C. Gopinath

Could boycotting one top oil company offer solution to runaway petrol prices? Unlikely. Alternative sources of energy need to be aggressively pursued. Lifestyle changes need to be made. Governments need to set taxes at a level that would alter consumer behaviour.

There was an unusual chain mail request in my inbox. The usual ones want me to forward the contents to ten others and promise a fortune, failing which disaster would strike. This one wanted me to join a boycott of ExxonMobil, the US oil giant, and if such action does not work, I figure disaster may strike our planet.

Oil prices have been going through the roof lately. The price per barrel reached $74 (Rs 3,330) recently and that seems to translate to the price at the petrol pump in my area to about $2.80 (Rs 126) for a gallon. That is about Rs 23 more than it was last year and about Rs 45 more than two years ago. The demand for oil is growing with the global economy humming along quite nicely. And with the US and Iran shadow-boxing on the sidelines, traders are pushing crude oil prices up using that as an excuse. Of course, it does not help that petrol production in the US is down as hurricane-damaged refineries are getting fixed, and ethanol production catches up to meet demand.

The boycott strategy

The mail admitted that by boycotting one company we were not going to make much of an impact on the oil price situation. It explained that petrol prices could go up to $4 (Rs 180) a gallon next year. It also stated that given our current lifestyles, we could not do without petrol. So the idea was to force a price war between companies by targeting one of them. The chosen target was ExxonMobil.

The sender of the mail wanted me to stop buying petrol from this company's pumps till the price dropped to about half of what it was now, and to send this message to ten others. With the usual magic of chain letters, hastened by the Internet, millions would be boycotting ExxonMobil and the magic of lower petrol prices would happen. I guess the sender has a point in picking Exxon as the target.It is the world's largest publicly traded oil company. This last year, it made $371 billion (Rs 16,69,500 crore) and generated a profit of $36 billion (Rs 1,62,000 crore). Those profits are greater than the GNP of 125 out of 184 countries tracked by the World Bank. And Exxon's former CEO, Mr Lee Raymond, who retired at the end of the 2005, was rewarded with a salary of $69.7 million (Rs 314 crore).

Energy committee hearing

I happened to watch the US Senate's (upper house) Energy Committee hearing where about half a dozen CEOs of major oil companies were being questioned by Senators on oil prices and oil company behaviour. The Senators were being kind, for these companies surely do their democratic duty of making monetary contributions to both the political parties. But one of the Senators, Mr Joseph R. Biden Jr., from the state of Delaware, asked the question. How is it, he said, that in a year when the price of your major raw material, crude oil, was so high, you made such a large amount of profit.

The Exxon CEO looked uncomfortable, shifted in his seat a bit, and then admitted that they were able to pass on the increase in costs to their customers. The truth is that the demand for petrol, at the pumps, is almost inelastic. Whatever the cost increase, the price will go up. Whatever the price, consumers have to pay to maintain their current lifestyle.

Senator Biden went on to ask if the oil industry still needed the subsidies it gets for its R&D efforts considering all the profits it was making. And one by one the CEOs agreed that they did not need those subsidies anymore.

Passing the buck

I can't blame the oil companies for shifting the cost to the consumer. Isn't that what any right thinking company would do, if it can? But again, this means that the superb profits were not being generated by any magical leadership or decision making of the CEOs. So let them give up their exorbitant compensation and admit that the profits were due to market conditions. Now that is a kind of leadership that we are not likely to see.

Trucking companies in the US, like the oil companies, have been able to pass on their higher costs to customers. But most others have tried to improve efficiencies and absorb their cost increases. Many of them face market conditions that do not permit such easy pass-through. And very soon, when they reach their limits of absorption, we will see the effects in terms of higher inflation.

The benefit of higher oil prices have also come to those in the developing world sitting on comfortable oil reserves and running state owned oil companies. Nigeria, perhaps for the first time in its history, instead of spiriting away the profits to the Swiss bank accounts of the ruling classes, has used it to repay sovereign debts. So much for having a democratic and responsible government. The vethal, the IMF, gets off its back!

And in South America, Mr Hugo Chavez, President of Venezuela, has been spreading his oil profits to his neighbours, offering them aid, and helping them repay their loans. The unsightly profits of companies such as ExxonMobil has given him the justification to argue that these companies are profiting at the expense of nations such as his. So he is all set on a path of the government taking a larger share of the ownership of oil companies operating in Venezuela and also demanding higher royalties and taxes.

The solutions

Targeting one company with a boycott is not going to solve our problems. There is a desperate need for an industrial policy here in the US. The government needs to set taxes at a level that would alter consumer behaviour. Alternative sources of energy need to be aggressively pursued. Lifestyle changes need to be made and people should give up their big suburban lifestyle, live closer to their places of work, and use public transport. Meanwhile, let me do my bit by looking for a petrol pump other than ExxonMobil.

(The author is professor of international business and strategic management at Suffolk University, Boston, US. His Internet address is cgopinat@suffolk.edu)

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