IR 892 Internship Report
The Political Economy of Petroleum: The Role of Government Policy
Joakim Hellberg
San Francisco State University
Spring 2013
Abstract
The scientific consensus view on the reality of anthropogenic climate change science has not been matched by
political action. United Nations-led climate talks are not showing any signs of putting the world on a 2C track and
investments in global petroleum production are inconsistent with this ‘safe level’ of temperature increase. The
United States has been called out as a spoiler of the climate talks and significant parts of new investments in new
fossil fuel production is located in North America. This report places government policy at center stage to explain
why the U.S. is not acting on climate change. It employs two theoretical models, or worldviews, to frame the ‘debate’
on climate change and facilitate understanding of the power dynamics that has led to a large and politically powerful
oil and gas industry. Two petroleum billionaires, Charles and David Koch, are especially active in their attempts to
shape the trajectory of government policy, directly and indirectly, and are therefore given special attention. The
report points out three critical elements of the political economy of petroleum: 1) That the oil and gas industry has
been profitable over time; 2) that government policy has been crucial to industry profits through direct and indirect
policy measures and; 3) that the industry has been especially active in influencing government policy and regulation.
It concludes that opposition to climate action is rooted in a mix if economic interests and deep ideological
convictions about the role of government in the economy.
1
2
3
INTRODUCTION ................................................................................................................... 1
1.1
THE ISSUE: CLIMATE CHANGE ........................................................................................... 1
1.2
CLIMATE CHANGE AND THE UNITED STATES .................................................................... 2
1.3
SUMMARY ........................................................................................................................... 5
THEORY AND METHODOLOGY ...................................................................................... 6
2.1
HYPOTHESIS ........................................................................................................................ 6
2.2
RESEARCH QUESTIONS ....................................................................................................... 6
2.3
THEORY............................................................................................................................... 6
2.3.1
The Market Model World View .................................................................................... 7
2.3.2
The Market Model Applied to American Politics ......................................................... 8
2.3.3
The Organizational Model ......................................................................................... 10
2.3.4
Juxtaposing Models .................................................................................................... 11
2.3.5
Coalitions of Organized Interest ................................................................................ 12
2.4
METHODOLOGY ................................................................................................................ 14
2.5
SUMMARY ......................................................................................................................... 16
CASE STUDY........................................................................................................................ 18
3.1
3.1.1
The Financial Performance of Major Oil and Gas Companies ................................. 18
3.1.2
The Income Base of Koch Industries .......................................................................... 22
3.1.3
Summary ..................................................................................................................... 24
3.2
GOVERNMENT POLICY, ACTIVE DIRECT SUBSIDIES TO PETROLEUM ............................... 24
3.3
GOVERNMENT POLICY: ACTIVE INDIRECT SUBSIDIES TO PETROLEUM............................ 33
3.4
ACTIONS TO AFFECT GOVERNMENT POLICY .................................................................... 35
3.4.1
Direct Influence on Policy Making............................................................................. 35
3.4.2
Indirect Means of Affecting Government Policy ........................................................ 39
3.4.3
The Positions of Supermajor Sponsored Organizations............................................. 47
3.4.4
The Positions of Koch Sponsored Organizations ....................................................... 48
3.5
4
THE PROFITABILITY OF THE OIL AND GAS INDUSTRY ...................................................... 18
SUMMARY ......................................................................................................................... 49
CONCLUSION ...................................................................................................................... 51
4.1
DISCUSSION ...................................................................................................................... 51
4.1.1
Strategic Implications................................................................................................. 51
1
Introduction
During the summer and fall of 2012, I have been engaged in the culminating experience at the International Forum
on Globalization1 (IFG), San Francisco, for my Master’s degree in International Relations. My work at IFG focused
around the issue of climate change and the actors in the U.S. who are opposing policy measures aimed at reducing
greenhouse gas emissions. In particular, this work centered on two multi-billionaires brothers: Charles and David
Koch, and resulted in a report released at the UN climate change conference in Doha, Qatar. The report was aimed at
stirring up a debate and draw attention to how extremely wealthy individuals wield disproportional influence over
the course of U.S. environmental policy. This internship report provides a more theoretical and comprehensive
account of U.S. environmental politics and places the work of the Forum in a broader context.
1.1
The Issue: Climate Change
Climate change is first and foremost a political problem. The scientific consensus on the human causes of a
changing climate is well established but political solutions remain distant. The Intergovernmental Panel on Climate
Change (IPCC) will begin presenting its fifth Assessment Report (AR5) in September of 2013, but a leaked draft has
already given indications of sharper formulations regarding the human causes of climate change, leaving virtually no
room for alternative explanations. The leaked report states:
"There is consistent evidence from observations of a net energy uptake of the earth system due to an
imbalance in the energy budget. It is virtually certain that this is caused by human activities, primarily
by the increase in CO2 concentrations. There is very high confidence that natural forcing contributes
only a small fraction to this imbalance" (Hickman, 2012).
The statement is to be contrasted with the previous 2007 report:
“Most of the observed increase in global average temperatures since the mid-20th century is very
likely due to the observed increase in anthropogenic greenhouse gas concentrations” (Pachauri &
Reisinger, 2007).
The terminology of estimates in the IPCC reports refers to a set standard of confidence intervals in which very likely
refers to a probability of occurrence > 90% and virtually certain indicates a level of confidence > 99% (Pachauri &
Reisinger, 2007).
Even devout skeptics are being converted. The Berkeley Earth Surface Temperature Project, led by former
climate change skeptic Dr. Richard A. Muller and funded in part by the Charles G. Koch Foundation, confirmed
increasing temperatures, debunked the solar variability theory, and could find no other explanation to global
warming better than increasing levels of carbon dioxide in the atmosphere (Muller, 2012). For climate change
skeptics this means that the minimal opening for reasonable doubt that existed is now closed.
1
Hereinafter, ‘the Forum’ or IFG.
1
Global business-oriented institutions have also recently published reports describing the impacts of a
warming world and the implications of using remaining global fossil-fuel resources. The World Bank (WB) raised
the alarm before last year’s climate change conference in Doha (COP 18), by drawing up a scenario with serious
effects of a moderate 4-degree Celsius warming (World Bank, 2012). The International Energy Agency (IEA) came
out at the same time with the conclusion that two-thirds of remaining fossil fuel resources need to stay in the ground
for the planet to stay below 2°C warming (International Energy Agency, 2012, p. 3).
Yet, there has been a boom in U.S. oil production and investment worldwide, which may expand world oil
production capacity significantly by 2020. The additional capacity would come not only from conventional, but also
from more polluting unconventional sources such as Canadian tar sands and U.S. shale oils making up 28.3% of
projected growth (Maugeri, 2012). Contrasting this growing supply scenario with the IEA’s 2 degree Celsius energy
demand forecast, Oil Change International suggests that 79% of planned capacity is above the ‘safe’ 2 degree
Celsius global temperature increase limit (Kretzmann, Stockman, & Turnbull, 2012). This calculation is consistent
with a 2009 study estimating the warming effect of an additional 500 billion tons of carbon emissions, bringing the
number of total anthropogenic emissions to 1 trillion tons, to 1.3-3.9 degrees Celsius (M. R. Allen et al., 2009, p.
1163).
The international negotiations on climate change are not showing any signs of putting the world on track
towards avoiding a significant rise in global temperatures either. The U.S. is considered by many to be one of the
largest stumbling blocks to progress on this issue due to the scale of the U.S. economy, the volume of its greenhouse
gas emissions, and its power position in international politics. During the 17th Conference of the Parties (COP) in
Durban, South Africa the U.S. was called out as a spoiler of progress in the negotiations a by a number of large
environmental groups, activists and elected officials (Goldenberg, 2011). These accusations were expressed anew in
late 2012 at COP 18 in Doha, Qatar where Special Envoy Todd Stern and Chief Negotiator Jonathan Pershing kept a
low media profile (Goodman, 2012).
1.2
Climate Change and The United States
Given the major part the U.S. plays in global climate change due to its high emissions, no significant international
effort to curb warming could be effective without American participation (Rabe, 2011, p. 495). For a long time the
U.S. was a leader in domestic environmental legislation as well as in international environmental politics, but in the
new millennium it has lost much of its momentum and fallen behind other states and the EU (Harris, 2009). This
negative trend goes back as far as the 1970s and 1980s (Falkner, 2005; Kelemen & Vogel, 2009). As the second
largest emitter of greenhouse gases (GHGs); with the highest per capita emissions of GHGs; and the largest
economy in the world; the U.S. has the financial and technological capability to mitigate climate change. If it was to
lead - it is likely that other countries would follow (Harris, 2009, p. 966).
Since many landmark environmental laws were passed in the 1970’s, U.S. environmental ambitions has
come and gone with the shift of presidents. While the Reagan and GW Bush administrations were the greatest
opponents of environmental legislation and international binging treaties, Clinton’s and Gore’s ambition to have the
Kyoto protocol ratified in the Senate was stymied by the Byrd-Hagel Resolution (Harris 2009).
2
After Congress failed to ratify the Kyoto Protocol signed by the Clinton administration in 1998 and George
W. Bush took office, climate policy in the U.S. shifted to the state level. During this period of state domination of
climate policy, renewable portfolio standards and regional cap-and-trade programs were developed in the absence of
federal leadership. Following the 2007 Supreme Court ruling in Massachusetts v. EPA, a ruling compelling federal
regulation of greenhouse gases under the Clean Air Act (CAA), climate policy transitioned into a period of
‘contested federalism‘ where the executive branch took back the lead over states amid legal and congressional
challenges (Rabe, 2011, pp. 499–501).
The CAA...“is arguably the most successful piece of environmental legislation ever drafted”
(Environmental law and policy, 2010, p. 465). It is estimated that the first 20 years of the CAA produced $21.7
trillion in benefits over costs (US EPA office of Air and Radiation, n.d.) and that the 1990 CAA amendments will
produce net benefits close to 2 trillion in 2020, as it already has accumulated over 1.2 trillion in benefits as of 2010
(US EPA office of Air and Radiation, 2011). In the above-mentioned ruling of Massachusetts v. EPA, the Supreme
Court found that the EPA was bound by the CAA to regulate ...”any air pollutant...which may reasonably be
anticipated to endanger public health and welfare”... (Plater et al., 2010, p.482.).
While subsequent EPA regulation under Obama has been challenged in courts, the Administration’s
climate policies were backed by the D.C. Circuit Court of Appeals in its June 2012 ruling in the case of Coalition for
Responsible Regulations v. EPA upholding all of the EPA’s new regulation on greenhouse gases and the legal
authority of the Agency over the field (Martinson, 2012). Despite the victory in the D.C. Circuit there is no reason to
believe that Congressional attempts to cripple the EPA in its greenhouse gas regulation attempts will cease as
industry-sponsored Republicans continue to use tactics of climate change denial and arguments of job-loss and
rising energy prices (O’Konski, 2012).
The Clean Air Act along with other environmental laws and their derivate regulations are under attack from
all directions. The Obama Administration has been forced to slow down on the rolling out of new regulations,
parking 25 of them in the review stage in 2012. Despite broad support for the EPA from the American people
attacks on environmental laws in Congress continue (J. Allen & Martinson, 2012).
Perceptions among the American public concerning the threat to them selves, their families, and
community from global warming have risen significantly since 2008 and a majority is convinced that global
warming is human caused (Leiserowitz, Maibach, Roser-Renouf, Feinberg, & Howe, 2012). The public support for
Environmental Protection Agency regulation of carbon dioxide is very strong with 77% of voters supporting stricter
Clean Air Act limits. 64% also believes that Congress should not stop the EPA from regulating carbon dioxide and
69% prefer EPA scientists to set air pollution standards over Congress. On top of the high approval for EPA action,
most voters believe that more jobs will be created as a result of updated CAA standards (Bocian, Baumann,
McHenry, & Judy, 2011).
Obama has tried to re-build the battered regulatory apparatus of the state by appointing leaders loyal to the
notion of scientific administration, proposals to increase agencies’ funding (including the EPA), and by shifting
cost-benefit analysis away from the conservative cost-heavy bias (Judis, 2010). Obama’s initial action was seen in
3
appointments of prominent names to lead the work on the environment, energy, and climate change, and initial
policy changes (Bomberg & Super, 2009).
While Obama is pushing a top-down federal regulatory effort to reduce greenhouse gas emissions, some
analysts see progress on climate change is to be seen as an entirely bottom-up process where policies are
implemented on the federal level only after states have already taken equivalent action (c.f. Selin & VanDeveer,
2007). Due to the limited scope and uncertain future of federal regulation, it is likely that future climate-policy
developments will be predominately state and regionally centered (Rabe 2011).
A plot of the participation trend of the U.S. in major environmental agreements2 reveals a steadily declining
ratification trend since the early 1990s. The divergence between signature and ratifications during the 1990s
indicates the division between the Clinton/Gore administration and Congress. If a global treaty on climate change is
assumed to be a necessary component of a slowdown of greenhouse gas emissions into our environment, and the
U.S. would need to be a key party to such an agreement, this data on participation does not show a particularly
promising trend.
FIGURE 1 U.S. participation in major environmental agreements
No. of Treaties Signed/Ratified
3
2.5
2
1.5
1
0.5
0
1970
1975
1980
1985
1990
Signed (5-year moving average)
1995
2000
2005
2010
Ratified (5-year moving average)
Data source: Mitchell, International Environmental Agreements Database Project, (Version 2012.1). n = 53
2
A major environmental agreement is defined as an agreement signed by at least 25% of U.N. member states at the time.
‘Environmental’ as classified by Mitchell, R. B. (n.d.). International Environmental Agreements (IEAs) Defined. International
Environmental Agreements (IEA) Database Project. Retrieved December 18, 2012, from
http://iea.uoregon.edu/page.php?query=static&file=definitions.htm
4
1.3
Summary
The scientific consensus regarding anthropogenic climate change has long been settled. The vast majority of
remaining fossil fuel resources need to be kept underground for global temperatures to stabilize on average
somewhere around 2C. The majority of the U.S. public has accepted that humans indeed are responsible for
warming the planet. There is a federal legal and regulatory framework in place with the power to limit greenhouse
gas emissions. The administrating agency, the EPA enjoys a high level of support and trust from the public to
implement the law.
Yet, its regulations are being challenged in court and by Congress. The very basis of science and climate
change is being questioned. Oil and gas investments worldwide and in North America are inconsistent with a global
2C warming limit and a substantial international agreement on greenhouse gas emission reductions is nowhere in
sight. Investment in oil and gas production is especially telling: Investors do not see future restrictions on oil and gas
production and/or use as a risk large enough to outweigh the potential benefits. Unless these actors are insensitive to
the trajectory of American politics, their choices indicate a business as usual scenario for oil and gas production.
