Introduction & the status quo of energy companies

A CDP report from 2017 shows that 100 companies are responsible for around 72 percent of all greenhouse gases ever emitted. Narrowing these figures even further down brings us to 25 companies that are accountable for 52 percent of all emissions with all of those being fossil fuel companies.[1]

While part of them (e.g., CNPC & Aramco) is under the control of pseudo-democratic states, this article is supposed to shed light on the bittersweet truth that even investor-owned oil companies like BP or Shell are operating in a system that is promoting the exploitation of resources at the expense of society.[2][3] The big difference between the two is that class one companies are not working within an economic framework, which is pretending to strive towards general prosperity, as advocates of free market capitalism, all the way back to Adam Smith, made us believe.[4]

To investigate the driving force behind such selfish behavior, we will look at it from two self-contained dimensions: One purely focused on free market rules and one that’s based on the science of strategic interactions to find an answer to the age-old question: Are human beings corrupting the system or is the system corrupting the people?

Behavior of oil companies in a capitalist environment

In one of his early works Keynes, stated that economics deals with “what is” instead of “what ought to be”, already hinting at the missing wisdom and sense of responsibility free markets are offering.[5]

But what are the driving forces for capitalistic and therefore oil companies’ actions? While textbooks make believe that it is all about finding that perfect balance between supply and demand, it is about ever-growing profits, as backed by consulting firms and oil experts alike.[6][7] This focal point can be seen as the general problem of the capitalist system but presents an even bigger dilemma within the business domain, which is responsible for the highest amount of greenhouse gases. The predicament is deriving from the fact that the most commercially successful business option is also the most detrimental to nature and society.[8]

Even with many economical experts[9][10] anticipating a shift towards renewable sources at the pivotal point when their cost of production is undercutting the production costs of fossil fuels, newest studies are showing that these expectations are wrong. With remarkable progress in terms of efficiency throughout the last couple of years, production of various renewables like photovoltaics and wind energy dropped below the manufacturing costs of classic oil and gas.[11] Still, we see all the “big five” oil companies investing heavily in the exploration, field development and production of fossil fuels.[12] BP, for example, invested in ten new major fossil production projects since the beginning of 2022.[13]

Reasons for the market failure

So why is the last hope for a market mechanism pushing oil companies onto a more sustainable path not working out as many experts were hoping? This is rooted in the misconception, that decision-making within the energy market is mostly based on relative technology costs. Yet, current studies are implying that key figures like the IRR, internal rates of return, as well the energy returned on energy invested, in short EROEI, are of utmost significance in energy companies’ strategic decision-making process. While the EROEI gap between renewables and fossil energies will narrow in favor of green energy with further technology improvements throughout the years, there is a significant difference between the calculated investment returns, which is heavily favoring oil and gas and will be hard to come by.[14][15]

The reason behind this is the marginal entry barriers in the renewable energy markets, stimulated by governmental incentives around the world. The resulting competition is pushing prices for green energy and therefore investment return rates to around five to six percent. On the contrary, new fossil energy ventures are basically non-existent because of the market power of the established oil companies, immense upstream investments, as well as the rather delicate property situation for profitable oil and gas fields, allowing fossil fuels to earn investment return rates of approximately 15 to 20 percent.[16][17] With these numbers in mind, it becomes quite obvious that free market mechanisms are failing to provide a feasible solution to mitigate greenhouse gases, making further investments in the destruction of the environment, to put it bluntly, completely reasonable from a capitalistic perspective. 

With science urging the consequences since the 1980s, there has barely been any action of the energy sector.[18] To explore possible solutions for this dilemma, we will try to extract the underlying patterns of strategic behavior from real-life occasion and look at it from a more theoretical perspective. 

Ending the “tragedy of commons”

As we discussed earlier the exploitation of free resources is just an unavoidable act in the capitalistic pursuit of profit. In a game theoretical context, this is called the “Tragedy of commons” based on Hardin’s essay of the same name.[19] The so-called tragedy derives from the circumstance that the gain through continued usage of limited resources will go to the user only while the associated costs are divided evenly by all the market players. Therefore, the usage will only stop once the resource is depleted. While being based on an abstract model, mathematical science was able to describe and predict economic behavior as well as the environmental dilemma, energy companies are confronted with, perfectly.[20][21]

