Tufts University students have joined a national campaign to pressure universities and other financial institutions to divest holdings of fossil fuel companies. Tufts’ organization is called “Tufts Divest For Our Future”, and you can find their website at http://tuftsdivest.com/. I have spoken to several students active in this campaign, and they are convinced that they are fighting the great moral crusade of our time, comparable in their minds to the fight against apartheid in South Africa. I don’t doubt their sincerity or their passion, but their campaign is based on several incorrect premises.
As I discussed in my post last week, climate change is a “fixed point” on college campuses. With very few (very quiet) exceptions, students never question the view that fossil fuels will destroy the planet in the very near future. In reality, as I have outlined in many posts, catastrophic climate change is a highly debatable proposition based on questionable assumptions, anecdotal evidence and weak science. It may prove to be true, but the case has yet to be made. We don’t have this discussion on college campuses very often, and most students have never been exposed to a contrary viewpoint since they started school at age 5.
The second incorrect premise is that we have available to us right now economically viable alternatives to oil, which are kept out of the marketplace by various political barriers. If we could remove these barriers, we would quickly transition to a new world in which low-cost mobility is available to all without carbon emissions. This statement is simply untrue.
During the 1960s, when the world was inhaling $2 per barrel Middle East oil, petroleum was the cheapest source of energy and penetrated every sector of our economy: transportation, electric power generation, home heating and industry. Following the sharp oil price increases of the 1970s, however, oil was quickly pushed out of many of these applications. In power generation, for example, oil’s share fell from a high of 17% in 1976 to its current level of less than 1%. In residential heating, oil’s share fell from a high of 18% in 1976 to around 5% today. The energy market does work, and oil loses when it can’t compete.
The structural change from a broad market base to a concentration in transportation cost the oil companies a great deal of money. Electric power plants use heavy fuel oil, which is a natural component of most crude oils. Without this market, the oil companies were forced to invest tens of billions of dollars in refinery upgrades to convert the heavy crude oil components into motor fuels. This expensive structural shift coincided with the loss of the oil companies’ most profitable overseas producing ventures to government nationalization.
The replacement of oil in transportation, however, has proven to be more difficult. Oil has advantages that no other fuel possesses, in particular its high density and liquid state. (For an excellent discussion of this issue, see Robert Bryce’s recent article in the National Review entitled “The Tyranny of Oil” at http://www.nationalreview.com/articles/342572/tyranny-oil-robert-bryce). We keep trying alternatives, such as biofuels, which have proven to be an economic and environmental mess benefiting only corn farmers and big food processing corporations like Archer Daniels Midland while ordinary consumers pay higher prices for both fuel and food. Electric cars are dramatically more expensive than conventional cars and have severe performance drawbacks, such as limited range and long recharging times. (See my February 13 post “The State of Play on Electric Cars” for more detail.)
The third incorrect premise is that the oil companies (or the fossil fuels companies in general) are in some sense criminally complicit in denying carbon-free alternatives to the public. I generally hear two versions of this argument. The strong version is that the oil companies are so politically powerful that they are able to block the introduction of these new and better technologies through various means, such as demanding and receiving heavy government subsidies for oil. This argument is simply wrong. (See my February 17, 2012 post “The Oil Subsidy Myth” for a complete discussion of this fallacy.) As an aside, an interesting question is why the oil companies, if they are so powerful, were unable to stop the nationalization of their properties and the loss of major markets, as noted above, during the 1970s.
The milder version of this argument, one often presented by Massachusetts Congressman and likely Senator Ed Markey, is that the oil companies are “rich” and have an obligation to use their considerable financial and technical resources to develop zero-carbon alternatives for the public. This argument is confused. Oil companies are commercial entities. They accept money from their shareholders in order to earn a return. Naturally, we expect all corporations to obey all laws and meet high ethical standards. ExxonMobil’s shareholders, for example, are primarily pension funds and mutual funds owned by average people in their retirement accounts. ExxonMobil is “rich” in the sense that its profits are very large, but not in terms of its return to its shareholders, which is in line with other large companies. It would be highly unethical (and probably illegal) for ExxonMobil’s management to take money entrusted to them and use it for social purposes, no matter how high-minded that might sound. Banks have fiduciary responsibilities to their depositors which supersede any other obligations, such as feeding the hungry or seeking a cure for cancer. The profits of a company like ExxonMobil belong to shareholders, not management.
Furthermore, companies like ExxonMobil have enormous technical capabilities, but these abilities are concentrated in very narrow areas related to finding, producing, transporting and manufacturing hydrocarbons. These skills are not easily transferable to other areas. Why would we expect ExxonMobil to be able to compete with a company like General Electric in the production of wind turbines or solar panels? Why would we expect that turning geologists loose on the problem of battery technology would produce real results? This idea is similar to asking the New England Patriots football team to suddenly start competing in ice hockey. That would be amusing to watch, but wouldn’t present much of a threat to the Boston Bruins.
In fact, Exxon tried to diversify its business lines in the late 1970s with investments in solar panels, uranium mining, nuclear fuel manufacture, computers and electrical equipment. The company even went so far as to buy Reliance Electric for $1.2 billion in 1979 in order to commercialize some energy-saving electrical device ideas Exxon had developed. The ideas turned out to have no commercial value, and Exxon sold off Reliance and most of its other non-fossil fuel businesses in the mid 1980s. The New York Times called Exxon’s diversification effort “an embarrassing, mistaken venture.”
As a final note, there’s an interesting irony in the student divestment movement. The organizers insist that replacement transportation technologies are available today, but they themselves don’t use these technologies despite heavy subsidies. I don’t know a single Tufts student who drives an all-electric car charged exclusively with renewable electricity. I suspect that they simply couldn’t afford such an option – a fact they ought to consider when formulating their views on this subject.
In effect, the students who support this effort are all consumers of the product they want to ban. If these students were demanding the prohibition of tobacco, we wouldn’t expect to see them all lighting up cigarettes while they marched. In a way, the Tufts divestment campaign is analogous to a group of smokers who refuse to give up nicotine, but demand that the tobacco companies offer them a safe, non-carcinogenic alternative at no additional cost. The students may see themselves as moral crusaders, but it’s a rather muddled morality.
I think most members of the Tufts community would agree that there are some endowment investments Tufts shouldn’t make. I, for example, wouldn’t support Tufts’ investing in the global opium trade, even if it were legal. The oil industry, however, is producing a product which is not only legal, but is currently both irreplaceable and essential to our economy and our way of life. I doubt that Tufts will succumb to this pressure and divest its holdings, but it would be nice to see the administration make a more robust defense of their investments.
[I have offered “Tufts Divest For Our Future” an opportunity to respond, and I will post their comments as soon as I receive them.]