents and then each other.
The Reagan administration ushered in the first frontal attack aimed at dismantling the antitrust policies of the United States. Reagan’s FTC initiated a new and radically permissive attitude toward corporate mergers that was carried on through each subsequent administration. As stated quite matter-of-factly by Jonathan Baker, an antitrust attorney for the Clinton administration, the “older concerns about protecting small business and preventing concentrations of political power have been discarded.” Since 1991, government regulators, under the direct and heavy influence of the nation’s largest oil companies and their lawyers, have allowed more than 2,600 mergers to take place in the U.S. oil industry. The mergers have resulted in the near demise of the independent oil company, refiner, and gas station in the United States.
The mergers of the megagiant oil companies have all taken place since 1999 and remain the largest mergers in corporate history. Exxon merged with Mobil, Chevron with Texaco, Conoco with Phillips, and BP with Amoco and then Arco to create the largest corporations the world has ever seen. Shell also participated in the merger wave by purchasing several “baby-Standard” oil companies.
The mergers helped Big Oil reestablish its footing as a major owner of oil. While nowhere near its Seven Sisters “glory years,” Big Oil’s oil reserves are impressive nonetheless. Were the five largest oil companies operating in the United States one country instead of five corporations, their combined crude oil holdings would today rank within the top ten of the world’s largest oil-rich nations. ExxonMobil, Chevron, ConocoPhillips, Shell, and BP exercise their control over the price of oil today through these individual holdings and through participation in the crude oil futures market. The futures market has replaced OPEC as the principal determinant of the price of crude oil. It is largely unregulated and prone to excessive speculation and manipulation.
The mergers also allowed the oil companies to take control of the refining and selling of gasoline in the United States in the style of Standard Oil. They have forged a mass consolidation of these sectors, yielding rapid increases in the price of gasoline and oil company profits. “Big Oil has created a market on the brink, manipulating inventories and refinery capacity to the point that the slightest supply disruption sends prices—and company profits—skyrocketing,” Connecticut’s attorney general Richard Blumenthal told a congressional committee in mid-2007. “There is sufficient supply, but these newly created industry giants use their huge market power to keep a stranglehold on the spigot.”
Riding on high oil and gasoline prices, the oil industry is far and away the most profitable industry in the world. Six of the ten largest corporations in the world are oil companies. They are, in order, ExxonMobil, Royal Dutch Shell (Shell), BP, Chevron, ConocoPhillips, and Total. According to Fortune’s 2007 Global 500 listing, the ten largest global oil companies took in over $167 billion in profits in 2006 alone—nearly $50 billion more than the top ten companies in the second most profitable industry, commercial and savings banks.
The largest publicly traded oil companies operating in the United States and those with the greatest influence on U.S. policy- making are ExxonMobil, Shell, BP, Chevron, Conoco-Phillips, Valero (the forty-third largest global corporation), and Marathon (the ninety- second largest global corporation). Each is either a direct descendant or has purchased direct descendants of Standard Oil. They are among the most powerful corporations in the world. These companies are Big Oil.
Big Oil is experiencing a level of power that has only one historical precedent: that of the Standard Oil era. And like Standard Oil, the companies appear willing to do anything to maintain their position. With over $40 billion in pure profit in 2007, ExxonMobil is the most profitable corporation both in the world and in world history. Its profits are larger than the entire economies of ninety-three of the world’s nations ranked by GDP. ExxonMobil had the most profitable year of any corporation ever in 2003 and then proceeded to surpass its own record every year for the next five years.
Wal-Mart edged out ExxonMobil as the world’s largest corporation in 2007 by just barely surpassing its sales—$379 billion compared with ExxonMobil’s $373 billion. Wal-Mart’s $12.7 billion in profits, however, were a mere one-third of ExxonMobil’s. In fact, ExxonMobil’s profits were more than twice those of the next three U.S. companies on the Fortune 500 list combined: Chevron with $18.7 billion; General Motors, which lost $38.7 billion; and ConocoPhillips with $11.9 billion. Similarly, in 2006 ExxonMobil’s profits were nearly twice those of the next two U.S. companies combined: United Airlines with $23 billion and Citigroup with $21 billion.
As described by Fortune magazine in 2005, ExxonMobil was “the most powerful U.S. corporation by just about any metric. It surpassed General Electric to become the most valuable U.S. com¬pany by market capitalization ($375 billion). It pumps almost twice as much oil and gas a day as Kuwait, and its energy re¬serves stretch across six continents and are larger than those of any non-government company on the planet.”
ExxonMobil is not alone. Each major American oil company— ExxonMobil, Chevron, ConocoPhillips, Valero, and Marathon— has surpassed its own record-breaking profits in almost every year for the last five years. Combined, they earned more than $80 billion in 2007 profits, making them the sixty-seventh largest economy on the planet. There is simply no comparison with any other industry in the United States. For example, the U.S. defense industry, which has also been experiencing some of its most profitable years of late, does not come close. The top five U.S. oil companies took in almost four times more profits in 2007 than the top sixteen U.S. defense and aerospace companies combined: $80 billion versus approximately $21 billion. The eighteen most profitable pharmaceutical companies took in about $43 billion in profits. In 2006 Big Oil had somewhat of a financial rival in the nation’s commercial banks, the top five of which had about $73 billion in profits. However, following the mortgage crisis, the twenty-five most profitable banks took in just $70 billion in 2007 profits. All other industries—including cars, computers, insurance, telecommunications, tobacco, coal, and entertainment—are not now, and for years have not been, even worth adding up; their profits are a pittance in comparison to Big Oil’s.