Since the abstract dimension is able to define the underlying problems in rather simple terms, will it also be able to give answers on possible solutions in a similar fashion? In an approach of solving this dilemma, new studies are now presenting a socialist solution.[22] Both dimensions, empirical as well as theoretical, show a lack of cooperation and trust. This is an obvious consequence of actors being placed in an environment that is promoting selfish behavior. Therefore, in an attempt to solve this problem, it’s clear that there must be a change in the underlying behavioral ethos. Literature is pointing toward two decisive influencing factors. Those socioeconomic criteria are a fair distribution of the company’s income based on individual input and a set of property relations securing a hierarchy-free environment without social inequalities. In several working papers it was proven, that, when aligned correctly, a democratic environment is able to harmonize all agents’ interests towards an optimized common and therefore sustainable behavior.[23] For in-depth mathematical proof, I recommend Roemer’s advocacy for socialism.[24]

Empirical proof for sustainable cooperation

The question remaining is: Can those findings hold up in real-life frameworks? While this really specific scenario is hard to back up with historical findings, in the last few years there have been several experiments looking into the resource-saving decisions communities would make in a scenario where mutual gain for everyone involved was guaranteed and profit wasn’t the driving force for their economical behavior. In an extensive experiment conducted by the universities of Yale and Harvard, its shown, that communities would only use a necessary minimum when future generations would be punished in scenarios of over-exploitation. The prerequisites for these sustainable decisions according to the experiment were democratic voting on resource usage, equality between all actors involved as well as a fair distribution of reward or punishment.[25]

Similar findings were made in experiments like the British “Climate Assembly UK” or France’s “Convention Citoyenne pour le Climat”, where earlier theoretical discoveries were put into practical projects, giving a cross-section of the respective society the power to develop strategies to fight climate change. Results are showing that either convention is campaigning for an immediate cut in their own resource usage in favor of future generations, showing a level of self-sacrifice, we could never expect of a profit-focused entity.[26][27]

Conclusion

It should be obvious that the before-mentioned theoretical and practical constellations can’t be achieved within companies bound to capitalistic decision-making processes. In an environment, where managerial performance is based on short-term profit, driven by the necessity to satisfy shareholders year in, year out, it’s not feasible to accept immediate costs for a payback at an uncertain point in the future. The arguments made aren’t meant to present the socialist approach as some sort of magical bullet, that miraculously can solve every problem, yet they were supposed to underline the condition that endeavors, working in favor of humanity, need a more direct democratic chain of command along with property mechanisms that ensure a fair involvement of a wide array of society, in short, public ownership. Therefore, making it possible to align the most sustainable decision and the economically most reasonable choice. Proving that communities are willing to sacrifice their own resource usage in order to ensure future benefits for coming generations, giving strong argument against the generally self-centered homo oeconomicus[28] view.

Even though those conclusions about human behavior are universally applicable, there is a special emphasis on implementing them in energy companies. This derives from the immense responsibility energy companies are holding in a crisis, which is getting worse year after year. It seems more than naïve to trust a market, that is failing all of us wherever it can, to bring a solution for the biggest problem humanity has ever faced. As new studies were showing, not even the eagerly awaited breakthroughs in sustainable energy efficiency brought the hoped-for change because multinational corporates are just sitting too comfortable with the (market) power, that fossil fuels are providing, even when the world around them is collapsing. So while the pledge for public ownership might seem extreme to some, it's mirroring the drastic times, we are living in, as well as the bold decisions we need RIGHT NOW!

References

[1] Griffin, Dr. Paul. 2017. ‘CDP Carbon Majors Report 2017’. The Carbon Majors Database. 

[2] Griffin, Dr. Paul. 2017. ‘CDP Carbon Majors Report 2017’. The Carbon Majors Database.

[3] Ross, Michael L. 2015. ‘What Have We Learned about the Resource Curse?’. Annual Review of Political Science Vol. 18: 239-259.

[4] Smith, Adam. 2012 (original: 1776). ‘Wealth of Nations’. Wordsworth Classics of World Literature. 

[5] Friedman, Milton. 1966. ‘The Methodology of Positive Economics’. Essays in Positive Economics: 3-16.

[6] Chronis, Amy, Noemie Tilghman, Kate Hardin, Anshu Mittal. 2021. ‘Portfolio Transformation in Oil and Gas’. Deloitte Insights. https://www2.deloitte.com/us/en/insights/industry/oil-and-gas/portfolio-optimization-oil-gas-chemicals.html .