The question is: why? Why is there such a discrepancy between what needs to be done and what is being
done? Why is so little being achieved despite public support? Why has the U.S. shifted from being a global leader of
environmental policy to a lackluster? What forces are at work behind scenes?
U.S. financial policy and regulation, or the weakness of such policies and regulations, proved to be a major
factor in the 2008 financial crises that set of a global recession. The financial crisis is an example of just how much
the U.S. matters to the world economy, and more importantly, that something has gone awry with a political system
that allows for such crises to occur. In a similar vein, U.S. climate policy and opposition to stronger regulation can
keep fueling global warming and set off irreversible changes in the climate system. As such a scenario seems
plausible, it is important to understand the political dynamics that are pushing us in this dangerous direction.
Guided by the flow of revenue from oil and gas production, this report is led towards the political activities
of the beneficiaries of continued and expanded use of fossil resources. Over the last decade, the so-called
‘supermajor’ oil companies have seen their profits go through the roof and a private conglomerate with a petroleum
income-base has generated extreme wealth for its owners. Understanding the dynamics connecting these extreme
concentrations of wealth and power to climate policy is a crucial step towards achieving policy change.
A comprehensive understanding of U.S. environmental policy and the role of extreme wealth in shaping its
course requires asking questions about broader changes in American society and the global economy. That U.S.
environmental policy is intricately connected to other policy areas and sources of political conflict in American
society is a truism. To focus this report, I will concentrate on the role of government policy and the ways a particular
segment of the fossil-fuel industry have leveraged their wealth to influence government policy.
2
2.1
Theory and Methodology
Hypothesis
Government policy has been crucial for building and sustaining oil and gas industry profits, and hence, the wealth of
Charles and David Koch.
2.2
Research Questions
1) Have government polices built and supported oil and gas industry profits?
a)
For the major industry actors?
b) For Koch Industries?
2) How does the oil and gas industry use their profits to influence government policy?
a)
The major industry actors?
b) Charles and David Koch and Koch Industries in particular?
2.3
Theory
To conceptualize and describe societal dynamics I employ an organizational model based on Miller (2008, Chapters
2–5) with a view of power as embodied in and wielded by organizations, as opposed to a market model with an
atomistic view of power. To capture the characteristics of the actors and coalitions of actors in the organization
model I will draw on Banerjee (2010) and Bishler and Nitzan (2004). From the viewpoint of organizational models,
politics is a struggle between organized interest groups or dominant factions. From the viewpoint of market models,
political power resides with individual voters. The self-interested utility-maximizing individual is the departure
point for this perspective.
The central assumption in this report is that government is the key institution in society. Government
policies and regulations determine income distribution not just through taxes and transfers but also through
regulating market income. Market income distribution is not beyond the reach of government - quite the opposite –
as government structure markets (Hacker & Pierson, 2010, pp. 169–170). State regulation of the economy is not
neutral but biased. It has different impact on …”class fractions, institutions and their competencies”. Conflicting
demands on the state for regulatory changes arise and are unequally granted to the favor of the dominant coalition
whose competencies are privileged (Banerjee, 2010, p. 5).
However, this view of government as the controller of markets and distributor of rewards is not always
acknowledged and not consistent with a conception of markets as an apolitical force distributing rewards in a natural
way. The view of markets as a natural and apolitical distributor of income is central to the ideological position and
rhetoric of the organizational actors who benefit most from current market arrangements. For the purpose of
enabling identification of this ideological position later in this report, I will outline a pure market model in this
section. To build a theoretical framework for capturing the power structures and actors behind the promotion of a
market-based understanding of political economy, I will outline an organizational model.
Raymond Miller’s account of three different world views (2008) provide a useful vantage point for beginning to
understand and describe the broader political and economic dynamics resulting in today’s U.S. environmental policy
6
position. In short, Miller’s three models (world views), the multi-centric organizational model, the market model,
and the Marxist model explains events through, respectively: power struggles; shifts in supply and demand; and
through change in material conditions. For the purpose of this report, I will concentrate on the first two models as
they capture the ideological and rhetorical base of the political right, including the petroleum industry and the Koch
brothers, as well as the dynamic of power struggles between organizations and coalitions of organizations.
Table 1. Miller’s World Views
School of thought
Central actors
Decision-making
Value theory
Ancestors
Free Market (neoclassical
Individuals
Markets
Subjective
Adam Smith
preference
economics)
Multi-centric organizational
Organizations
Power-negotiations
Cost of production
David
Ricardo
Classical Marxism
Classes
Capitalist mode of
Abstract labor
Karl Marx
production
Source: Adopted from table 8.1: Miller, R. C. (2008). International Political Economy: Contrasting World Views.
London ; New York: Routledge.
2.3.1
The Market Model World View
The Market Model as delineated by Miller (2008, pp. 15–37) is a model that includes free-market ideology, the
doctrine of neoliberalism and neoclassical economics. In the ‘purely competitive market model,’ described by Miller,
the central actors are free, rational utility-maximizing individuals. The subjective preferences of individuals form the
basis for decision-making, and the aggregated decisions of individuals translate into the market interactions of
supply and demand. Because the market is seen as the central mechanism through which individuals’ subjective
preferences are negotiated, it is viewed as natural and apolitical. Therefore, politics and economics are separate
dimensions due to the central role of the market as decision-maker.
In the Market Model, the idea that individuals should be free to make their own decisions without
government interference is dominant. The role of government should therefore be restricted too supporting the
functioning of the market by: 1) establishing, interpreting, and enforcing rules; 2) providing essential infrastructure;
and 3) providing (physical) security for its citizens. The critical assumptions behind the superiority of the market as
an independent and apolitical exchange mechanism are: unrestricted factor mobility: i.e. capital and labor can and
will move without restrictions in order to maximize returns; no restrictions on setting up businesses, no geographical
obstacles, no copyright, no intellectual property rights; and he value of everything can be captured in a price and
traded. Market interactions take place under conditions of perfect competition and perfect information, meaning that
no actor has market power (cannot affect prices by its actions alone).
Critical assumptions about the individual are: that individuals are rational towards the end of maximizing
material interests (in a narrow sense); the material appetite of individuals is insatiable: more is better. This results in
7
individuals acting as Adam Smith’s classical “economic man” subordinating all non-material objectives to material
maximization.
The most striking feature of the Market Model worldview is that it is devoid of any power analysis. As
consumers are sovereign entities and no actor has market power, there is no need for further elaboration on power
relations.
2.3.2
The Market Model Applied to American Politics
There are two main categories of arguments being levied against environmental protection and action on climate
change. Neither of the two do necessarily have anything to do with opposition the preservation of our natural
environment, but rather with deeper ideological beliefs about the role of government.
“Conservative don’t like blaming the market; if there is a problem with the economy, in their hearts
they know the true cause must be government” (Stiglitz, 2010, p. 10).
2.3.2.1
General Political Polarization
A widely used measure of political polarization in Congress developed by political scientists Keith Poole and
Howard Rosenthal discerns two main dimensions of voting from the distribution of roll-call votes. The first
dimension is a traditional liberal-conservative scale reflecting the...”division on the fundamental role of government
in the economy” (Poole, 2012). The second dimension separates legislators by geographic region, mostly over issues
of race and civil rights. After the civil-rights era, race-related issues have been subsumed in the first-dimension and
are now questions of redistribution. Today, the first dimension, the liberal-conservative scale, can capture most
voting as regional differences along the second dimension has been all but eradicated (VoteView.com, 2013). This
alignment of voting patterns leads to the definition of polarization as …“a separation of politics into liberal and
conservative camps”, and with a vanishing share of moderates, conservatives have become close to synonymous
with Republicans and liberals with Democrats (McCarty, Poole, & Rosenthal, 2006, p. 3). The parties have become
more ideologically homogenous and the distance between party means has increased with time. There is no longer
overlap between conservative Democrats or liberal Republicans (McCarty et al., 2006, pp. 3, 23–24). Two
movements, beginning in the 1970s, are responsible for the increased polarization of political parties: A general drift
of Republicans to the right and the party shift of Southern Democrats to the GOP (McCarty et al., 2006).
8
FIGURE 2. Party polarization, 77th to 112th Congresses
Distance between party means - first dimension
1.1
1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
1940
1950
1960
1970
1980
House distance
1990
2000
2010
Senate distance
Source: VoteView.com. (2013, January 18). House/Senate Polarization 1st to 112th Congresses (excel files).
Retrieved from http://pooleandrosenthal.com/political_polarization.asp
2.3.2.2
Environmental Regulation as a Drag on the Economy
“Environmental protection typically entails government intervention into markets and restrictions on
property rights, challenging conservative values, but is consistent with liberal’s view that protecting
collective welfare is a proper role of government” (McCright & Dunlap, 2011, p. 160).
Conservatives began attacking environmental regulations in the 1970s as they were seen as a…“federal intrusion
into the workings of the private sector” (Layzer, 2012). Historically, environmental protection was supported by
both parties and was not a particularly divisive issue until the early 1980s when Ronald Reagan defined
environmental regulation as a drag on the economy. Constructing ‘government as the problem‘ has been an
electorally successful strategy for the Republican Party for a long time, and the anti-environmentalist label seem to
have come at a low cost (Dunlap & McCright, 2008).
Global warming had been introduced as a legitimate problem in the U.S. by the time of the 1992 UN
Conference on Environment and Development in Rio de Janeiro. Anti-environmental forces led ...”by conservative
foundations, think tanks, and politicians emerged in response to global environmentalism”... and backed by the
9
fossil-fuel industry, sought to debunk climate change science and ...”to delegitimize global environmental problems,
particularly anthropogenic global warming, in order to undermine the call for regulatory action” (McCright &
Dunlap, 2011, pp. 158–159). After Clinton-Gore administration action had been blocked by a Republican takeover
of Congress in 1994, the election of George G.W. Bush further politicized climate change and the ‘war on terror’
drove it off the agenda (McCright & Dunlap, 2011, pp. 158–159).
2.3.2.3
Undermining Scientific Credibility
"The vast majority of people who are involved in the [Republican] nominating process—the
conventions and the primaries—are suspect of the science," Phillips continued. "And that’s our
influence. Groups like Americans for Prosperity have done it” (Quoted from Novak & Maguire, 2012).
Sir Nicholas Stern has described climate change as “the greatest and widest-ranging market failure ever seen“ (Stern,
2006). Oreskes and Conway concludes in their study of the history of denial of issues ranging from the negative
health effects of tobacco to the reality of climate change, that the real reason behind the discrediting of science was
…”about the proper role of government” … in regulating markets (Oreskes & Conway, 2010, p. 262). It was about
free-market fundamentalist defending against a problem that scientific studies implied would require government
intervention (Oreskes & Conway, 2010). Robert Brulle arrives at a similar conclusion from his studies of climate
change denial funding, tracing the roots of denial through conservative foundations and funders to free-market
ideology and opposition to government interference in in markets (Brulle, 2013).
2.3.3
The Organizational Model
The Organizational Model, again as delineated by Miller, 3 is very much an antithesis to the Market Model. It does
not view individuals as the central actors with the power to alter productive capacities through changing consumer
preferences, but instead places organizations at center stage. It takes into account historical and cultural contexts and
defines interactions in terms of power-negotiations between organizational actors instead of in apolitical marketnegotiated consumer demand meets producer supply - terms. Individuals are not assumed to be ‘free’ and ‘rational’ 4
and their preferences as consumers are by and large determined by producer preferences through advertising. 5 In the
Organizational Model, capitalism is about profit maximization and not about maximizing competition. As
corporations seek to acquire market power, control over culture and social norms, and knowledge, the main
interaction is competition for power – power to control production, set prices, and control distribution of resources.
In the Organizational Model, government is a major organizational player with power to determine the level of
competition in the economy (pre-market) and how to distribute its resources (post-market). The inductive basis for
the Organizational Model worldview does not lead to any logical outcomes, but likely outcomes are; income, wealth
and knowledge inequality; market-defying movements in price levels: stagflation; symbiosis between business and
Miller, 2008 pp. 86-113. Miller titles his model ’the Multi-Centric Organizational Model’, but for the sake of simplicity, I will
simply refer to it as ’the Organizational Model’.
4 Mature and bureaucratized organizations are an exception, assumed to act rationally. See Miller, p. 101.
5 Described by Kenneth Galbraith as the “revised sequence”, see Miller, p.97.
3
10
government: the revolving door; democratic deficit as unelected corporate managers makes decision about
production and distribution; over-usage and abuse of the natural environment as costs are externalized to keep
profits levels up. As the outline of the Organizational Model above implies, control of government policy is the vital
instrument to maximize profits and control its distribution. This is the central premise of this report.
2.3.4
Juxtaposing Models
To contrast these two models can be contrasted, and, at the same time give the relevant political background for the
economic fortunes and dominance of oil and gas in the American economy, I will use the story of income inequality.
Political scientists Jonathan Hacker and Paul Pierson capture the conflicting premises of the two models in their
analysis of the roots of American income inequality (2010). A credible political account of rising income inequality,
they argue, must not only explain the extreme concentration of income in the top, but also identify the policies, and
more importantly the political processes giving rise to those policies (2010, p. 168). Their main critique of economic
and political science accounts is that they are either apolitical or too focused on the median voter to account for the
trend of rising inequality since the 70’s. They trace these failures to an overemphasis of the ‘voter-politician nexus’,
neglect of organized interest, and the crucial role of government in distributing market rewards. The median voter
emphasis assumes that voters have the power to discipline politicians through their vote. Hacker and Pierson’s
critique of the voter-politician-nexus focus, or what they also call “politics as electoral spectacle,” resonates well
with the central premise of the Market Model in which individual consumer preferences (read votes) can alter
productive capacities (read politics and policy). 6
Hacker and Pierson argue against a market-based understanding of economic inequality through
scrutinizing economic and political science accounts. Economic explanations point to “skill-biased technological
change” as a factor that has skewed the income distribution in favor of the highly educated. The argument that
technological change has skewed returns towards the highly educated does not hold up, as the base of highly
educated individuals is much broader than the economic elite’s. Returns to top income earners in an international
comparative perspective, despite exposure to the same markets and technologies for all advanced countries, are not
uniform either, with a number of countries seeing no increase or even a smaller share going to its top income earners
(Hacker & Pierson, 2010).
