I do not hate oil companies, I hate their business model. I hate the fact that they are capturing a vast portion of the world’s wealth and power by extracting an ever higher price for essentially the same product that they have been selling for 100 years with few technical improvements that make it more valuable for their customers. I hate the fact that their recent marketing materials disrespect the only energy source that can give their own product any real competition.
Though there has been some innovation in the back end of the business of finding, extracting, refining and delivering the end product, the material that I pump into my car every couple of weeks is nearly identical to the liquid that powered Henry Ford’s Model T. It is the same fluid that I remember my Dad purchasing for less than 25 cents per gallon during our 1972 vacation, that I remember purchasing for 50 cents for my 1973 VW Beetle on the day I passed my driving test, and that my 27 year old daughter remembers purchasing for less than $1 when she started driving. Last week, I paid $3.25 for a gallon of gas, 13 times more than exactly the same amount of the same product cost just 40 years ago.
There has certainly been inflation over that time, but many of the products that cost more today are substantially improved. For me personally, there is an interesting numerical parallel between the price of gasoline and the price of of another basic commodity – shelter. The home I grew up in cost my dad and mom about $25,000 in 1962. The home I recently purchased cost something close to 13 times that amount. There are a number of similarities but also some substantial differences between the two products.
Here are the similarities. At the time of purchase, both homes were about 2-3 years old and in subdivisions that are still under construction. Both neighborhoods were farm land before becoming subdivisions. Both were solidly in the middle class and both purchasers – my dad and me – were employed as middle management level engineers who value solid workmanship and up to date devices.
Here are the differences. My house is about twice as large, the exterior is brick instead of painted cinderblock and the lot is more than twice as large with a panoramic view of the Blue Ridge mountains instead of our neighbors back yard. We have central air conditioning, improved floors, improved countertops, an installed dishwasher, and several other amenities that were not even available in 1962. Part of the “inflation” in home prices has included substantial product enhancements. In the meantime, gasoline is still gasoline. Because of the fact that it contains more ethanol than it did in 1972, it actually contains less of the characteristic that customers really want – stored energy.
Though oil companies frequently claim innocence for the sharp, but erratic increases in the price of their product during the past 40 years, they love to brag about the financial results that those price increases provide. Since they are selling the same product from the same refineries, often extracted from the same wells that have been producing for several decades, market price increases simply fall directly to the bottom line. Those pumped-up bottom lines provide plenty of justification for increases in management and executive salaries, even though the corporate leaders avoid taking any responsibility for price increases. Oil and gas company managers and executives enjoy getting credit from investors for good results, but they do not like getting blame from customers or politicians for higher prices.
The oil company business model of driving up profits by enjoying market driven price increases really looks bad when compared to the high technology industry that has given us incredible advances in capability with ever lower prices. For a long time, I tended to pay about the same each time I upgraded my personal computer; I just bought more and more computer capability with each replacement cycle.
I broke that string on my last purchase with an iMac that cost less than $1600 after shipping and taxes. The two year old “all in one” that sits on my desk has a gorgeous 24″ screen, a screaming fast processor, a 500 GB hard disk, and 4 gigabytes of main memory. That is an enormous set of improvements compared to my first “all in one” Mac Plus with its 9″ greyscale screen, no hard drive at all, and a grand total of 1 megabyte of main memory. That very limited capacity machine cost me $2200 in 1987 more than 25% more than the machine I now own.
John Hofmeister, a former President of Shell Oil, is the author of a book published in May 2010 titled Why We Hate the Oil Companies. I purchased the book for my Kindle yesterday, partially on the recommendation of Gail Marcus, the author of the excellent blog titled Nuke Power Talk. Gail wrote about Hofmeister’s book before it was released; obtaining and reading a copy has been on my “to do” list for over a year. I am a procrastinator.
Though Hofmeister and I have had our initial views about energy shaped by the same events – the Arab Oil Embargo of 1973, the decades long parade of politicians promising energy independence, and the rapid run up in natural gas and liquid petroleum prices in the period from 2005-2008 – we saw those events through very different lenses of education and personal experience. We run in different crowds and have different values; that have also had an influence on our perspective.
