Thursday, April 20, 2006

Public Potshots

The oil and auto industries have generated lots of headlines in the last several years, but rarely for taking public jabs at each other. Yet that's exactly what is happening now, as described in this article from the Detroit News. A Chrysler executive took oil companies to task for failing to invest in alternative energy, after an ExxonMobil ad suggested that much more could be done to improve the efficiency of automobiles. It's worth spending a few minutes looking at the claims of each side.

Although I can see why it wouldn't have pleased the US auto makers, the Exxon ad seems less inflammatory that the response it provoked. It states--correctly, I believe--that while automobile engine technology has improved tremendously since the first oil crisis, few of those gains have translated into better fuel efficiency. They single out increasing vehicle weight as the key culprit, but neglect to mention the competition to provide consumers with dramatically improved performance in the form of horsepower plays a large role, too. The commentary also ignores the fact that, while US automakers have benefited tremendously from the SUV trend, consumer choice has been driving this trend.

Chrysler VP Jason Vines responded by attacking high oil executive salaries, share buybacks, and tardy investment in new production, both conventional and alternative. There is something to these arguments, but he, too, includes factors either beyond the industry's control or generally pervasive in US business. Retiring Exxon CEO Lee Raymond's compensation has made headlines, and there's no question it is exorbitant. At least he received it for guiding his company to unparalleled success, in contrast to the lavish pay many CEOs have received for riding their firms to ruin. The salaries of other major oil company CEOs seem pretty much in line with those of comparably-sized businesses in other sectors, which means they are at very high multiples of the salaries of average workers. This is a societal concern, not an energy issue, per se.

As to reinvestment, the major oil companies were late realizing the magnitude of China's demand growth and the impact of chronic supply disruptions in West Africa and the Middle East. They were also probably overly influenced by painful memories of the last down-cycle in the late 1990s. I believe they have generally redressed these issues with expanded investment budgets. The larger question is whether they have sufficient access to the world-class opportunities necessary to shift the supply/demand balance back in favor of lower, more sustainable prices. The jury is out.

Alternative energy is another area in which the industry has been slow to invest, though several firms have put substantial sums into this area, going back to the 1980s and 1990s. But if I were to criticize them for shyness concerning alternative energy, I would hardly focus on ethanol, which until quite recently was widely regarded as having a negative energy balance and providing more assistance to agricultural interests than to consumers or energy security. The auto industry is falling in love with ethanol as a way to hedge its environmental exposure, but the fuel cannot deliver on its supporters' claims until the next generation of biotech-based production processes become mainstream.

Our energy problems will persist as long as we focus exclusively on either supply- or demand-based solutions, rather than combinations of these strategies. As a result, we will require full cooperation between the oil and auto sectors, not suspicion and confrontation. Carmakers need to design efficient vehicles that consumers will buy in large numbers, and the energy industry needs to help by optimizing fuels to the new engine technologies, and investing in the necessary infrastructure. Resorting to a public hay-throwing contest will not advance this agenda.

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