Political science median-voter explanations of why voters have not disciplined their representatives –
contradictory to the theory of voters disciplining their political representatives – point to immigration as a factor
(Hacker & Pierson, 2010, p. 165). This argument, brought by McCarty, Poole and Rosenthal, claims immigrants
In International Relations theory, some liberals also hold this perspective. Andrew Moravcsik’s conception of international
politics rests on a bottom-up perspective in which state preferences are determined mainly by individuals’ …”material and
ideational preferences [formed] independently of politics and then advance through political exchange and collective action.” In
such liberal perspectives, organizations are acknowledged as important actors and individuals are not assumed to be perfectly
rational or guided solely by material gain, but crucially, the root of organizational action is still a reflection of aggregate
individual preferences unaffected by organizational preferences. See: pp. 513-553 in Moravcsik, A. (1997). Taking Preferences
Seriously: A Liberal Theory of International Politics. International Organization, 51(4), 513–553. Doi: 10.2307/2703498
6
11
have depressed wages through adding to the low-income labor pool, which explains rising income inequality, and
since immigrants are not entitled to vote, they cannot compel political representatives to pass redistributive policies.
Hence, the statistics on income inequality will show rising income inequality between income earners but conceal
that citizens (voters with power to discipline politicians) have not experienced rising income inequality and therefore
has no greater incentive to push for redistribution than before (2006). Hacker and Pierson refute this line of
argument, as the income ratio of the median citizen/population mean is not significantly different from the ratio of
the population median/population mean. In addition, both have fallen significantly since the 70s (2010, fig. 4,
pp.165-166).
Paul Krugman supports the position that immigration and skill-biased technological change are not
sufficient to account for rising inequality. Krugman adds growing international trade to the factors causing income
inequality, as trade depress wages through increased competition. However, as Krugman points out, immigration,
trade, and skill-biased change are only potential contributors to the widening wage gap between high-skilled and
low-skilled workers. If these factors would add up to a complete explanation of income inequality, we would expect
to see a more even distribution of income among high-skilled workers - a distribution matching the group’s
productivity gain. Yet, this outcome has not materialized as most if the gain has been concentrated to a narrow elite
of high-skilled workers (2007, Chapter 7).
2.3.5
Coalitions of Organized Interest
If market-based explanations of technological change, immigration, and economic globalization fail to account for
rising income inequality: what lies behind the trend, and which are the political forces behind changing public
policy? Both Hacker and Pierson and Krugman point to the power of organized interests and the organizational
transformation that took place in the 1970s. The former authors emphasize the material aspects of a changing
organizational power balance with business interested at center stage, while the latter author emphasizes the
ideological roots of political change with racism providing the fuel for a conservative political movement, which
ultimately built up to alter the power balance between organized interests. They agree that the outcome of this
political battle was a stronger Republican party, increased political polarization, and a power-shift from organized
labor to business organizations and the wealthy.
Hacker and Pierson pinpoints four major changes in politics since the 1970s; the rise of business power in
politics, the decline of labor organizations, the moral issue focus and alignment of Christian conservatives with the
GOP, and the monetization of politics, as all having contributed to the weakening an organizational voice for the
working and middle classes on economic issues in America.
While Hacker and Pierson avoids mentioning a coalition of interests deliberate working together to gain
influence over government decision-making, Krugman describes a coalition between a number of different groups.
Described in short; the coalition of factions that started as a conservative right-wing drift within the Republican
Party grew to accommodate anti-union businesses, sunbelt-entrepreneurial interests, neoconservatives and cold-war
intellectuals. This coalition, ‘movement conservatism’, drew its financial support from anti-union sentiment in the
12
business community and gained its popular base by exploiting communist fear and dislike of welfare payments to
certain racial groups (2007, Chapter 6).
Since the focus of this report is on the oil and gas industry, the Sunbelt entrepreneur link described by
Krugman is of particular interest.7 Bishler and Nitzan situate the petroleum industry as a part of a coalition within
what they call ‘dominant capital’ …“the largest power coalitions at the center of the political economy” (2004, p.
256). In Bishler and Nitzan’s account, dominant capital groups are engaged in a battle to increase their relative share
of profits through controlling the trajectory of future production. As dominant capital groups are focused on relative
performance, and not absolute profits, they need to ensure that they can accumulate at a faster pace than the average.
Bishler and Nitzan call this process ‘differential accumulation’.
For large investors, there is only one method for achieving differential accumulation: to actively engage in
actions to make sure that such accumulation occurs. Whichever group can accumulate differentially is by definition
the ‘dominant capital’ group – a group involved in the central power processes of government, law, ideology, mass
persuasion, and international organizations (Bishler & Nitzan, 2004, p. 272). To underscore the vital role of
government policy in the realization of profits, with little relation to productivity or the costs of production inputs,
Bishler and Nitzan point to the reliance of Microsoft on intellectual property rights, Citigroup on monetary policy,
and General Motors on a host of policy decisions supporting the profitability of enterprise: the interstate highway
system, lack of public transport, environmental regulation, oil prices, taxes, and labor union strength, to mention a
few (2004, pp. 269–271).
Measuring shares of global market capitalization is one way to visualize the power struggles between
factions within dominant capital (see Figure 3). Bishler and Nitzan capture the relationship between
7
See Krugman 2007, p. 160.
13
Figure 3. Shares of Global Market Capitalization.
Source: Nitzan, J. (2012). Topic 10: Regimes of Accumulation: Theory and History. York University. Retrieved
from http://bnarchives.yorku.ca/331/11/nitzan_y6285_10_regimes_of_accumulation_handout_2012_13.pdf
two factions of dominant capital who rely on different regimes of accumulation for their profits. The
neoliberal ‘techno-mergerdollar’ coalition relies on a breath regime with added productive capacity, new investment
and mergers and acquisitions dominant from the mid-80s to the mid 90s. The neo-conservative ‘weapon-petrodollar’
coalition on the other hand thrives under a depth regime, dominant from the 70s till the mid-80s and from the early
2000s and onwards, relying on instability and social crises and working through redistribution through stagflation
(Bishler & Nitzan, 2004).
Banerjee describes a dominant coalition as …“a minimal collection of class fractions and government
institutions able to win regulatory contests repeatedly against other class fractions and institutions while
accumulating assets faster than them” (2010, p. 1). Agents (class fractions and institutions) are able to retain their
positions in the production network by access to information-rich nodes that enables competencies. Through their
hegemonic positions they can induce the state to enact biased regulation as to reinforce their competencies (Banerjee,
2010, p. 1).
2.4
Methodology
Hacker and Pierson’s organizational take on rising income inequality is primarily material and corresponding to the
direct ways organized interests can affect policy. They acknowledge the important role of ideas, as I classify here as
indirect ways of affecting policy, but point to policy changes taking place prior to intellectual rationales. The
evidence they present is quite compelling. Business organizations managed to begin the era of deregulation, stop
labor and health care reform, minimum wage indexing, and a consumer protection agency under a Democratic
president and a Democratic Congress in the late 70s before Reagan won the White House (Hacker & Pierson, 2010,
14
p. 179).
“In emphasizing organized interests and the evolving structure of American political authority, we do
not wish to deny that changes in ideas have played an important independent role in the restructuring
of public policy over this period. The rise of neoclassical economics and increased emphasis on
market-based policy prescriptions — as well as the broader ideological backlash against activist
government — have clearly shaped the policy trends we describe” (2010, p. 174).
Contrary to their own preferred focus on material means of policy influence over ideational influence, Hacker and
Pierson point out that public distrust in government is a reason for government failure to address inequality (2010, p.
174). Consequently, fuelling such sentiments should facilitate policy drift. Given the apparent interrelationship
between material and ideational factors, it should be safe to draw the conclusion that material and ideational means
of influencing policy are complimentary in two directions, so that the latter legitimizes the former, or makes way for
it.
Based on previous theories and accounts of shifting power constellations resulting in the redistribution of income in
general, this report will be structured according to the following reasoning:
Factions with competencies and interests tied to the use of oil and gas have leveraged their financial resources
directly (campaign contributions, lobbying, independent expenditures) to affect legislation. These factions have also
leveraged their financial resources indirectly to undermine the credibility of science related to climate change, and,
more importantly, to politicize and align all environmental issues along the liberal-conservative spectrum over the
fundamental disagreement regarding the role of government in the economy.
Independent
variable: Organized
efforts by oil & gas
interests/Koch
Brothers
Intermediate
variable:
Environmenatal
policy shift/ policy
drift
Dependent variable:
Economic rewards
to oil & gas
interests/Koch
Brothers
Two tracks for organized interests to affect government policy:
(1) Direct, material means of influencing policy makers
(a) Campaign finance
(i) Direct contributions
(b) Lobbying
(2) Indirect means of influencing policy makers by promoting an anti-government and anti-regulation
ideology.8
8
Hacker and Pierson refers to indirect means of affecting policy as ”agenda setting.” 2010, p. 173.
15
(a) Funding think tanks;
(b) Academic institutions and research;
(c) Astroturf and independent expenditure organizations and;
(d) Industry organizations.
These two tracks represent the ways profits and wealth can be leveraged to affect policy outcomes. The most visible
and quantifiable track is the direct track that utilizes fully legal means to influence what bills legislators introduce
and how they vote. The indirect/ideological track is more difficult to capture in numbers as is designed to impact
they way legislators and the general public comprehend and frame issues. The indirect/ideological track is designed
to have an impact on public opinion and therefore how the public vote. It also represents a way to influence the
minds and opinions of legislators and provide them with an ideological toolkit to use against their political
opponents and persuade voters.
The remaining part of the report is structured according to the following logic:
(1) Show how the oil and gas industry, including Koch Industries, have been profitable over time.
(a) With petroleum industry income data
(b) With estimates of Charles and David Koch net worth
(2) Show that government policy has been crucial to oil and gas industry profits through:
(a) Active policy measures:
(i) Direct industry subsidies
(b) Active indirect policy decisions:
(i) War in the Middle East
(ii) Construction/maintenance of the interstate highways system
(3) Show that oil and gas has taken action to affect government policy
(a) Through direct action – lobbying and campaign finance
(b) Through indirect action – funding of think-tanks, astroturf agents, academia, and interest group
organizations
2.5
Summary
The Market Model view of the world is emphasizes the apolitical nature of markets and consequentially does not
contain a power analysis beyond the power of individual consumers. The Organizational Model on the other hand
recognizes the relationship between the distribution of power and the distribution of rewards in society. Groups
standing to gain from the current distribution of power and income benefit from keeping the logics and dynamics of
this unequal relationship obscured and as far away from the public mind as possible. To promote a Market Model
view of the world justifies the current distribution of income. Such a promotion is exactly what is to be expected
from the most powerful factions in society.
16
The main division in American politics is manifested as a fight about the proper role of government. Environmental
issues were drawn into that dispute starting from the 1970s and have since followed a similar pattern of polarization
as has liberals and conservatives. Constructing environmental regulation as a drag on the economy and undermining
scientific credibility is not about the environment per se, but only really tactical expressions of deeper ideological
beliefs. Beliefs, which to varying degrees, are consistent with their proponents’ economical interests. Therefore,
supporting groups that are for limited government, less regulation, free markets, free enterprise, lower taxes, and
against generally accepted methods of science is equal to opposing government action on climate change.
17
3
3.1
Case study
The Profitability of the Oil and Gas Industry
3.1.1
The Financial Performance of Major Oil and Gas Companies
The petroleum industry has been profitable over time, especially in the early to late 2000s as show in figure 3 below.
The operating revenues of the major oil companies are also sizeable relative to U.S. GDP with 9% on average
between 1977-2009 and a top observation of over 19% in 1980.9 In 2011, the revenues of the five so called ‘supermajor’ integrated10 oil companies, ExxonMobil, Chevron, BP, Royal Dutch Shell, and ConocoPhillips weighed in at
12% of GDP (Pirog, 2012, p. 1)
Figure 3. Petroleum Industry Profitability 1977-2009
140
30
120
25
100
20
80
15
60
10
40
5
20
0
1975
1980
1985
1990
1995
2000
2005
2010
0
2015
Petroleum Industry Net Income ($2005 billions left scale)
Return on Equity for Major Energy Producers (ROE % right scale)
Source: EIA. (n.d.). Financial Reporting System (FRS) Database. U.S. Energy Information Administration.
Retrieved March 26, 2013, from http://www.eia.gov/finance/data.cfm#petroleumops Including the ‘super-majors’
BP, Royal Dutch Shell, ExxonMobil, Chevron, and Conoco/Philips. ROE is consolidated data for all major energy
producers but almost entirely comprised of petroleum company income and equity. For a complete list of companies
reporting to the FRS see: http://www.eia.gov/finance/performanceprofiles/CoList.cfm
Figure 3 show net income and return on equity (ROE) as measures of profitability. Net income is a
straightforward absolute measure of profitability, and ROE is a relative measure of profitability as it is the ratio of
net income to stockholders’ equity, or put in another way, profits relative to capital input or share value. As figure 3
9
Based on EIA FRS petroleum operations data compared to nominal U.S. GDP for the same year.
Integrated companies span the entire oil supply chain from exploration and production to retail sales.
10
18
shows, major energy producers’ ROE and net income reached record levels in the mid-2000s. The ROE level
between 2000-2006 was 7% higher than the manufacturing industry average that had been only 2% below between
1985-1999 (Lazzari & Pirog, 2012, p. 7). The record profit levels since 2003 has been seen by many as windfall
profits or unearned gain and resulted in the introduction of Congressional proposals if windfall profit taxes (Pirog,
2012; Pirog & Lazzari, 2008).
The relationship between oil prices, crude oil supply and demand, oil industry profitability, and the
performance of the overall economy is both peculiar and interesting. First, the size of profit of the oil industry
depends largely on crude oil prices and not on supply volume (Pirog , 2012; Pirog & Lazzari, 2008). Second, crude
oil prices are more a function of the level of conflict in the Middle East than a function of supply and demand
(Bishler & Nitzan, 2004). Third, even as the economy as a whole suffers from high oil prices, major oil companies
generally experience increased incomes and higher profits (Pirog, 2012; Pirog & Lazzari, 2008).
The standard market model predicts that the market price of a commodity responds to movement in supply and
demand. Ceteris paribus: More supply results in lower prices and less supply equals higher prices. More demand
results in higher prices and less demand equals lower prices. The price is set at the equilibrium level where supply
meets demand. Given these assumptions, oil prices would correspond to oil inventories given a constant demand.
Figure 4. Scarcity and the Real Price of Oil
Source: Nitzan, J. (2012). Topic 10: Regimes of Accumulation: Theory and History. York University. Retrieved
from http://bnarchives.yorku.ca/331/11/nitzan_y6285_10_regimes_of_accumulation_handout_2012_13.pdf
Bishler and Nitzan show that while oil prices went up in the 70’s and 80’s, actual supply increased and was
in fact greater than demand. Even when some regional supply has been held from the world market, other source
19
have always compensated for the shortfall. The conclusion Bishler and Nitzan draw is that inventories do not matter,
as actual physical supply has been constant. Instead, prices fluctuate with the perception of risk that actual physical
supply may be affected (Bishler & Nitzan, 2004, pp. 301–302).