Hofmeister most likely started off in roughly the same middle income economic status as I did; he mentions that he fell in love with internal combustion engines while driving a tractor at age 11 on a farm owned by a landlord. My dad came from farming stock, but he was an engineer and middle manager by the time he started a family.
By the time of the Arab Oil Embargo, Hofmeister was in a management training program for a Fortune 500 corporation. He held a series of ever higher level jobs while climbing the corporate rank structure. Though he eventually wound up as a top executive at a multinational oil company, he had no technical training or experience – he was a political science major before becoming a business manager.
In contrast, I entered a leadership/management training program a few years after the 1973 Arab Oil Embargo when I accepted an appointment at the US Naval Academy and started plebe summer in 1977. I served in some tough sea duty assignments and made good progress up the promotion ladder until 1993, when I left active duty to start a company whose mission was to make a measurable improvement in the world’s energy supply.
Along the way, I have stood countless watches with smart people who could not afford to attend college, worried – as my business struggled to overcome decades worth of carefully instilled fear – how I could possibly afford to send my children to the level of college that their academic performance warranted, broken bread with high school dropouts who work with their hands in open air factories, and managed a small plastics factory where the electric power bill was about twice my salary. I also had the opportunity to have some input on the Navy’s fuel budget at the height of the 2008 peak in prices and during the period subsequent to the recession driven price reduction.
Like Hofmeister, I started off with a non-technical undergraduate degree, but early in my career, I obtained some of the best technical training available in the world by successfully navigating the Navy Nuclear Power training pipeline. While Hofmeister obtained first-hand experience as a power generator by operating a 50 hp reverse wired motor connected to an old water wheel that was part of an old mill property he and his wife restored, I obtained my power generation experience in several assignments with direct responsibility for an fission heated machine producing hundreds of times more power. Like Hofmeister’s water wheel, my ship’s atomic engine also produced no emissions. Based on Hofmeister’s description of his power plant, I am pretty sure it was comparable in size to the one that drove my submarine – when you include the required fuel sources.
Though Hofmeister includes some mildly positive comments about nuclear energy; he does not indicate any deep understanding of the technical superiority that fission has compared to fossil fuel combustion. He knows some things about nuclear energy; but he does not grasp their implications.
For example, he quotes William Tucker’s book titled “Terrestrial Energy” as pointing out that uranium fission releases 2 million times more energy per equivalent fuel unit than fossil fuel, but he does not understand to the core of his being that means that a ship powered by uranium can be designed so that it never needs to be refueled. He does not grasp intuitively that it means a handful of uranium contains as much energy as thirty tanker trucks full of oil.
He describes the visible and irritating air in China, but does not mention that the technically competent Chinese leaders have decided to build nuclear plants as fast as they can in order to eliminate coal generated pollution. He talks about how the US will never eliminate its need for coal generated electricity and also describes how France generates more than 80% of its electricity from nuclear. But he never puts the two facts together and investigates why France managed to achieve that success even though it was far behind the US when it started building. He does not point out that the US would have had an essentially coal-free power system by 2000 if it had just kept building nuclear plants.
Hofmeister recognizes that a failure to expand supply drives prices up. He acknowledges that oil company managers are often focused on their own short term desires for profits. He even recognizes that political decisions often put an artificial limit on the supply. However, he has blinders when it comes to putting together those disparate comments. I would have thought that a trained political scientist who has worked his way up through corporate ranks would recognize that business leaders are also political beings. They will who do whatever they can to use carefully selected words to alter political decisions to favor their own interests.
Hofmeister does not address the fact that a reasonable person with critical thinking skills might wonder if just maybe, the political decisions that resulted in restricting supply and drive up prices might have been encouraged by business leaders whose companies make more money when they sell their products a higher prices. He describes how painful it was to be forced to swear in before testifying to Congress about high prices, but he never mentions that those same high prices directly resulted in expanding his personal wealth.
