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Book Review: Counsel for An Industry Under Fire
Monday, June 28, 2010@ 5:10 PM
Author: admin

This book review appears originally on the Financial Times website FT.com.  Please find the original at:

http://www.ft.com/cms/s/2/a79fd5c0-821e-11df-938f-00144feabdc0.html

Review by Sheila McNulty

Published: June 28 2010 01:44 | Last updated: June 28 2010 01:44

Why We Hate the Oil Companies: Straight Talk from an Energy Insider, by John Hofmeister, Palgrave Macmillan £17.99, $27

When John Hofmeister wrote this book, the former president of Royal Dutch Shell’s US business could have had no idea it would be published amid an oil spill gushing into the Gulf of Mexico. The title he chose could not have been more apt.

In an annual favourability poll by Gallup covering the 24 largest industries in the US, he notes, the industry has for the past seven years been rated 24 out of 24. That alone indicated a ready audience for Why We Hate the Oil Companies; after BP’s disaster it will be wider still.

Hofmeister begins with an anecdote about a meeting in 2007 with Microsoft executives about its plans to build at least six new information centres across the north-west. “We need new electricity equivalent to the output of a 350 megawatt power plant to support them,” Hofmeister recalls being told. “But we don’t know where we’re going to get that much new electricity in Washington or Oregon. Hydropower has peaked, there’s not enough natural gas, coal-burning plants cannot be built here for now, wind is too erratic and no nuclear plants are on the horizon in the time frame of our business growth. Do you have any suggestions about where electricity is going to come from in the future?’’

Microsoft would come up short. Hofmeister writes: “What was clear to me after this meeting was this: in the digital age, we are more power-hungry than ever. Our economic growth depends more than ever on electrons.’’

And yet, he argues, regulators continue to restrict access and limit production that could fuel the global economy. It is a misguided approach: all fuels will be needed and the world’s oil deposits could be relied upon for longer if used more cleanly and efficiently. But the industry has failed to engage and educate to make that case. If “Big Oil” encounters an administration that is unfavourable, it merely retreats to its bunker to wait for a friendlier one.

Hofmeister underlines the extent of public disdain by recounting a visit in 2006 to Pennsylvania, where he dropped in without warning on Shell stations. One manager was rude before finding out who Mr Hofmeister was and grew more so when the latter identified himself, saying: “You disgust me. You make billions, and I squeeze nickels to keep up with my bills.’’ The then Shell Oil president tried to engage, but the manager did not soften. “When the person wearing your logo sees your company as the problem,” Hofmeister reflects, “you know you are in trouble.’’

The issue, he says, is that oil companies do not see themselves as consumer products companies in the mould of Apple, which work to educate and build relationships. They see themselves as wholesale producers of high-volume products. The retail stations are not money makers and in many cases have been outsourced if not sold altogether. But they are where the public’s disdain for the industry is built – on high prices at the pump, first and foremost, but also on dirty restrooms and rude staff. “By the time a tanker’s load of gasoline is delivered to the retail station, the oil executive has moved on to think about the gasoline that will be delivered 10 to 25 years in the future.’’

These executives do not focus on the public, which, therefore, does not understand that while the raw profit numbers for oil companies are huge, earnings, measured in net income as a percentage of sales, are fairly modest, in the range of 6-8 per cent. This is a high-cost business; these numbers are fairly typical for manufacturing companies and well below the earnings of pharmaceutical, telecommunications and beverage companies.

Then there is the threat of disaster. “When the industry makes operational mistakes, they can be spectacular: refinery explosions, well blowouts, shipwrecks and oil spills. Equally spectacular is the industry’s poor handling of such incidents, to the point that they live on as case studies of what not to do in a crisis.’’

His solution? To create a Federal Energy Resources System, modelled on the Federal Reserve, to manage America’s energy and its energy-related environmental footprint. A group of governors with 14-year terms, he writes, could have the authority to make decisions that have been sorely needed for decades.

Would such a body have prevented the disaster in the gulf? Perhaps not, but it might well have seen the need for better regulation and accountability as the industry moved deeper and further offshore in search of new resources. Such oversight would certainly not hurt a regulatory system that has been rudderless for years.

The writer is US energy correspondent

Copyright The Financial Times Limited 2010.

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