An elaboration on the reasons for price increases consistent with this risk perception hypothesis, is that an
increased conflict level in the Middle East discourages investment in oil production, not only in the region, but
everywhere in the world. The reason is that the Middle East has the lowest crude oil production costs in the world,
and if investments are put off for the future, more expensive production sites in other parts of the world become
risky investments as a future price fall resulting from decreasing conflict levels would render these investments less
profitable (Bilmes & Stiglitz, 2008, pp. 220–221).11
The previous figures have illustrated the absolute level of profits and the relative profits level to capital
input (figure 3), and the market defying price levels of crude oil (figure 4). The below figure (figure 5) illustrates the
relationship between oil companies’ share of profits and the ratio of oil price to consumer prices. The ratio of the oil
price to the consumer price index (CPI) is the steepness of the thin curve. When oil prices increase more than the
average price increase (the CPI), i.e. when the price of oil contributes relatively more to the price increase than other
items included in the CPI, relative profits accrue to oil companies.
Figure 5. The Price of Oil and the Global Distribution of Profit
11
The authors also refute the claim that a surge in demand from China can account for the jump in prices the early 2000s and
retained high price levels. Their argument is supported by much lower futures markets oil prices prior to the Iraq war than after
the invasion decision. Futures markets, they argue, are accurate and anticipate surges in demand through forecasts, which in turn
proved to be accurate with respect to rapidly growing markets’ demand.
20
Source: Nitzan, J. (2012). Topic 10: Regimes of Accumulation: Theory and History. York University. Retrieved
from http://bnarchives.yorku.ca/331/11/nitzan_y6285_10_regimes_of_accumulation_handout_2012_13.pdf
The economic conditions that allowed for the kind of relative price increase seen since the onset of the war
on terror are stagnation and inflation. This argument, brought by Bishler and Nitzan as an attempt to explain why the
petroleum industry manages to expand its share, relies on the nature of inflation and its dominant components.
Inflation is a measure of average price increases, but it does not indicate if some elements contribute more or less to
the average. Oil prices have been a leading indicator of inflation since the 1970s and have made up a larger share of
price increases than other items in the CPI. Furthermore, and contrary to conventional wisdom, inflation has been
accompanied by stagnating growth and high unemployment – factors that Bishler and Nitzan claim undermine
consumer power to resist price increases (2004).
Figure 6. The Petro-Core’s Differential Accumulation
Source: Nitzan, J. (2012). Topic 10: Regimes of Accumulation: Theory and History. York University. Retrieved
from http://bnarchives.yorku.ca/331/11/nitzan_y6285_10_regimes_of_accumulation_handout_2012_13.pdf
Figure 6 illustrates the relative performance of major oil companies to all other companies included in the
Fortune 500. Comparing the percent deviation of the petro-core12 to the Fortune 500 and the occurrence of Middle
Eastern conflicts reveals a striking pattern. All Middle Eastern Conflicts have been preceded by a relative
underperformance by the petro-core and all conflicts are positively correlated with the petro-core beating the
average. The importance of the relation between oil company profits and Middle East conflicts will be re-visited
later in the case study section of this report.
12
The ‘petro-core’, as defined by Bishler & Nitzan, is currently comprised by BP, ExxonMobil, Royal Dutch Shell, and Chevron.
21
3.1.2
The Income Base of Koch Industries
Koch Industries is the second largest privately held company in the United States after Cargill with and estimated
$115 billion of revenue in 2012 and 60000 employees (“Koch Industries on the Forbes America’s Largest Private
Companies List,” n.d.) Compared to the ‘super-major’ integrated oil companies, Koch Industries is a small player
with revenues not even matching up to half of the smallest super-majors’ revenues: Chevron and ConocoPhillips.13
Koch Industries business activity is mainly concentrated in and around petrochemicals with Flint Hill Resources
running oil refineries in Alaska, Minnesota and Texas; the Koch Pipeline Company transporting petroleum, natural
gas and chemicals; and Koch Fertilizer and Invista making use of natural gas and petroleum for fertilizer and
synthetic fibers and polymer production. (“Koch Industries Companies,” n.d.). Together with the single most
valuable asset in the Koch portfolio, paper and pulp product producer Georgia-Pacific, these companies are
estimated to contribute almost 80% of Koch Industries $115 billion annual revenue (“Bloomberg Billionaires,” n.d.).
The activity of Koch Industries petroleum operations is not only limited to downstream interests but also to
upstream production of tar sands in Alberta, Canada trough Koch Exploration Canada L.P. and Koch Oil Sands
Operating G.P. Koch Industries imports roughly 25% of Alberta tar sands oil to its refineries, operates a barrel of
terminal in Hardisty, and is among the largest mineral lease holders in Alberta. In late 2012, Koch Oil Sands
reviewed offers on 220000 acres of its holdings of tar sands, exposing some information on its stakes in the Canada
tar sands otherwise not publicly available (Douglass, 2012).
As a private company, Koch Industries is not required to publish details on its financial performance
publicly (“About Koch Industries,” n.d.), which makes it difficult to pinpoint and quantify specific sources of
revenue and profit. However, as the Forbes Magazine and Bloomberg continuously publish estimates of the total
assets of Charles and David Koch, it is possible to plot the growth of their fortunes against crude oil spot prices.
13
ConocoPhillips’ revenue reached 251.2 billion in 2011, Chevron’s reached 244.4 billion See Pirog, 2012, Table. 2
22
Figure 7. Charles and David Koch Wealth vs. Oil Price
90
2012
80
R² = 0.87447
Wealth ($billion)
70
60
50
40
2008
2009
30
20
10
2005
1987
0
0
20
40
60
$ / barrel
80
100
120
Updated and improved from: IFG. (n.d.). How to Reduce Gas Prices and Remove Barriers to Clean Energy: Ban Oil
Derivatives. IFG Oligarchy Blog. Retrieved from http://thesuperrich.wordpress.com/2012/03/21/koch-cash-set-tosoar-from-rising-gas-prices-oil-speculation/ Data sources: Forbes Magazine. Various Issues. Forbes. (1987-2011).
Print. Bloomberg Billionaires. (n.d.). Retrieved September 19, 2012, from
http://www.bloomberg.com/billionaires/2013-04-08/aaa EIA. (n.d.). Petroleum & Other Liquids: Europe Brent Spot
Price FOB. U.S. Energy Information Administration. Retrieved November 19, 2012, from
http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=RBRTE&f=M
Forbes billionaires list is compiled by adding up individual’s assets, cash, property, and debt (“Inside The
2013 Billionaires List,” n.d.). If the assumption is made that Charles and David Koch’s assets are primarily based on
ownership titles in Koch Industries, their overall wealth becomes a proxy for the growth in net value of Koch
Industries. The above plot shows a very strong correlation between oil prices and growth of the combined wealth of
the Koch Brothers. Oil prices can successfully predict 87% of the variation in wealth. Moreover, the most interesting
feature of the comparison between the Brothers wealth and oil prices is that it resembles the record profit levels of
the ‘super-majors’ as illustrated in Figure 3. The 2005-2006 jump in wealth may also be related to Koch Industries
acquirement or Georgia-Pacific and the stagnation of 2007-2009 to the economic crises, but the overall pattern ties
the fortune of Koch Industries and its owners to the price of oil.
23
3.1.3
Summary
The petroleum industry has been profitable over the last 35 years and especially since the early 2000s. The
wealth of Charles and David Koch increased six fold over the ten-year period of 2002-2012. Both the profitability of
the petroleum industry and the wealth of the Koch Brothers are closely correlated with crude oil prices. Oil prices
have not obeyed standard supply and demand logics, but appear to be more closely tied to risk perception than to
actual physical supply. The key turning point in the time-series of oil prices, profits, and wealth accumulation was in
the early 2000s when skyrocketing oil prices propelled the net income of major oil, return on equity, and relative
return on equity to record levels. The wealth of the Koch Brothers also begun soaring upwards towards new heights.
The major factor behind the concentration of income towards the petroleum industry seems to have been the war on
terror destabilizing the Middle East.
3.2
Government Policy, Active Direct Subsidies to Petroleum
“Energy tax policy involves the use of the government’s main fiscal instruments — taxes (financial
disincentives) and tax subsidies (or incentives) — to alter the allocation or configuration of energy
resources. In theory, energy taxes and subsidies, like tax policy instruments in general, are intended
either to correct a problem or distortion in the energy markets or to achieve some social, economic
(efficiency, equity, or even macroeconomic), environmental, or fiscal objective. In practice, however,
energy tax policy in the United States is made in a political setting, being determined by the views and
interests of the key players in this setting: politicians, special interest groups, bureaucrats, and
academic scholars. This implies that the policy does not generally, if ever, adhere to the principles of
economic or public finance theory alone; that more often than not, energy tax policy may compound
existing distortions, rather than correct them” (Lazzari, 2008, p. 1, added emphasis).14
Energy tax policy has historically been characterized by two broad policy objectives: reducing oil import
dependence and promoting national security, and environmental concerns. These two objectives have not always
been consistent with each other as increased domestic oil production has negative environmental effects (Sherlock,
2010, p. 1)
The history of energy tax policy (subsidies) can be categorized into five time-periods (Lazzari, 2008; Sherlock,
2010):
1.
1918-1970 – promoting oil and gas
2.
1970-1980 – conservation and alternative fuels
3.
1980-1988 – free-market approach
4.
1988-1998 – back to interventionism, energy security, environmentalism
5.
1998 –
Salvatore Lazzari is a Specialist in Public Finance at the Congressional Research Service’s Resources, Finance and Industry
Division.
14
24
The first period was entirely focused on increasing oil and gas production with no tax incentives for other energy
sources. The second period was characterized by federal budget deficits, environmental and equity concerns, and the
1973 and 1978-1979 oil shocks which all contributed to a shift towards energy conservation and alternative fuels.
The Reagan administration’s free-market approach and the scaling back of many subsidies and taxes marked the
third period. The fourth period contained a mixed bag of incentives aimed at conservation, alternative fuels energy
security and reduced oil imports, but also renewed and new tax incentives for oil and gas. The fifth period initially
saw very low oil prices and support proposals for the oil industry, but after as oil prices rose around the turn of the
century, proposals shifted towards reducing energy prices (Lazzari, 2008; Sherlock, 2010).
However, the Energy Policy Act of 2005 (EPACT05) introduced new tax incentives for oil and gas, despite
high and rising oil prices, even if the net tax effect change was slightly negative for the industry. The 2000s saw a
tripling of the number of energy tax expenditures and increasing revenue losses with EPACT05 responsible for most
of both (Lazzari, 2008; Sherlock, 2010).
Energy subsidies, or producer incentives to develop domestic energy resources and consumer support
measures, come in different forms. Tax policy, as outlined above, is only one type of subsidy. What makes tax
policy subsidies special is that it is generally accepted as such and estimates of revenue losses are readily available
from government sources. There is no universally accepted methodology to calculate its size and impact of other
subsidies or non-specific tax provisions benefiting energy producers.
The most comprehensive methodology divides energy subsidies into six categories: tax policy, regulation,
research and development, market activity, government services, and disbursements.
25
Table 2. Types of Energy Subsidies
Description
Type
Tax Policy
Oil and Gas Application Example
Special tax code provisions: credits, exemptions, allowances, and
deductions


Regulation
Legitimizing and facilitating potentially hazardous operations.
Influencing/setting prices for different energy types. Subsidies can
be calculated as exemptions from federal regulation and regulatory
oversight costs to government.



Research and
Development
Market Activity
Government
Services
Disbursements
Percentage depletion
provision
Intangible drilling costs
provision
Stripper well exemption
from price controls
Two-tier price control
system
Higher rate of return
allowance for oil
pipelines
Federal funding for energy research and development programs.

Federal involvement in the marketplace through investment in
construction and operation (of dams for hydroelectric energy),
planning, leasing, resource management (for oil & gas).
Indirect producer support: provision of commercial infrastructure
for energy transportation.

BLM resource
management, leasing
and planning

Waterways such as
ports and channels
Grants
Source: MISI. (2011). 60 Years of Energy Incentives: Analysis of Federal Expenditures for Energy Development.
Washington, DC: Management Information Services.
Several studies involving one or more of the above categories have been commissioned by various
organizations to assess the magnitude and impact of energy subsidies. Tax policy dominate these studies, perhaps
for obvious reasons as estimates of expenditures and foregone revenues 15 are estimated annually by the Joint
Committee on Taxation (JCT) and the Office of Management and Budget (OMB), but some studies attempt to be
more inclusive. However, there is no comprehensive study covering all subsidy types.
Tax expenditures are “revenue losses attributable to provisions of the federal tax laws which allow a special exclusion,
exemption, or deduction from gross income or which provide a special credit, a preferential rate of tax, or a deferral of tax
liability” Sherlock 2010, p.11 citing the Budget Act; P.L. 93-344. Excise taxes (special taxes levied on a good) are not classified
as taxes under the Budget Act even though reductions or exemptions from such taxes turn up as lost government revenue
(Sherlock 2010, p. 12).
15
26
Table 3. Studies on Energy Subsidies
Study
Timeframe
Scope
Limitations
Environmental Law
2002-2008
Federal subsidies –
Counts producer and consumer support: tax policy
fossil fuels vs.
and grants. Does not include nuclear power. Only
renewables
study including the Foreign Tax Credit and Reduced
Institute (2009)
Government Take from Federal Oil and Gas
Leasing.
Federal subsidies –
Nuclear R&D focus as report commissioned by
Information
comparison of all
Nuclear Energy Institute
Services (2011)
energy sources
Management
DBL Investors
1950-2010
Federal subsidies –
Counts only producer tax policy support: Intangible
role in energy
drilling costs (IDC) and Excess percentage over cost
transitions
depletion
2000-2002,
Federal and AK,
Counts both producer and consumer support
2008-2010
TX, WV fossil fuel
measures.
1918-2009
(2011)
OECD (2011)
subsidies
CRS (2012)
2010-2012
Federal subsidies –
Counts tax specific tax policy only.
comparison of all
energy sources
The studies analyzed here vary greatly in time periods and scopes, as well as in their classification and
inclusion of incentives as subsidies. They are however comparable in groups, with the ELI, OECD, and CRS studies
providing the most recent, inclusive and detailed accounts of tax-policy incentives. The DBL and MISI studies are
less inclusive but span much greater time-periods, showing long-term trends. The studies of government subsidies
spanning longer time periods16 are all conclusive in one respect: the oil and gas industry are, and have been, the
largest recipients of subsidies over time and on average.