I will give Hofmeister the benefit of the doubt. My friend Gail thinks highly of him. I will assume that he does not know that at least some oil industry leaders have known about the potential of nuclear energy to provide better and more efficient energy since at least 1956. That was when President Eisenhower sent a “wealthy Texas oil man” named Robert Anderson to explain the facts of life to King Saud and Prince Faisal as part of an effort to defuse the Suez crisis. The encounter is described on page 488 of Daniel Yergin’s classic work on the oil industry titled The Prize: The Epic Quest for Oil, Money, and Power.
Aside: I think it is one of the most enlightening passages in the 788 page book. End Aside.
The objective was to get the Saudis to apply pressure on Nasser to compromise. In Riyadh, Anderson warned King Saud and Prince Faisal, the Foreign Minister, that the United States had made great technical advances that would lead to sources of energy much cheaper and more efficient than oil, potentially rendering Saudi and all Middle Eastern petroleum reserves worthless. The United States might feel constrained to make this technology available to the Europeans if the canal were to be a tool of blackmail.
And what might this substitute be, asked King Saud.
“Nuclear energy,” replied Anderson.
Neither King Saud nor Prince Faisal, who had done some reading on nuclear power, seemed impressed, nor did they show any worry about the ability of Saudi oil to compete in world energy markets. They dismissed Anderson’s warning.
Like the Saudi’s in 1956, I think that Hofmeister might have read a few things about nuclear energy, but he has never seen first hand how a tiny amount of fuel can drive a powerful submarine through the water for decades without new fuel. He has never lived for months at a time sealed up with a power plant and then compared that clean air experience with trying to breathe in a polluted place like Beijing, China or Washington, DC on the third day of a temperature inversion.
Hofmeister may not realize that there is virtually no physical limit to the amount of nuclear heat that can be made available to the world’s energy market – he may not realize that political constraints on the magnitude of its contribution are most likely to have come from pressure applied by people with a vested interest in constraining supplies to drive prices higher. Remember, the business model in the oil and gas business is selling as much of the same old product as possible at a price just a fraction below that which will send the entire world into a recession.
I am pretty sure that King Saud and Prince Faisal were far more worried in 1956 about the looming expansion of nuclear energy than they let on. They knew from direct experience that increased supplies of energy sources led directly to reductions in energy prices and that lower energy prices were not good for their personal bottom lines. My guess is that the warning that Anderson pr
ovided resulted in a lot of behind the scenes planning and action implementation. Hofmeiser came into the business much later; all of the talking points about how expensive nuclear plants are and how the environmentalists have campaigned against them for so many years – just like they do all other forms of reliable energy – had already been written. My guess is that those talking points were in the documents provided to him as reading material to get up to speed on his new industry.
People who are put in charge of a technology-driven company without having risen through the ranks of that industry, have little time to develop more than a very shallow understanding of their new industry. Though executives are “quick studies,” the knowledge they obtain often comes from briefs provided by well meaning staffers. Having spent ten years providing digested knowledge to high ranking officers, I recognize the mile wide and inch deep nature of the knowledge that they accumulate in order to survive all of the pressures of their position.
On at least one topic Hofmeister and I agree – he is the founder of Citizens for Affordable Energy. American prosperity has been enabled by access to some incredibly abundant and easy to obtain energy fuels. We need laws and regulations that allow energy accessibility and seek to make clean energy the affordable kind. The difference between us is that I have seen the light – the Earth was endowed from its initial creation with all the energy fuel that mankind could ever desire.
We have access to a terrestrial version of the process that converts tiny quantities of mass to incredible quantities of energy. It is a process that has similarities with the one that allows the sun to provide heat and light from 93 million miles away for what is, for humans, an infinite period of time. Our earthly version of that power source is compact enough to be put into small machines that can be distributed to most of the places where their power is needed.
We do not have to depend on an unreliable, 93 million mile transmission path that is often shaded by our own planet. We do not have to depend on organic materials that took hundreds of millions of years to ripen into petroleum with the help of the pressures and temperatures of geologic processes. We do not have to depend on rapacious, multinational corporations that see increasing prices as their pathway to prosperity.
We also do not have to develop a complex industry to handle our gaseous waste products if we simply acknowledge and take advantage of the fact that we have been gifted with an energy source that does not produce any gaseous waste to process in the first place.