The oil industry argues in public that while its profits look large, its profit margin is not. In testimony before the U.S. Congress in April 2008, for example, ExxonMobil senior vice president J. S. Simon explained, “[I]n 2007, the oil and gas industry earned, on average, about 8.3 cents per dollar of sales—near the Dow Jones Industrial Average for major industries of 7.8 cents per dollar of sales.”9 Simon measured the company’s net income as a share of its total revenues. In ExxonMobil’s shareholder re¬port, however, the company uses a very different measure—the company’s return on capital employed (ROCE). As ExxonMobil argues in its 2007 annual report, “The Corporation has consistently applied its ROCE definition for many years and views it as the best measure of historical capital productivity in our capital-intensive, long-term industry. . . .” Using this mea sure, Exxon-Mobil is far and away more profitable than any other comparable U.S. industry. ExxonMobil’s global operations made a 31.8 per¬cent rate of return on average capital employed, nearly 24 points higher than the average return for all nonfinancial U.S. corpora¬tions in 2007 and 18 points higher than that of the manufactur¬ing sector in 2006 (the most recent date available).10 As for the oil industry as a whole, U.S. News and World Report urges readers to look at shareholder equity available for investment. Using this measure, the oil industry, at 27 percent, was nearly 10 points higher than that of other manufacturers in 2007.
Shell and BP are headquartered in The Hague and London, respectively, but each has powerful, influential, and sizable American affiliates. Each is a leading U.S. campaign spender, heavily influencing and benefiting from the American political system. Shell and BP, combined with their five American sisters, garnered an incredible and unprecedented $133 billion in pure profit in 2007—the equivalent of the combined GDPs of the forty-two poorest nations in the world, including Fiji, Kyrgyzstan, Bhutan, and Sierra Leone.
What does $133 billion in profits buy an industry?* It bought the oil industry at least eight years of a U.S. “oiligarchy”: a government ruled by a small number of oil interests. The oil industry spent more money to get the George W. Bush administration into office in 2000 than it has spent on any election before or since. In return it received, for the first time in American history, a president, vice president, and secretary of state who are all for¬mer oil company officials. In fact, in 2000 both George W. Bush and Condoleezza Rice had more experience running oil companies than they did working for the government. Every agency and every level of bureaucracy was filled with former oil industry lobbyists, lawyers, staff, board members, and executives, or those on their way to work for the oil industry after a brief stint of government service. The oil industry got what it paid for: an administration that has arguably gone further than just about any other in American history to serve Big Oil’s interests through deregulation, lax enforcement, new access to America’s public lands and oceans, subsidies, tax breaks, and even war.
Americans tried to change course in 2006 by replacing the Republican Congress with a Democratic-controlled House and Senate. Democrats pledged in their election campaigns to take action against the oil industry, climate change, and the war in Iraq—all three of which are intimately and rightly connected in the public’s mind. The Democrats failed to deliver. Far too often, Big Oil’s money appeared to be the reason why. In one particularly glaring example, the Center for American Progress investigated the relationship between votes and campaign contributions in connection with HR 2776, the Renewable Energy and Energy Conservation Tax Act of 2007. The bill would have eliminated $16 billion in oil and gas industry tax breaks to fund clean energy alternatives. Between 1989 and 2006, members of Congress who voted against the bill received on average four times more money in campaign contributions from the oil and gas industry (approximately $100,000) than those who voted for the bill (ap¬proximately $26,000). The bill ultimately died.
Similarly, Oil Change International compiled voting records for the five most important bills on the Iraq war: the initial 2003 vote authorizing the use of force in Iraq and the subsequent supplemental war funding bills in 2003, 2004, 2005, and 2006. From 1989 to 2006, members of Congress who voted for all five bills received on average eight times more money from the oil and gas industry (approximately $116,000) than those who voted against the war (approximately $14,000). And the war rages on.
Big Oil does not only wield its financial purse at election time, it impacts daily policy-making through its unprecedented spending on lobbyists. In fact, the millions of dollars it spends on elections is small potatoes compared with the tens of millions it spends lobbying the federal government. From 1998 to 2006, ExxonMobil alone spent more than $80 million lobbying the federal government, over fourteen times more money than it spent on political campaigns. Combined, ExxonMobil, Chevron, Shell, BP, Marathon, and ConocoPhillips spent $240 million lobbying the federal government from 1998 to 2006—more than the entire oil and gas industry spent on federal election campaigns from 1990 to 2006.
There is simply no comparison between the financial reach of the oil industry and that of organizations working on behalf of consumers, the environment, public health, communities liv¬ing near oil production or gasoline refining facilities, and groups working in support of alternative energy, antitrust enforcement, or the protection of human rights. Through lawyers, lobbyists, elected officials, government regulators, conservative think tanks, industry front groups, and full-force media saturation, the oil industry uses its wealth to change the public debate and, more often than not, achieve its desired policy outcomes.