The least common denominator of all studies is that they include the two single most important tax
provisions over time: the ‘Intangible Drilling Costs’ (IDC) provision 17 and the ‘Excess Percentage Over Cost
Depletion’ provision. 18 These provisions, both longstanding subsidies to the oil and gas industry, were enacted,
respectively, in 1916 and 1926 (Sherlock, 2010, pp. 2–3). The IDC allows integrated oil and gas companies to
deduct 70% of the cost of domestic oil and gas exploration and the development costs of other fuels immediately
and the remaining costs over a five-year period. Normal tax rules would only allow deductions as a capital cost
based on the rate of extraction (OECD, 2011, p. 6). The percentage depletion provision allows for recovery of
investment costs as a fixed percentage of gross income from the property instead of as a percentage of the actual
16
The ELI, MISI and DBL studies. The Environmental Law Institute study does not include nuclear power.
Oil and Gas Exploration and Development Expensing (IRC Section 617).
18 IRC Section 613, hereinafter ‘percentage depletion’.
17
27
value of extracted resources (OECD, 2011, p. 6; Sherlock, 2010, pp. 2–3). The effect of percentage depletion was
limited to independent producers and royalty owners in 1975 (“Timeline History of Natural Gas and Oil Tax
Provisions,” n.d.) and is currently not applicable to integrated oil companies (OECD, 2011, p. 6).
Table 4. Energy Subsidy Studies Comparison (annual average $millions)
Subsidies included
2002-2008
2008-2010
1918-2010
1950-2010
2010-2012
Annual
Annual
Annual
Annual
Annual
Average
Average
Average
Average
Average
($2010)
($2010)
($2010)
($2010)
($2010)
ELI
OECD
DBL
MISI
CRS
All subsidies
$7,957
$6,561
$4,860
$9,786
$2415
Tax policy only
$5954
$2512
$4860
$6012
$2415
$1,998
$1,689
$4,860
$6,012
$1500
IDC and percentage
depletion tax policy
incentives only
Source: Author calculations from original studies using price deflator data from the Bureau of Economic Analysis.
Table 4 shows the inflation-adjusted annual average of all subsidies included in the reports, separate
accounts of all tax policy, and the isolated contributions of the IDC and percentage depletion tax provisions. The
effects of the two tax provisions were stronger over the period 1950-2010 than from 1918-2010 and have decreased
lately as indicated by the ELI and OECD estimates. The ELI and OECD estimates are consistent with a 2005 CRS
estimate of IDC and percentage depletion revenue losses at $2100 million (Lazzari, 2006, Table 2). The lower
figures of the 2000s compared to the 60 year average is an effect of the scaling back of both tax provisions in the
1986 Tax Reform Act, as well as an effect of external market forces as world market prices fell for crude oil, IDC
expensing became negative (See Sherlock, 2010, pp. 3–4).
28
Figure 8. Energy Tax Expenditures: Inflation-Adjusted Dollars
Source: Sherlock, M. F. (2010). Energy Tax Policy: Historical Perspectives on and Current Status of Energy Tax
Expenditures (No. R41227). Congressional Research Service. Figure 3.
Figure 8 shows the costs of the IDC and percentage depletion tax policy incentives in blue, locating the
bulk of the cost prior to 1988. The green field, the unconventional fuel production credit, is mainly attributable to
coal (Sherlock, 2010, p. 17). The IDC and percentage depletion provisions reached an impressive $10.4 billion in
1981 (in 2009 dollars) (Sherlock, 2010, p. 14). During the much of the period of large revenue losses from IDC and
percentage depletion, a windfall profits tax was in place to recoup parts of the excess profits earned. In place
between 1980-1990, the windfall profits tax collected $73 billion 19 in net revenue before it was repealed (Lazzari,
2006b, Table 4).
The DBL study focuses exclusively on the IDC and percentage depletion, making it uncontroversial. The
CRS study is limited to energy specific tax provisions. The other studies stand out more. The MISI study, with the
highest average estimate, only includes the IDC and percentage depletion tax provisions but unlike the others,
include regulation, market activity and government services in the total. 20 Regulations listed include the ‘stripper
well price incentives’ (in place 1944-45, and 1974-1981) the ‘higher rate of return allowance for oil pipelines’ (in
place 1921-1951) and the ‘two-tier price control system’ enacted as part of the Emergency Petroleum Allocation Act
of 1973, and ‘well-head price controls’ for natural gas and general costs of regulation. Market activity is counted as
19
20
Adjusted from nominal figures to 2009 dollars.
See Table 2 for categorization.
29
the support form the Bureau of Land Management to the oil and gas industry regarding planning, leasing and
resource management. Government services are calculated mainly as the maintenance cost of ports and inland
waterways (MISI, 2011, pp. 24–25, Exhibit 11), i.e. as an indirect producer support measure. While the MISI
accounting categories are reasonable, the lack of transparency in data disclosure makes it difficult to assess the
accuracy and weights of non-tax estimates.
The ELI study is notable for including two posts not accounted for in any of the other studies: the ‘Foreign
Tax Credit’ (IRC Section 901) and ‘Reduced Government Take from Federal Oil and Gas Leasing.’
The Foreign Tax Credit is a general provision for individuals as well as for corporations to avoid double
taxation on income earned abroad. The reason why this provision constitutes a revenue loss is due to the
classification of royalty payments to foreign governments as corporate income tax. This practice constitutes a
subsidy to oil and gas for three reasons presented by the ELI study. First, no other foreign businesses are normally
subject to royalty payments to foreign governments. Second, royalty payments are normally classified as a levy to
compensate for special economic benefits and not as taxes; and third, royalty payments for oil and gas were reclassified as tax credits and deductible dollar-for-dollar instead of at the marginal tax rate (approx. 35% between
2002-2008). This arrangement was somewhat limited in the 70s by only allowing credits up to what would have
been taken under the U.S. tax code, although excess royalty payment credits could be carried back one year and
forward up to ten years (Adeye et al., 2009, pp. 9–12).
The argument presented by the ELI is that since the ‘taxes’ imposed on oil and gas extraction by foreign
countries far exceed their average general corporate income tax, the difference constitutes a royalty payment and
should therefore be treated as such. If the IRS would credit oil and gas companies based on the general tax rate
applicable in the foreign locations (lower than in the U.S.) and treat the difference as a levy, it would recover
approximately $2.4 billion21 annually in revenue (Adeye et al., 2009, pp. 9–12).
The line of argument made by ELI is valid insofar that the special classification of royalties as taxes instead
of as levies is correct. However, as the noted in the study, the high royalties on foreign oil and gas in combination
with the royalty-as-tax classification does not necessarily benefit oil and gas companies, but merely serves to
transfer revenue from the U.S. government to foreign governments. In this respect, the foreign tax credit cannot be
counted as a subsidy turning up as indisputable net income on the oil and gas balance sheet. The only scenario in
which this arrangement would benefit oil and gas companies’ bottom line is if foreign governments could shift other
non-deductible costs otherwise incurred on the foreign company to the royalty post.
The ‘reduced government take from federal oil and gas leasing’ post in the ELI study is based on the
existence of legislation 22 lowering take from federal offshore leases and the comparatively low level of U.S.
Government royalties to other OECD countries. ELI bases its calculations on a previous Government Accountability
Office (GAO) methodology and arrives at an annual $1.1 billion23 subsidy number (Adeye et al., 2009, pp. 12–13).
21
Author calculations in 2010 dollars based on ELI figures.
See Johnston, J. J. S. 158 (104th): Outer Continental Shelf Deep Water Royalty Relief Act. , Pub. L. No. S.158. Retrieved from
http://www.govtrack.us/congress/bills/104/s158/text
23 Author calculations in 2010 dollars based on ELI figures.
22
30
The net effect of an increased government take on offshore leases may be difficult to assess as indicated in
the ELI study, but as targeted legislation has been passed and rates are low in an international perspective, it would
be reasonable to accept reduced rates as revenue loss.
Other large posts, included in both the ELI and OECD study, are direct payments categorized as consumer
support measures. These two posts are the Low Income Home Energy Assistance Program (LIHEAP) and Strategic
Petroleum Reserve.
The LIHEAP is a federal program distributing funds to low-income households since 1981. It helps
households pay for their utility bills, including heating, cooling but also includes state leveraging and outreach
programs as well as financial assistance for weatherization (Adeye et al., 2009, pp. 13–15; OECD, 2011, p. 13).
Both studies isolate the proportions of energy payments that support fossil fuels directly through only including
heating costs (ELI) and only heating and crises benefits (OECD) to estimate the total subsidy. The OECD
methodology differentiates between fuel-types, but attributes LIHEAP funding in its entirety to petroleum and
natural gas. The ELI study does not make this distinction.
ELI counts the LIHEAP as a subsidy by stating that accounts otherwise ‘delinquent’ are active and
maintained (Adeye et al., 2009, p. 14). The OECD study does not provide a rationale for including LIHEAP as a
consumer support measure. It is clear that LIHEAP is a tax expenditure for the government but it is not entirely clear
that the entire oil and gas portion of LIHEAP funds would be absent from oil and gas revenues if it was to be
discontinued.
The Strategic Petroleum Reserve (SPR) not a clear-cut case of accounting either. It serves as a buffer for
impacts of oil supply disruptions for the national economy, which is a potential benefit for consumers as well as for
producers. As most countries maintain a strategic reserve, the OECD methodology assumes that a SPR is a
necessary expenditure and calculates the support cost as a cost that would otherwise have been incurred on the oil
industry. The cost equals operating costs and capital-related expenditures (OECD, 2011, 20). The ELI study makes
similar assumptions, only including the capital and operational costs, but makes a point of excluding the acquisition
cost of crude as it may prove to be profitable as well as deducting for government leasing of SPR facilities (Adeye et
al., 2009, p. 15)
A post not included in the later OECD and CRS studies, but accounted for by ELI is the ‘credit for
enhanced oil recovery.’ This credit has been unavailable during the OECD and CRS timeframes as it only can only
be claimed when the West Texas Intermediate exceeds $28.24
Another recently added post, included in the ELI, OECD, and CRS studies, has grown since it became law
with the EPACT05 in 2005. The ‘temporary expensing of equipment for refining’ matched the only two major longstanding tax provisions (IDC and percentage depletion) between 2008-2012.
3.2.1.1
Summary and Discussion
Two long-standing tax provisions account for the bulk of historical subsidies to the oil and gas industry with oil as
the largest recipient. Most of the support was concentrated to the period of 1950-1987, but these provisions are still
24
See (Lazzari, 2008, Table 2.) $28 is in 1990 dollars. The threshold is tied to inflation.
31
intact and their size was still significant in 2012. However, comparing the size of these subsidies across studies
reveal a negative trend with amounts declining steadily between 2002-2012 from an average of $2 billion (20022008) to $1.7 billion (2008-2010) to a final $1.5 billion on average for the last two years (2010-2012).25
Other tax provisions enacted in 2005 have compensated for the decline. The ‘temporary expensing of
equipment for refining’ is the single largest provision adding an average of $0.7 billion between 2010-2012.
Excluding the foreign tax credit and the reduced lease for oil and gas posts from the ELI study show that total tax
policy subsidies have remained at a stable annual level of $2.4-2.5 billion over the last ten years.
The question of which government support measures should be counted as subsidies is the critical to the
size of overall subsidies to the oil and gas industry. Direct targeted tax provisions included in official government
estimates are not controversial, even as the American Petroleum Institute (API) refuse to classify lost government
revenues as subsidies and claim that all deductions and credits to the industry are not unique to the industry (“Why
Oil & Gas Tax Treatments Are Not Unique or ‘Subsidies’,” 2012). Classifying subsidies solely as direct government
spending is not consistent with the Budget Act definition of ‘tax expenditures’ as including foregone revenues. 26
Other tax code provisions generally not considered to be special provisions for the oil and gas industry
require more elaborate and complex arguments to qualify as special treatment for the industry. The foreign tax credit
is such a case as it relies on estimates of average corporate taxes across oil producing countries. The Outer
Continental Shelf Deep Water Royalty Relief Act (DWRRA) claimed by ELI as a targeted subsidy for the oil and
gas industry is a much more straightforward case. The statute clearly identifies the oil and gas industry as the object
for the measure of encouraging …”production of marginal re-sources on producing or non-producing leases;
through primary, secondary, or tertiary recovery means, reduce or eliminate any royalty or net profit share set forth
in the lease(s)”(Outer Continental Shelf Deep Water Royalty Relief Act, 1995). The GAO estimates that the royalty
relief could amount to $80 billion in total and estimates that an error made in 1998-1999, prohibiting the Secretary
of Interior to impose oil price thresholds, alone could add up to $14.7 billion in foregone revenues (Gaffigan, 2007;
Humphries, 2009).
Direct payments to the oil and gas industry as consumer support measures through LIHEAP and the SPR
are also quite clearly supportive of the industry. LIHEAP guarantees a certain amount of revenue for energy
producers from low-income consumers who otherwise may have had problems to keep up with utility payments. The
SPR is a government-funded supply buffer for the oil industry. It is not only helpful in case of supply interruptions,
but through its insurance function facilitates a disproportional reliance on oil as a primary energy source. In the
absence of such an economic insurance for the U.S. economy it is likely that the energy sector would have been
more diversified with a proportionally lesser reliance on oil.
The MISI estimates of the cost of regulation, market activity, and government services are all legitimate
posts, but the spread over time and the report’s lack of transparency makes it difficult to include these posts.
25
26
See table 4 summary.
See note 20.
32
To conclude this section, the preceding discussion finds that there are a number of major subsidies still in
place that can be counted towards the total sum of all direct subsidies to the oil and gas industry with few
reservations:
1.
2.
3.3
Tax Policy (Producer Support)
a.
Intangible Drilling Costs 1916 -
b.
Percentage Depletion 1926 -
c.
Deep Water Royalty Relief 1995 -
d.
Election to Expense 50% of Refinery Cost 2005 -
e.
Credit for Enhanced Oil Recovery 1990 –
Economic Security & Consumer/Producer Support
a.
Low Income Home Energy Assistance Program
b.
Strategic Petroleum Reserve.
Government Policy: Active Indirect Subsidies to Petroleum
This section explores subsidies to the petroleum industry that are indirect. Indirect subsidies are government
expenditures that are not directly aimed at the industry to stimulate production or consumption, but expenditures that
facilitate and enable oil production and consumption. I.e. the very economic structures of society that determine
what sectors of the economy can flourish. One example taken up in the previous section on direct subsidies is
waterways: ports and channels. A more accurate classification of waterways is as an indirect producer support
subsidy due to its enabling of the transportation of oil to refineries and markets. Highways on the other hand can be
classified as indirect consumer support subsidies for the petroleum industry as it enables consumption of road fuels
in cars and trucks. Apart from government active policy supporting a petroleum-based economy, this section also
includes active policy choices that have an indirect impact on oil companies’ revenue base.
