Small (Oil) Is Not Necessarily Beautiful

Politicians occasionally ask me which oil companies they should trust and are surprised when I say, none of them. (I also tell them not to trust consultants, including myself.) Instead, they should employ the Reagan doctrine of “Trust, but verify.”

Many castigate the big oil companies (and the private sector more generally) for their focus on profit, which is after all their job, kind of like non-profits spend a lot of time, money and energy on fund-raising. This is not to say oil companies should increase profit by dumping toxins into waterways or reducing safety monitoring, especially since either could ultimately have massive negative consequences for their profits. Just ask BP, which lost something on the order of $60 billion in the Deepwater Horizon incident.

It’s also the case that while state owned mineral enterprises (SMEs) do not seek to maximize profits, that doesn’t mean they have serving the public’s welfare as their primary goal. First and foremost, they seek to satisfy politicians, which often translates into spending on personnel and operations that are unnecessary or inefficient but yield political gains. In Soviet days, it was noted that a lot of drilling occurred in an area that was not petroleum rich but controlled by a relative of the Soviet leader; other national oil companies, like Argentina’s YPF, suffered from the same problem.

And it might be argued that government entities like national oil companies are more not less prone to create unresolved pollution, as the cleanup costs might not be charged to their own budget and governments rarely penalize their own organizations for such transgressions. Companies like Mexico’s Pemex and Venezuela’s PDVSA are prime examples of this, and some of the largest methane leaks are committed by Russian state-owned companies.

In my college years, a popular book was E. F. Schumacher’s Small is Beautiful which argued that the tendency towards massive organizations, installations, operations etc. should be resisted. The same theme has been taken up by renewable energy advocates with a goal of weakening the power of the big utility companies over power users. Except of course much of the solar power and nearly all of the wind comes from utility scale operations, which are not exactly community empowering.

Without doubt, the large multinational oil corporations (those that still exist) have a certain amount of political power because of their size and wealth, as well as what they can provide to many smaller countries. At the same time, they are much more likely to suffer political attacks as anyone who reads the newspapers in this country can attest. Indeed, in this country after World War II, it became common for politicians to seek lighter regulation of ‘mom and pop’ oil companies, which usually meant the wealthy owner of a small refinery. Oil import quotas, for example, were intended to reduce competition from the big oil companies with cheap Middle Eastern oil, that would hurt domestic producers, largely independents.

On the one hand, smaller companies can be easier to regulate than large ones, given their lesser political influence. But recent news stories have also pointed to a way operations by small companies can be more detrimental than large ones. Some of the larger methane leaks seem to come from smaller companies (based on unscientific anecdotal ‘data’), perhaps because they can’t afford the same sensing devices that larger companies can or, more likely, the extra personnel. If you have ten wells, hiring someone to monitor them can be more expensive per well, than if you have 1,000. That’s simple economies of scale.

In the end, how an oil company behaves is largely unrelated to its size and more a function of its corporate culture and personnel. A small company can be just as responsible or irresponsible as a large one. Small companies can be more nimble than large ones—if the management is more nimble. They can also invest more conservatively, or less, and focus more on community empowerment or less. To paraphrase Mitt Romney (and what I think he meant to say), corporations are made up of people and the people should be judged by their actions, not by stereotypes that all too often go astray.