[7] Ghouri, Dr. Salman. 2017. ‘The Single Most Important KPI For Oil & Gas Companies’. https://oilprice.com/Energy/Crude-Oil/The-Single-Most-Important-KPI-For-Oil-Gas-Companies.html .

[8] Van den Hove, Sybille, Marc Le Menestrel, Henri-Claude de Bettignies. 2002. ‘The oil industry and climate change: strategies and ethical dilemmas’. Climate Policy 2 (2002): 3-18.

[9] Wolf, Martin. 2020. ‘Last chance for climate transition’. Financial Times, February 18th, 2020, https://www.ft.com/content/3090b1fe-51a6-11ea-8841-482eed0038b1 .

[10] Yang, Ying, Pietro Elia Campana, Jinyue Yan. 2020. ‘Potential of unsubsidized distributed solar PV to replace coal-fired power plants, and profits classification in Chinese cities’. Renewable and Sustainable Energy Reviews, Volume 131.

[11] Osman, Ahmed I., Lin Chen, Mingyu Yang, Msigwa Goodluck, Mohamed Farghali, Samer Fawzy, David W. Rooney, Pow-Seng Yap. 2022. ‘Cost, environmental impact, and resilience of renewable energy under a changing climate: a review’. Environmental Chemistry Letters (2023) 21: 741–764.

[12] Li, Mei, Gregory Trencher, Jusen Asuka. 2022. ‘The clean energy claims of BP, Chevron, ExxonMobil and Shell: A mismatch between discourse, actions and investments’. PLoS ONE 17(2).

[13] Christophers, Brett. 2021. ‘Big oil companies are driven by profit – they won’t turn green by themselves’. The Guardian; May 25th, 2021. https://www.theguardian.com/commentisfree/2021/may/25/big-oil-companies-profit-green-renewables-fossil-fuels-net-zero .

[14] Diesendorf, Mark, Thomas Wiedmann. 2020. ‘Implications of Trends in Energy Return on Energy Invested (EROI) for Transitioning to Renewable Electricity’. Ecological Economics Volume 176.

[15] Christophers, Brett. 2021(II). ‘Fosilised Capital: Price and Profit in the Energy Transition’. New Political Economy: 1-14.

[16] Christophers, Brett. 2021(II). ‘Fosilised Capital: Price and Profit in the Energy Transition’. New Political Economy: 1-14.

[17] Butler, Nick. 2019. ‘The private sector alone will not deliver the energy transition’; Financial Times October 28th, 2019. https://www.ft.com/content/1c4f641a-f58f-11e9-b018-3ef8794b17c6 .

[18] Dunlap, Riley E., Aaron M. McCright. 2011. ‘Organized climate Change Denial’. The Oxford Handbook of Climate Change and Society: 144-145.

[19] Hardin, Garrett. 1968. ‘The tragedy of the commons’; Science 1968, 162: 1243–1248.

[20] Du, Jinming, Bin Wu, Long Wang. 2016. ‘Aspiration dynamics and the sustainability of resources in the public goods dilemma’. Physics Letters A 2016.

[21] Hardin, Garrett. 1968. ‘The tragedy of the commons’; Science 1968, 162: 1243–1248.

[22] Roemer, John E. 2022. ‘What is socialism today? Conceptions of a cooperative economy’. International Economic Review: 1-28. 

[23] Roemer, John E. 2022. ‘What is socialism today? Conceptions of a cooperative economy’. International Economic Review: 1-28.

[24] Roemer, John E. 2019. ‘A theory of cooperation in games with an application to market socialism’. Review of Social Economy 77: 1-28. 

[25] Hathaway, Bill. 2014. ‘For the next generation: Democracy ensures we don’t take it all with us’. Yale Education June 25th, 2014. https://news.yale.edu/2014/06/25/next-generation-democracy-ensures-we-don-t-take-it-all-us .

[26] Willis, Rebecca, Nicole Curato, Graham Smith. 2022. ‘Deliberative democracy and the climate crises’. Wiley interdisciplinary Reviews: Climate Change, 13(2).

[27] Cherry, Catherine, Stuart Capstick, Christina Demski, Claire Mellier, Lucy Stone, Caroline Verfuerth. 2021. ‘Citizens’ climate assemblies: Understanding public deliberation for climate policy’. Cardiff University Project Report.

[28] Kirchgässner, Gebhard. 2014. ‘The role of homo oeconomicus in the political economy of James Buchanan’. Const Polit Econ 25: 2-17.

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