3.3.1.1
The Interstate Highway System
The Federal-Aid Highway Act of 1952 authorized the first step of constructing of the Interstate Highways System
and the 1956 Act set the Federal share of cost at 90%. Construction costs were to be covered by the Highway Trust
Fund through gas and motor vehicle use taxes. The total Federal share of the costs was $114.3 billion in 1991 27
dollars (Federal Highway Administration, 2013). Today, 83% of the 18.4 cents per gallon of gasoline tax and 88%
of the 24.4 cents per gallon on diesel fuel goes towards the highway account in the Highway Trust Fund. The
remainder goes to the Mass Transit Account (“Financing Federal-Aid Highways,” n.d.). The Federal Highway
Administration has spent around $30 billion annually since 1999 on maintaining the highway system (“Status of the
Highway Trust Fund 1957-2011,” 2013).
The mass transit account was introduced in 1983 and approximately 20 % of Highway Trust Fund
expenditures are spent on mass transit (Snyder, 2011). Adding up the expenditures based on the Federal Highway
27
$170 billon in 2010 dollars.
33
Administration’s Highways Statistics reveals that the percentage spent on mass transit is actually much lower at 9%.
Adjusted to 2010 dollars, the total amount expended on building and maintaining the interstate highways system
since 1957 amounts to over $1.3 trillion. The waterway infrastructure calculation from the MISI study is
comparatively small with only $34.2 billion between 1950-2010.28
Table 5. Expenditures of the Highway Trust Fund 1957-2011 ($2010 billions)
Accounts
Expenditures
Percentage
Highway Account
1,335
91
Transit Account
127
9
Total
1,462
100
Source: Status of the Highway Trust Fund 1957-2011. (2013, January). Highway Statistic 2011. Retrieved April 14,
2013, from http://www.fhwa.dot.gov/policyinformation/statistics/2011/fe210.cfm GDP deflator data from US
Department of Commerce, B. E. A. (n.d.). Bureau of Economic Analysis. Retrieved April 12, 2013, from
http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1#reqid=9&step=3&isuri=1&910=X&911=0&903=13&904
=1980&905=2009&906=A
3.3.1.2
War in the Middle East
As indicated previously in this report, conflict levels in the Middle East is the primary driver of oil prices, which in
turn is the primary factor in determining oil company net income. Given this connection between Middle Eastern
conflicts and oil companies’ absolute and relative profits, the power of the U.S. government to affect the conflict
level is crucial to the oil industry.
The U.S. Department of Defense (DOD) is the single largest energy consumer in the world (Singer &
Warner, 2009) consuming 117 million barrels of oil in FY2011 at a cost of $17.3 billion. Although, the DOD only
consumed 1.9% of domestic petroleum energy, making it a relatively small user compared to overall petroleum
consumption (Schwartz, Blakeley, & O’Rourke, 2012).
Whereas the actual consumption of petroleum of the U.S. military is relatively small, the impact on oil
prices of using the military in the Middle East is far greater. Joseph Stiglitz and Linda Bilmes has assessed the cost
of the war in Iraq in their book The Three Trillion Dollar War: The True Cost of the Iraq Conflict implies: assessing
the actual costs of the Iraq war that begun in 2003. Their calculations are built on data from government agencies
and respected independent sources for estimating health related costs for veterans. Their framework for estimating
the total costs for the war is contains ten steps:
28
(1)
Add appropriations/expenditures for military operations and;
(2)
operational expenditures and re-allocations within the Department of Defense and;
(3)
correct for inflation and ‘time value’ of money.
(4)
Add future operational expenditures and;
See MISI, 2010
34
(5)
current and future cost of disability and health care for veterans and;
(6)
future cost of replacing and restoring military materials spent and;
(7)
budgetary costs to other parts of government and;
(8)
add interest.
(9)
Estimate the cost to the economy incurred from lost income to deaths and disabilities of soldiers and their
families plus cost to society from the same.
(10)
Estimate the macroeconomic impact from higher oil prices, larger deficits, diverted funds from other
government spending that would have stimulated the economy provided grounds for future growth.
Stiglitz and Bilmes arrive at an estimate of $1.7 to 2.7 trillion in mere budgetary costs of the war in Iraq covering
steps 1-8, and add another $300-400 million from step nine. What is interesting is step ten, adding in the
macroeconomic costs of higher oil prices, higher deficit and opportunity costs. In the view of the authors, war is not
good for the economy and the only benefactors from the war are the oil and military industries. Oil prices has shot
up dramatically since the Iraq war begun incurring costs at around $400 billion on U.S. imports only (Bilmes &
Stiglitz, 2008, p. 117). Stiglitz and Bilmes then applies standard macroeconomics to show how money spent on
imports have a double negative impact on GDP as it reduces output directly and diverts resources from domestic
spending which has multiplier effects in the economy. They also add an assessment of the negative impact of the
war on stock markets and future growth prospects. The tally of the Iraq war alone ends up at $4 trillion (Bilmes &
Stiglitz, 2008, pp. 130–131).
The opportunity cost of alternative spending of these trillions of dollars to the U.S. economy are difficult to
assess, but previous studies of the impact of cold war military spending suggests that military spending is a poor use
of government resources. In a comparison of the multiplier effects of military and non-military government
spending, Ward and Davis concludes that …”military spending is a significant drain on the economy” (1992, p. 1).
The negative macroeconomic effects on the economy resulting from military spending as opposed to nonmilitary spending and the loss of GDP due to higher import costs of oil are double. Lost opportunities to invest
taxpayer money in education or infrastructure and negative effects on growth reduce government revenue in the
short and long term. Budget deficits force the government to reduce overall spending on already underfunded
government services, compounding the effect further.
Budget deficits, in turn, reflect poorly on government as it implies that it cannot manage its costs, thus
boosting anti-government and anti-regulation sentiments.
3.4
3.4.1
Actions to Affect Government Policy
Direct Influence on Policy Making
Lobbying works through influencing political representatives by informing them about interest group
preferences. Campaign contributions are means to support candidates who vote according to donor preferences.
Independent spending from outside groups is somewhat different, as it can be used both as a carrot and a stick. For
example, negative spending against Obama reached $332 million in the 2012 election with only $26 million in
35
positive advertising (“OBAMA, BARACK President - Follow the Unlimited Money - Sunlight Foundation
Reporting Group,” n.d.). Independent spending will not be included here as a direct influence on government policy.
Lobbying from the oil and gas industry has more than doubled in nominal terms since 1998, reaching a
peak of $174 million in 2009. The biggest spender on lobbying among the supermajors over the period was
ExxonMobil, followed by Chevron. Koch Industries was a relatively small spender compared to the supermajors,
but its growth in lobbying expenditures has been tremendous. Koch Industries spent only $200,000 in 1998, but a
full $18 million in 2008, a growth of 9000%. Considering the revenues of Koch Industries at only a quarter of
ExxonMobil’s and not even half of Chevron and ConocoPhillips’s, the amount spent on lobbying by Koch Industries
is truly remarkable.
36
Table 6. Lobbying Expenditures of the Supermajors and Koch Industries (nominal millions)
Year
Oil & Gas Industry
ExxonMobil
Shell
BP
ConocoPhillips
Chevron
API
Koch Industries
1998
$61
$11
$4
$5
$0
$9
$3
$0
1999
$60
$12
$4
$6
$1
$5
$3
$0
2000
$52
$7
$5
$4
$1
$5
$2
$0
2001
$54
$6
$5
$2
$1
$6
$1
$1
2002
$59
$8
$6
$3
$1
$7
$3
$1
2003
$56
$8
$5
$3
$1
$6
$3
$1
2004
$52
$8
$1
$2
$3
$7
$3
$1
2005
$66
$7
$1
$3
$5
$9
$4
$1
2006
$75
$15
$2
$4
$2
$7
$3
$3
2007
$85
$17
$3
$5
$4
$9
$4
$4
2008
$135
$29
$4
$10
$8
$13
$5
$18
2009
$174
$27
$10
$16
$18
$21
$7
$12
2010
$148
$12
$10
$7
$20
$13
$7
$8
2011
$149
$13
$15
$8
$21
$10
$9
$8
2012
$140
$13
$14
$9
$4
$10
$7
$11
Grand Total
$1,366
$192
$91
$86
$90
$136
$65
$69
Notes: BP includes Amoco. ConocoPhillips includes Conoco and Philips Corp. until merger. Chevron includes ChevronTexaco, Unocal and Texaco.
ExxonMobil includes and Exxon and Mobil. Source: Oil & Gas: Lobbying. (n.d.). OpenSecrets.org Center for Responsive Politics. Retrieved April 18, 2013,
from http://www.opensecrets.org/industries/lobbying.php?cycle=2012&ind=E01
37
Table 7. Campaign Contributions of Three Supermajors and Koch Industries (nominal millions)
Election Cycle
Oil and Gas Industry
Industry total % to Dem.
Industry total % to Rep.
ExxonMobil
Chevron
BP
Koch Industries
1990
$11
38%
62%
$0.53
$0.49
$0.49
$0.04
1992
$21
34%
66%
$0.67
$1.15
$0.48
$0.15
1994
$18
37%
63%
$1.08
$1.14
$0.51
$0.40
1996
$26
23%
77%
$1.21
$1.51
$0.88
$0.84
1998
$22
23%
77%
$1.10
$1.25
$0.81
$1.01
2000
$35
21%
79%
$1.40
$1.57
$1.31
$1.07
2002
$25
20%
80%
$1.18
$1.31
$0.49
$1.45
2004
$27
19%
81%
$0.94
$0.50
$0.33
$0.85
2006
$22
18%
82%
$0.85
$0.61
$0.29
$1.51
2008
$39
23%
77%
$1.43
$1.11
$0.52
$2.00
2010
$33
23%
77%
$1.42
$0.97
$0.14
$2.20
2012
$71
10%
90%
$2.78
$3.88
$0.41
$2.74
Grand Total
$349
Avg. 24%
Avg. 76%
$14.57
$15.48
$6.65
$14.29
Source: Oil & Gas: Top Contributors to Federal Candidates, Parties, and Outside Groups. (n.d.). OpenSecrets.org Center for Responsive Politics. Retrieved April
18, 2013, from http://www.opensecrets.org/industries/contrib.php?cycle=2012&ind=E01
38
The Center for Responsive Politics accounting for campaign contributions use Federal Election
Commission records of individual donors to compute its data. This data contains information about the amount
given and the employer/occupation of the individual used to associate the donation to a particular corporate
entity(“About the data in these industry profiles,” n.d.). Most of the contributions from the oil and gas industry as a
whole have been allocated to Republicans, and their share has been growing steadily since the mid 1990s. The
spending of Koch Industries has not seen the same dramatic increase as its lobbying expenditures, but it is still
remarkable considering the smaller size of Koch Industries relative to other major oil companies. Koch Industries
outspent ExxonMobil in 2002, between 2006 and 2010, and was almost on pair with the leading supermajor in 2012.
3.4.2
Indirect Means of Affecting Government Policy
Lobbying expenditures and direct campaign contributions are relatively easy to track through the FEC and
traceable to the corporations through its employees. Independent expenditures are a different story as they often
include a third party organization with limited reporting requirements to the FEC. Independent expenditures are
classified in this report as indirect means of affecting government policy as the money is not directly targeted at
influence over government policy choices. As opposed to lobbying and campaign contributions, which are closely
connected to legislators’ votes on specific bills, independent expenditures direct attention to political candidates with
the aim of influencing voter support for these candidates.
The FEC defines ‘Independent expenditures’ are non-coordinated expenditures expressly advocating the
election or defeat of a clearly identifiable candidate. These expenditures are subject to different reporting
requirements than coordinated communications. ‘Coordinated communications’ are communications between a
political party or candidate, and outside groups (PACs and individuals are the only ones permitted to do this)
regarding election communications clearly in favor or opposing a certain candidate. Coordinated communications
are subject to certain reporting requirements (“Coordinated Communications and Independent Expenditures,” 2013).
Independent expenditures on advertising hit record levels in 2012 as corporations were allowed to spend
unlimited amounts from their general funds to support or oppose candidates following the ruling of the infamous
Supreme Court case Citizen United v. FEC (Franz, 2013).
Super PACs registered as 527 organizations with the IRS have to disclose their donors, but 501(c)4s do not
have any donor disclosure requirement. However, 501(c)4s cannot count elections as their ‘primary purpose’ which
restricts their ability to sponsor ads explicitly supporting candidates (Franz, 2013, p. 9). 501c4s together with 527s
and regulated PACs spent more in 2012 as independent expenditures and electioneering communications than over
the preceding 30-years from 1980-2010 (Franz, 2013, Fig 2). Franz points out that the shift from party committee
spending to outside groups does not really make a difference as outsides groups are closely aligned with partisan
goals (2013, p. 22).
39
Table 8. Trends in Political Expenditures 1980-2012
Year
PAC Ind. Exp.
Party Coord. Exp.
Party Ind. Exp.
Electoral Com.
1980
$16,367,316
$17,544,144
$0
$0
1982
$5,935,127
$17,497,584
$0
$0
1984
$23,468,774
$29,142,372
$0
$0
1986
$10,202,309
$23,595,423
$0
$0
1988
$21,465,566
$40,689,308
$0
$0
1990
$5,647,859
$19,553,001
$0
$0
1992
$11,035,701
$62,950,765
$0
$0
1994
$5,200,081
$42,834,872
$0
$0
1996
$10,183,805
$54,727,412
$12,345,461
$0
1998
$10,183,805
$38,794,509
$1,658,192
$0
2000
$28,802,075
$52,164,188
$3,612,127
$0
2002
$20,355,772
$21,549,521
$3,703,698
$0
2004
$68,708,428
$58,694,250
$269,462,574
$79,376,646
2006
$38,555,666
$33,947,635
$225,461,770
$10,506,998
2008
$156,621,685
$49,329,383
$280,523,392
$98,842,661
2010
$208,817,989
$51,101,356
$183,046,343
$69,705,692
Sum 1980-2010
$641,551,958
$614,115,723
$979,813,557
$258,431,997
2012
$986,149,879
$63,617,951
$251,101,895
$12,131,085
Source: Adopted from: Franz, M. M. (2013). Interest Groups in Electoral Politics: 2012 in Context. The Forum,
10(4). doi:10.1515/forum-2013-0007, Appendix.
Table 8 shows trends in political expenditures since 1980. It indicates how outside groups’ spending took off
dramatically in the 2008 cycle (even before Citizens United v. FEC) and overtook party expenditures in 2012
outspending parties by a ratio of 3:1. Not only did expenditures shift from party hands to outside groups, but funds
more than doubled from 2010 to 2012.
