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Enron vs. Exxon Mobil: Polar Approaches to Energy and Public Policy

I have previously described Exxon Mobil as the anti-Enron. In an opinion-page editorial in yesterday’s Houston Chronicle, I contrasted the two companies in terms of both energy strategy and public policy.

More could be said than is in the editorial (reprinted below). Enron’s first fraud, engineered by Andrew Fastow, came with the purchase of Zond Corporation, which was renamed Enron Wind Corporation and is now part of GE Energy. (This complicated story about a “qualifying facility” under federal energy law is told in McLean and Elkind’s The Smartest Guys in the Room, pp. 166–67 and Kurt Eichenwald’s Conspiracy of Fools, pp. 142–44.)

Enron Energy Services, the energy outsourcing division of Enron that so excited environmentalists (including Joe Romm, now blogging at Climate Progress), was one of the company’s biggest frauds.

So Enron’s “green” strategy was at the core of its business problems and legal problems, a theme that I will detail in a forthcoming book.

Also, some of the points made below have been the subject of MasterResource posts, such as:

  • The oil majors are moving away from renewables.
  • Enron pushed for the Kyoto Protocol and cap-and-trade.
  • Enron’s role in getting Texas to enact the nation’s most stringent renewable quota (mandate).

Here is “ExxonMobil on Right Path” (the link will be broken in time–that is the newspaper’s policy):

Listening to the dissident shareholders leading the proxy fight to recast Exxon Mobil Corp. as a political energy company, it’s tough not to be reminded of the meteoric rise and operatic fall of the Enron Corporation.

That is what comes to my mind when I read the shareholder resolutions asking ExxonMobil to buy into climate alarmism and splash into uneconomic but politically correct renewable energy investments. Renegade shareholders Sister Patricia Daly, Neva Rockefeller Goodwin, et al. dress their case in the language of maximizing longer-run profits, asserting that the future of ExxonMobil is not in its traditional, very successful activities. But they are wrong on both business and public-policy counts.

In my 16 years at Enron, I watched the company shift from its core natural gas operations to investments in solar power, wind power, and other “green” energy activities. Time and again, environmental groups lauded Enron for practicing “energy sustainability.” The politically correct company received a climate-protection award from the EPA and a corporate-conscience award from the Council on Economic Priorities.

I remember how an Enron lobbyist asserted that passage of the U.N.-sponsored Kyoto protocol in 1997 — with its unrealistic mandate that the developed world cut greenhouse-gas emissions — would be “good for Enron stock.” He predicted that Enron’s wind, solar, and emissions-trading investments would take off once Kyoto came into force. “We bet on the future,” he crowed, “while others have bet on the past.” Chairman Ken Lay, in fact, announced at a management conference that Enron’s vision was “to become the world’s leading renewable energy company.”

Meanwhile, ExxonMobil (founded by the legendary John D. Rockefeller, Sr.) plodded along with its consumer-driven hard-asset energy model. It made steady progress by avoiding the energy fads that so captivated Enron.

The tale of two companies has played out. None of Enron’s “green” initiatives was profitable, and the “new-economy” company imploded. The smartest guys in the room were not so smart after all. ExxonMobil has proven itself to be sustainable in both the boom and busts of the present business cycle.

There is a deeper lesson in all this that both dissident shareholders and company supporters should take to heart: Reject political rent-seeking.

A business can make money via the free-market means of voluntary consumer patronage or via the political means of special governmental favor. The first is the way of capitalism; the second, of political capitalism.

None of the wind or solar projects Enron pushed were economically competitive with its natural gas business. And the energy-efficiency contracts peddled by Enron Energy Services turned out to be a mirage.

ExxonMobil is doing just fine, thank you, without a forced change in business direction. BP and Shell, in fact, have moved toward their rival’s business model by de-emphasizing their renewable-energy investments because of the field’s subpar profits (as determined by consumers). All the major oil companies are now focused on their core natural gas and oil activities, including offshore drilling and heavy oil production. Nobody, including BP, has gone Beyond Petroleum.

And this is good news for consumers. The International Monetary Fund and the International Energy Agency have concluded that the world needs trillions of dollars of oil and gas investment. The Energy Information Administration of the Department of Energy sees hydrocarbons as continuing their dominant role in the United States and the world for decades.

Successful companies stick to their core strengths and avoid profit centers that depend on special government favor. That was John D. Rockefeller’s philosophy a century ago, and ExxonMobil shareholders deserve to be the heirs to his genius, not to the flawed business model of Ken Lay and Enron.

Bradley, a former Enron employee, is founder and CEO of the Institute for Energy Research and author of “Capitalism at Work: Business, Government, and Energy.”

5 comments

1 Paul Roberts { 06.15.09 at 2:28 pm }

I certainly advocate civic responsibility for corporations. But corporate entities also have fiduciary responsibilities. Civic responsibility includes support for charities and compliance with applicable laws and regulations. Fiduciary responsibility means maximizing the ability of the organization to grow and earn. These are separate but not mutually exclusive duties.

Fiduciary responsibilities are not well served by investing in every fad and paranoia that emerges. It is and must remain the duty of the board to determine how the company allocates its resources. These responsibilites must not be abandoned to activitists with their own objectives.

2 Andrew { 06.15.09 at 3:06 pm }

The problem is that in the upside down modern world, success is a liability and failure an asset. How’s that for “New Economy”?

3 rbradley { 06.15.09 at 9:55 pm }

I got a nice email from an old Enron buddy, David R., who wrote:

“Right on. Skilling called Exxon a dinosaur, yet who is extinct.

Every time I see an article on evil old Exxon which has an opportunity to comment, I point out that as someone who owned both Exxon and Enron stock, I’ll take stodgy old Exxon, thank you.

If appropriate, I also point out the golden opportunity we (INI) had in the early eighties to invest in an ethanol plant in LA which at the time provided a gasoline tax exemption which combined with the fed exemption equaled the cost of production. Of course, there were no plants at the time. We asked what the probability was that as soon as a plant was built, the state would change the exemption. “Never happen!!!!!!” Our response was, thanks, but no thanks, what the Lord giveth, the Lord can taketh away”.
Sure enough, when a plant was finally built, LA eliminated the exemption entirely. The answer is blowing in the wind, so to speak.

I kind of like the philosophy of only investing in projects which make money even if the government changes their mind.”

4 David R { 06.16.09 at 9:23 am }

One addition to my comments Rob quoted: Last I looked (may be a bit lower now) Exxon-Mobil paid out almost 70% of profits before all taxes in property, excise, sales, income, and other taxes. Put another
way, for every dollar of after tax profits, they pay $2.30 to various governmental entities.

Seems more than fair to me.

5 Browsing Catharsis – 07.28.11 « Increasing Marginal Utility { 07.28.11 at 7:02 am }

[...] Enron lobbied HARD for green energy back in the day. HT Matt Ridley. [...]

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