The groups behind this spending are for the most part not required to disclose their donors. These groups
are 501(c)(3)s, 501(c)(4)s, and 501(c)(6)s, and unless donations are made through corporate foundations or
earmarked for a specific political communication there is no disclosure requirement. Political organizations under
IRS section 527, PACs or Super/Hybrid PACs, are required to disclose donor information publicly, although if
donations are routed through a non-disclosing group 501(c)(3), (4), or (6) donors can remain anonymous. 501(c)(3)s,
“charitable non-profit organizations”, are most limited in their political activity and can only engage in issue
advocacy and certain election activities. These groups can only do a minimal amount of lobbying. 501(c)(4)s,
“social welfare organizations”, and 501(c)(6)s, “business leagues”, have less limitations regarding their political
40
activities and can support specific candidates as long as they are not coordinated with the candidate’s own campaign.
The primary purpose of (c)(4)s and (c)(6)s cannot be political activity. 29
Examples of Super PACs (independent expenditures only PACs) are American Crossroads, Club for
Growth PAC, and FreedomWorks for America. All these have sister organizations (Crossroads GPS, Club for
Growth Action, and FreedomWorks Inc.) registered with the IRS as 501(c)(4)s, which allows them to keep donors’
identities hidden from the public eye. The most prominent 501(c)(6) is the U.S. Chamber of Commerce and the most
notable (c)(3) is the Americans for Prosperity Foundation. 30
This report will focus on the organizations that have clear ties to the oil & gas industry or the Koch
Brothers and spent significant amounts in the 2010-2012 election cycle. These groups are the American Petroleum
Institute (API), American Enterprise Institute (AEI), The Heartland Institute, Americans for Prosperity (AFP) and
FreedomWorks.
3.4.2.1
The Ideological Conviction of Charles and David Koch
“A market economy functions best when governments do not attempt to influence outcomes with a
political agenda, when they do not attempt to pick winners and losers” (“Executive Viewpoint:
Twenty Questions for Charles Koch,” 2009).
“As a company, we are committed to doing what is right in every aspect of our business. That is why
we will continue doing everything we can to persuade politicians to put what is good for the country
first, before it is too late” (“Moving Forward,” 2013, p. 12).
The leading ideological force of the two Brothers is Charles Koch. Charles was influenced by the Austrian School of
Economics with Ludwig von Mises and Friedrich Hayek (“Executive Viewpoint: Twenty Questions for Charles
Koch,” 2009). These two along with Milton Friedman are suggested readings on the Koch Industries website. 31
Charles Koch speaks of ‘economic freedom’ and the Charles Koch Institute runs a website with the same name.32
The requirements for ‘economic freedom’ are listed as:
(1) Individual and property rights
29
Facts regarding donor disclosure and political activities of 501(c)s, PACs and Super PACs adopted from: Grifo, F., Halpern,
M., & Hansel, P. (2012). Heads They Win, Tails We Lose: How Corporations Corrupt Science at the Public’s Expense. Union of
Concerned Scientists. Retrieved from http://www.ucsusa.org/scientific_integrity/abuses_of_science/how-corporations-corruptscience.html See also: Requirements for Exemption. (2013, March 15). IRS. Retrieved April 18, 2013, from
http://www.irs.gov/Charities-&-Non-Profits/Other-Non-Profits/Requirements-for-Exemption
31
See What is Economic Freedom? (n.d.). Koch Industries Inc. Retrieved April 20, 2013, from
http://www.kochind.com/Newsroom/EconomicFreedom.aspx
32 See Economic Freedom. (n.d.). Economic Freedom. Retrieved April 20, 2013, from http://www.economicfreedom.org
41
(2) An impartial and beneficial rule of law
(3) Freedom to trade for wants and needs
(4) Sound currency
(5) Limited government (“Economic Freedom: A heated Debate,” 2012).
According to Koch Industries ‘Discovery newsletter’, government should be small and limited …”to those activities
that actually contribute to societal well-being, such as the protection of persons and property” (“Economic Freedom:
A heated Debate,” 2012). Government regulation of greenhouse gases does not seem to be defined as regulation
that contributes to ‘societal well-being’ as it is described as a …” kind of excessive regulation [that] guarantees the
long-term decline of U.S industry,” Charles Koch said” (“Economic Freedom: A heated Debate,” 2012).
Koch Industries is also committed to ‘free trade’ without any tariffs, quotas, or subsidies …”and any other
laws or regulations that distort the market – even when they benefit Koch businesses” (“Economic Freedom: A
heated Debate,” 2012). As a beneficiary of the ethanol tax credit through Flint Hill Resources, Charles Koch said in
the January Discovery Newsletter that Koch Industries were happy to see the credit expire in 2011 (“Moving
Forward,” 2013, p. 12).
Government in general is described as a self-interested entity funding pork-barrel projects with public
money it gets from taxation of income and gasoline, borrowing, and inflating debt through quantitative easing. Koch
Industries are also squarely against government bailouts of business (“Economic Freedom: A heated Debate,” 2012).
Charles Koch showed signs of an organizational model understanding of politics when he complained
about businesses engaging in rent-seeking behavior through seeking special favors instead of competing with each
other. Behavior he calls ‘cronyism’ (Koch, 2012).
3.4.2.2
The Ideological Conviction the Koch Family Foundations
According to Greenpeace, the Koch family foundations spend $55 million funding organizations denying climate
change between 1997-2009 (Greenpeace, 2011). The Kochs are on the boards of several foundations that have
supported a variety of think tanks, academic institutions, and fake grassroots organizations. The foundations that the
Kochs are active directly in are:

Charles C. Koch Charitable Foundation

David H. Koch Charitable Foundation

Claude R. Lambe Charitable Foundation

Knowledge and Progress Fund

Fred C. and Mary R. Charitable Foundation
Lately, there has been a lot of attention directed to two secretive foundations, Donors Trust and Donors Capital.
These two foundations have routed large sums of money to similar causes. According to a recent Greenpeace report
based on IRS 990 tax forms, Donors Trust has given $146 million to 102 groups …“ that have attempted to
undermine and obstruct the scientific consensus around climate change or policy solutions to climate change, against
42
the recommendations of the scientific community that countries must act urgently to reduce carbon pollution”
(Greenpeace, 2013). Donors Trust is according to its webpage … dedicated to the ideals of limited government,
personal responsibility, and free enterprise…and encouraging philanthropy and individual giving and responsibility,
as opposed to governmental involvement, as an answer to society's needs” (Donors Trust, n.d.).
Table 9. Donors Trust Funding to Twenty Climate Denial Recipients (2002-2011)
Organization
Total
American Enterprise Institute (AEI)
$19,840,954
Heartland Institute
$14,496,497
Americans for Prosperity (AFP)
$12,241,961
Federalist Society
$10,854,463
State Policy Network
$10,059,051
Hudson Institute
$5,222,000
Committee for a Constructive Tomorrow (CFACT)
$4,165,978
Americans for Limited Government
$3,950,000
Independent Women's Forum
$3,387,604
Institute for Humane Studies
$3,349,662
Texas Public Policy Foundation
$2,630,758
Institute for Religion and Democracy
$2,340,000
Mercatus Center
$2,258,650
NFIB Legal Foundation
$2,093,500
Illinois Policy Institute
$1,895,707
Philanthropy Roundtable
$1,822,560
Independence Institute
$1,727,000
Freedom Foundation (Evergreen Freedom Foundation)
$1,716,555
Cato Institute
$1,535,207
Commonwealth Foundation for Public Policy Alternatives
$1,473,300
Grand Total
$107,061,407
Source: Adopted from: Greenpeace. (2013). Donors Trust: Laundering Climate Denial Funding (Briefing).
Greenpeace. Retrieved from http://www.greenpeace.org/usa/en/media-center/reports/Donors-Trust-LaunderingClimate-Denial-Funding/
The link connecting the Kochs to Donors Trust and Donors Capital Fund is the fact that the Knowledge and Progress
Fund – a Wichita based fund - has donated over $6 million to Donors Trust and Donors Capital since 2005
(“Recipient: Donors Capital Fund,” n.d., “Recipient: Donors Trust,” n.d.). Charles Koch is the Chairman and CoDirector of the Fund which has Richard Fink as President (Love, 2012). Fink is an executive VP at Koch Industries
where he serves on the board of directors. He is also a co-founder of the Mercatus Center at George Mason
43
University where he sits on the board of directors. In addition, Fink sits on the board of the Charles G. Koch
Charitable Foundation, Claude R. Lambe Charitable Foundation, Fred C. and Mary R. Koch Charitable Foundation
and on the board of Americans for Prosperity, which he also co-founded (Mercatus Center, n.d.).
3.4.2.3
The Ideological Conviction of the Supermajors
From the top twenty recipients of Donors Trust and Donors Capital funds, ExxonMobil has contributed to nine since
2001. These institutions include the Heartland Institute, the Cato Institute, the Federalist Society, the Mercatus
Center, and the American Enterprise Institute (AEI) and totals over $4 million, with almost half of the funds going
to AEI (“Funder: ExxonMobil,” n.d.).
The engagement of ExxonMobil in the climate science debate is nothing new. A Union of Concerned
Scientist report from 2007 traced $16 million of Exxon funds to institutions, which manufactured uncertainty around
climate science using similar tactics as the tobacco industry had regarding the health effects of tobacco (Shulman,
Abend,
&
Meyer,
44
2007).
Table 10. ExxonMobil Donations to Organizations Who Receive Funds From Donors Trust & Capital ($ nominal)
Year
American
Cato
Committee
Federalist
Heartland
Independent
Independent
Mercatus
Texas Public
Enterprise
Institute
for a
Society for
Institute
Institute
Women's
Center
Policy
Institute for
Constructive
Law and
Public
Tomorrow
Public
Policy
Policy
Research
Studies
Forum
2001
230000
20000
35000
15000
90000
5000
2002
280000
30000
35000
15000
15000
10000
5000
2003
260000
25000
72000
15000
92500
10000
15000
2004
255000
15000
125000
15000
100000
2005
265000
90000
15000
119000
2006
265000
70000
15000
115000
2007
240000
40000
15000
2008
245000
2009
20000
Foundation
5000
40000
529500
10000
15000
560000
534000
40000
15000
555000
40000
10000
360000
15000
40000
10000
310000
235000
15000
40000
20000
310000
2010
245000
15000
40000
10000
310000
Grand Total
2520000
280000
80000
4258500
110000
467000
150000
Source: Funder: ExxonMobil. (n.d.). Bridge Project. Retrieved April
15000
400000
390000
40000
30000
Grand Total
15000
531500
70000
50000
l 21, 2013, from http://bridgeproject.com/?organization&id=253653
45
A Union of Concerned Scientists analysis of corporate influence over the climate science and policy
dialogue, including ConocoPhillips and ExxonMobil, shines some light on the supermajors’ positions on science and
policy. Based on the companies’ positions on the EPA’s endangerment finding, contributions to the pro or antiproposition 23 camps, public relations, annual report, SEC and IRS filings, shareholder action and Congressional
engagement, and funding of outside organizations, UCS has evaluated both companies positions in 2009-2010
(Grifo et al., 2012).
ExxonMobil was affiliated with six industry organizations in opposition of climate science or science-based
policy, and only affiliated with one support climate science or science-based policy. On the other hand, it was
affiliated with an equal number (five on each side) of think tanks and other organizations that either supported or
misrepresented climate science. In its public relations communications, Exxon was consistently pro-climate but its
actions were almost always anti-climate (Grifo et al., 2012).
ConocoPhillips was also affiliated with six oppositional industry organizations, but also with four in favor
of climate science or science-based policy. It was not affiliated with any think-tank or other organization
misrepresenting climate science, but with one supporting climate science. However, its actions through lobbying and
contributions to Congress consisted of equal parts pro and anti-climate funding (Grifo et al., 2012).
Interestingly, of the seven energy corporations included in the USC study, all but one (Occidental
Petroleum) misrepresented climate science in their comments on the EPA endangerment finding, and only one
company of all 28 included expressing concern about climate change in its EPA comment. 33 This consistency
indicates that the science misrepresentations are related to regulations, regulations that follow from the EPA
endangerment finding.
Shell, instead of embarking on a denial track has instead been working on its image through improved
public relations over the last twenty plus years. The company has worked on its image as a leader in corporate
environmentalism despite being the most carbon intensive among the supermajors with 29% of its reserves in
Canadian tar sands and risky exploration ventures in the Arctic (Greenpeace, 2012).
It remains unknown if the non-Exxon supermajors are involved in funding organizations fuelling climate
denial, but it is possible that they are among the fifteen large donors providing more than 50% of U.S. Chamber of
Commerce funding.34 As a 501(c)6, the Chamber does not have to disclose its donors. In 2011 only $11 million of
$200 were disclosed (Leonnig, 2012). As the Chamber has run large campaigns promoting the oil industry (Johnson,
2010), has a history of climate change skepticism (Johnson, 2009) and has a policy of not disclosing its members
(U.S. Chamber of Commerce, n.d.) it would be reasonable to suspect some level of involvement from the
supermajors.
33
See Figure 8 in: Grifo, F., Goldman, G., Gutman, B., Freeman, J., Rogerson, P., & Veysey, D. (2012). A Climate of Corporate
Control: How Corporations Have Influenced the U.S. Dialogue on Climate Science and Policy. Union of Concerned Scientists.
Retrieved from http://www.ucsusa.org/scientific_integrity/abuses_of_science/a-climate-of-corporate-control.html
34 See US Chamber Watch. (n.d.). The Echo Chamber: How the U.S. Chamber of Commerce’s Top Corporate Funders Dictate
the Agenda for the 112th Congress. Public Citizen. Retrieved from
http://www.fixtheuschamber.org/sites/default/files/us_chamebr_watch_-_the_echo_chamber_-_final_formatted_2.pdf
46
3.4.3
The Positions of Supermajor Sponsored Organizations
The American Petroleum Institute represents all of the oil and gas industry, including ExxonMobil, BP,
Shell, CococoPhillips, and Chevron (“API Member Companies,” n.d.). API is not admitting that oil and gas
contribute to climate change according to its website:
“Oil and natural gas take us down the street and around the world…we rely on them for most of our
energy and will likely do so for years to come, emissions from their production and use may be
helping to warm our planet by enhancing the natural greenhouse effect of the atmosphere. That’s why
oil and gas companies are also working to reduce their greenhouse emissions” (API, n.d., my
emphasis).
API’s 2013 stance has been largely unchanged since 1997 according to an API document available on the
Heartland Institute web. The document presents the reality of climate change as uncertain, emphasizes the
occurrence of historical temperature changes, and points to reasons such as sunspots, variations in the earth’s orbit,
clouds and ocean currents (American Petroleum Institiute, 1997). API spent $68 on advertising in 2011 (“API 2011
990,” n.d.) and had spent $37 as of September 2012 promoting more drilling for oil and gas and less regulation
(Lipton & Krauss, 2012).
API is relatively careful about expressing its positions on government regulations, market-based
approaches and climate change. It came under criticism regarding a leaked internal document which went against
USCAP supported legislation, despite the support for energy and climate legislation from some of its members
(DeMelle, 2010). API opposes regulation of greenhouse gases under the CAA and have been part of campaigns
against a comprehensive climate and energy bill arguing that it will cost jobs, raise gas prices, reduce energy
security and make American companies less competitive (Grifo et al., 2012; Kaplun, 2009, p. 5). API has also been
involved in funding of a scientific reports skeptical of climate change (“American Petroleum Institute,” 2010).
The Heartland Institute, supported both by the Koch family foundations and Exxon, has a well-documented
history of spreading doubt over science including climate change denial 35 and are showing no signs of changing its
position. The Heartland Institute mission is …“to promote free-market solutions to social and economic problems…
privatization of public services, and deregulation in areas where property rights and markets do a better job than
government bureaucracies” (Heartland Institute, n.d.). Just recently it released a new report written by retired NASA
astronauts, scientists, and engineers. The report titled ‘Anthropogenic Global Warming Science Assessment Report’
emphasize uncertainties and questions the ‘hype’ over global warming (The Right Climate Stuff Research Team,
2013).
The American Enterprise Institute has a similar history to Heartland, arguing as late as 2007 that DDT was
unnecessarily banned and promoted Michael Crichton’s novel State of Fear in 2004 (a book describing global
35
See Oreskes, N. (2010). Merchants of doubt: how a handful of scientists obscured the truth on issues from tobacco smoke to
global warming (1st U.S. ed.). New York: Bloomsbury Press.
47
warming as a hoax) (Oreskes & Conway, 2010). They have also been caught offering scientists and economists
$10,000 each in cash to undermine the 2007 IPCC assessment report (Sample, 2007). The AEI representative who
offered cash to undermine the IPCC report was Kenneth P. Green. Green, before coming to AEI, was at the Fraser
Institute 2002-2005 where he published an article expressing skepticism against climate science.36 As a resident
scholar at AEI since 2006, Green compared climate change to science fiction (Green, 2011). Another prominent AEI
‘scholar’, Stephen F. Hayward, has also questioned the reality of climate change in the Weekly Standard (Hayward,
2006). In the most recent issue of the Weekly Standard, Hayward questioned the reality of climate change again:
“The recent temperature record is falling distinctly to the very low end of the range predicted by the
climate models and may soon fall out of it, which means the models are wrong, or, at the very least,
something is going on that supposedly “settled” science hasn’t been able to settle” (Hayward, 2013).37
3.4.4
The Positions of Koch Sponsored Organizations
Americans for Prosperity was formed in 2003 from the Citizens for A Sound Economy Foundation. The now
director, Richard Fink who also founded Citizens for a Sound Economy, and sits on the board of Koch Industries Inc.
He is the director of the two Koch companies, INVISTA and Flint Hill Resources. Fink is the president of the
Charles G. Koch Charitable Foundation and Claude R. Lambe Charitable Foundations and director of the Fred C.
and Mary R. Koch Foundation. Fink was the founder of the Mercatus Center at George Mason University and
currently serves on its board of directors. He was also on President Reagan’s Commission on Privatization (“About
AFP,” n.d.). Citizens for a Sound Economy was founded in 1984 by Charles Koch, David Koch, J.P. Humphries and
Richard Fink (“Citizens for a Sound Economy,” n.d.) David Koch has served as chairman of AFP (Benett, 2012).
Americans for Prosperity is according to its own website an organization that works for limited government,
less ‘red tape’ (regulation), less taxes and government spending and free markets (“About AFP,” n.d.). The
organization is against all carbon taxes (Phillips, 2012), and against cap and trade which the group defines as tax on
“coal, oil and natural gas”… at its special website set up specifically to make that point (“Don’t Use Climate Change
to Hide Tax Hikes!,” n.d.). While the official arguments are economic and AFP says it does not argue against the
science of climate change, AFP representatives have been caught claiming that there is no scientific consensus over
anthropogenic climate change, if its good or bad, and that carbon is not a pollutant (Johnson, 2010).
Politico reported in May 2012 that Charles and David Koch pledged to coordinate and spend $400 million
in the federal elections (M. Allen & Vandehei, 2012). Much of this money may or may not have been spent by the
Brothers. According to AFP director Tim Phillips, the organization planned to spend $110 million to defeat Obama
in 2012 (Wilson & Wenzi, 2012).
See Green, K., Ball, T., & Schroeder, S. (2004). The Science Isn’t Settled: The Limitations of Global Climate Models. The
Fraser Institute. Retrieved from http://www.fraserinstitute.org/publicationdisplay.aspx?id=13537# and Sourcewatch. (n.d.).
Kenneth Green. Sourcewatch The Center for Media and Democracy. Retrieved April 27, 2013, from
http://www.sourcewatch.org/index.php/Kenneth_Green
36
37
Hayward is no longer with the AEI but is prominent on AEI webpages: http://www.aei.org/scholar/steven-f-hayward/
48
The AFP does not disclose its donors. However, IRS filings of from donor organizations leads to Donors
Trust, a foundation led by Whitney Ball, the former director of development at the Cato Institute, and the Claude R.
Lambe Foundation, one of the Koch Family Foundations. Charles Koch was one of the founders of the Cato Institute
(Novak & Maguire, 2012; “Whitney L. Ball, President President & CEO, DonorsTrust,” n.d.). Donors trust and
Claude R. Lambe foundation has given a combined $8 million to AFP since 2010 (“Top Organizations Disclosing
Donations to Americans for Prosperity, 2012,” n.d.). The David H. Koch Charitable Foundation donated $1 million
from in 2008, the Charles G. Koch Foundation granted AFP $67,556 in 2009 and the Claude R. Lambe Charitable
Foundation has given over $4.5 million since 2005 (“Recipient: Americans For Prosperity Foundation,” n.d.). AFP
spent over $36 million in independent expenditures and electioneering communications during the 2012 election
cycle (“2012 Outside Spending, by Group,” n.d.).
FreedomWorks, like AFP has its roots in Citizens for a Sound Economy and was created through a merger of CSE
and Empower America in 2004 . Former FreedomWorks CEO/President and House Speaker Dick Armey sat on the
CSE board together with David Koch prior to the merger of FreedomWorks and Empower America (“Dick Armey,”
n.d.)
FreedomWorks …”fight for lower taxes, less government and more freedom”(“About FreedomWorks |
FreedomWorks,” n.d.). FreedomWorks believes that regulation is a burden on enterprise and that cost-benefit
analysis and market-based incentives should be used in reforming the regulatory framework (“Red Tape, Hidden
Taxes and Regulation | FreedomWorks,” n.d.). The EPA is said to be …“responsible for some of the most costly
regulations imposed on businesses and consumers” (“Energy and Environment | FreedomWorks,” n.d.).
FreedomWorks blogger Jon Gabriel recently attributed climate change to solar variability, volcanic activity, and
weather patterns while doubtfully ascribing a negligible part to human activity (Gabriel, 2013).
The largest donation of $10.6 million in 2012 to FreedomWorks came from a mysterious company set up
the day before the first donation was made (Gillum, 2012; “Top Organizations Disclosing Donations to
FreedomWorks, 2012,” n.d.). The mystery man behind the mystery company was later identified as a William Rose
(Gillum & Brown, 2012). According to the Bridge Project38, FreedomWorks has received both large and numerous
donations from Donors Trust dating back as far as 2006 (“Recipient: FreedomWorks Foundation,” n.d.). While the
funders of Donors Trust are secret, tax records reveals at least one donation of $25,000 from the Charles G. Koch
Charitable Foundation in 2010 (“Recipient: Donors Trust,” n.d.).
3.5
Summary
The petroleum industry has been profitable over the last 35 years, especially since the turn of the century.
Charles and David Koch have built their fortunes on the petroleum operations of Koch Industries. Both the
petroleum industry as a whole and the Koch brothers have seen their net income rise dramatically since the early
2000s. Both the industry’s profits and the Koch’s net worth are closely correlated with rising oil prices. Oil prices,
38
A liberal Super PAC, see PAC Profile: American Bridge 21st Century. (2012, February 16). The Center for Public Integrity.
Retrieved April 19, 2013, from http://www.publicintegrity.org/2012/02/16/8177/pac-profile-american-bridge-21st-century
49
which in turn depend on the level of conflict in the Middle East, are largely disconnected from supply and demand
dynamics.
Government policy has supported oil and gas through direct subsidies for almost a century; with the two
largest provisions dating back as early as 1918 and 1926. These subsidies are still in place, with somewhat reduced
effects. Other provisions have been enacted to compensate for the reduction. Non-specific tax provisions have also
benefited the industry and consumer support/security programs provide extra backing for oil and gas as primary
energy resources. Key government provided infrastructure has enabled production and consumption of petroleum
products on a massive scale. Through indirect government decisions to wage war, the petroleum industry has also
benefited immensely over the last decade.
The supermajors and the Koch Brothers have been actively engaged in efforts to directly affect government
policy through lobbying and campaign contributions. Lobbying (1998-) and campaign contributions (1990-) add up
to over $1.7 billion. These actors have also employed indirect tactics to secure their privileged economic position in
the economy by promoting an anti-government, anti-regulatory, and anti-science ideology through various external
organizations.
50
4
4.1
Conclusion
Discussion
Climate change is likely to have severe effects around the world due to political resistance against transformations of
economies away from fossil fuel dependence and toward more sustainable use of energy resources. Since the United
States is the largest oil consumer today and is projected to become the largest oil producer in the world by 2020,
political developments in the U.S. is of outmost importance for the trajectory of climate change.
This report is an analysis of the politics and economics of petroleum and the role of government policy in
determining the scale of production and consumption of oil resources. The oil and gas industry has received tax code
support for almost a century. It has benefited from one of the largest public works projects in the world and through
wars destabilizing the Middle East. The industry has been profitable over time and has leveraged these profits
directly against policy through lobbying and campaign contributions. In addition to efforts to influence government
policy directly, major industry actors have poured large sums into affecting policy indirectly through the electorate.
By promoting a Market Model ideology through funding of right-wing free-market anti-government, anti-regulation
think tanks, fake grassroots movements, and custom election propaganda organizations, the industry has contributed
to the polarization of American politics. This political polarization lies at the heart of the problem for addressing
climate change. Environmental issues in general and climate change in particular has drifted from being issues in
their own respect to becoming issues of government ‘intervention’ in the economy. In reality, the government is
deeply involved in every aspect of the economy, and particularly in the energy sector. However, promoting a
market-based understanding of the world and portraying government intervention as a negative, helps safeguard the
privileged position of the oil and gas industry.
4.1.1
Strategic Implications
Oil and gas interests have used their capital resources to shape the political and economic landscape
according to their preferences. This landscape is shaped in such a way that government regulation of greenhouse
gases is politically difficult, if not impossible, to realize at a meaningful scale and speed. How then would it be
possible to either alter or circumvent the political obstacles for climate action?
As this report has pointed out, the battle over the environment is a fight for control over the legislature and
the public understanding of environmental issues. Since money is the medium used in both contests, restricting its
usefulness in the political arena is the key to success.
The legal ways to address the corporate grip on Congress can be done through reforming campaign finance
law and ending corporate personhood through a constitutional amendment. However, this proposal is logically
flawed, as a constitutional amendment is an attempt to change the law since the legislative body is not willing to
change the law. The remaining option to action in Congress is to convince a significant number of state legislatures
to sign on to the amendment in order to forcefully change federal law. So far, only two states (Vermont and
Montana) have actually passed joint resolutions or voter initiatives (Move to Amend, n.d.). Restraining the direct
use of money in legislative processes should not put any restrictions on democracy, but rather improve it, as money
would buy less influence and corporations would not be considered persons. In the public sphere, it would be more
51
problematic to place legal limits on the ability of corporate money to influence government policy indirectly through
shaping public perceptions.
Other possibilities would be to try reclaiming and separating environmental issues from the debate over
government involvement in the economy, or getting the message across to the public that environmental regulation
is not a cost to the overall economy, but rather a substantial long term gain. Such a tactic must be employed in the
arena of public perceptions – the ideological battlefield – where political views have become more polarized than
ever before. Given that political polarization has grown steadily over the last thirty years and that environmental
regulation was joined to the trend in the mid 1980s, it would be reasonable to expect that reversing this trend would
take an equal amount of time. However, the last historical turning point towards political consensus took place in the
context of severe economic crises and two world wars and the shift was swift. 39
Besides waiting for the economy to collapse and war to break out, there may be innovative ways to get the
message across to a critical mass of people. A promising attempt to promote public awareness of global warming
through educating key elements of the media who enjoy high levels of confidence with the public has been made by
Ed Maibach, director of the Center for Climate Change Communication at George Mason University. Maibach has
together with meteorologist and weather forecaster Jim Gandy used weather reports to educate the public in South
Carolina about climate change (Ludden, 2013). Changing the minds of climate change skeptics may require the
employment of ‘broker categories’ such as security, technology or religion, to bring believers an skeptics together
instead of each camp concentrating their efforts on demonizing each other (Hoffman, 2011).
If it is true that environmental policy chance relies on reduced levels of political polarization, then, the
underlying factors involved in producing differences must be addressed. As problems related to race, immigration,
social intolerance and inequality are fought by a variety of groups, it makes sense for the environmental community
to make common cause with these groups as part of the strategy. Insofar that this is a viable strategy, IFG’s efforts to
bring groups together with the intent of making common cause and coordinate strategies is a positive contribution to
change.
Alternatively, if amending the Constitution or directly campaigning to promote public awareness of climate
change fail, the environmental community could attempt to promote a dominant capital faction with competencies
and interests more consistent with environmental protection and climate change mitigation in order to reduce the
fossil-fuel industry’s share of national income. As the income of other industries increase, the fossil-fuel industry’s
influence over government policy would be reduced.
A key lesson from this report is that oil-related conflicts are immensely beneficial to the petroleum industry
and extremely destructive for the overall economy. It boosts oil company profits like no other policy measure, it
drains public accounts of resources for other government programs and breaks the federal budget, and it impacts
GDP negatively through making oil imports more expensive. Opposing any U.S. military intervention in the Middle
East should therefore be a top priority for the environmental community.
39
See VoteView.com. (2013, January 18). The Polarization of the Congressional Parties. VoteView.com. Retrieved April 26,
2013, from http://pooleandrosenthal.com/political_polarization.asp
52
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