complaining about mosquitos while a crocodile bites your leg

Post Carbon Institute | Last week, in a repeat of 2008, reports of fat earnings from the oil majors were met with blame and outrage from American consumers, who are stressed from $4+ gas prices and strapped finances. Exxon Mobil, the 18th-largest oil company in the world, with about 3% of world production (~4million barrels of oil equivalent per day), reported quarterly earnings of $10.7 billion dollars. Americans are upset because they envision such hefty profits as direct transfers from their thin pocketbooks to Exxon, itself the recipient of government oil and gas subsidies to boot.

I am not an oil industry apologist, but recognize that I live in an oil-centric world, own a car, enjoy air travel and partake in the daily smorgasbord of food, services, and novelty made possible in the cheap energy age. To me, given the problems our country and government face, blaming Exxon for high gasoline prices and excessive tax subsidies is akin to complaining about a mosquito bite on your arm when a crocodile has your leg in its mouth.

First, it is a stretch to say that Exxon is under-taxed; last year Exxon's worldwide total taxes amounted to $86 billion, or 23% of its revenue (by comparison, at this country's second-largest corporation — Apple, Inc. — taxes were 6.9% of revenue. Yet Exxon understandably is a lightning rod, because the ~3 cents per gallon it makes as the world's largest refiner add up to very large numbers. And yes they make large sums on their oil production when commodity prices rise more than costs. But these are two sides of the wrong argument, and are not the real story.

Under a lens of ecology and biophysical economics, the vitriol being expressed at the Exxon is misplaced at best and counterproductive at worst. Though our culture perceives dollars and digits in the bank as wealth, in reality they are only markers. Our real wealth comes from the sun, including its direct daily insolation, its role in photosynthesis (which creates biomass, including fossil fuels), and its pushing natural and hydrological cycles that perform vital services to our species and others.

Our primary wealth is our finite endowment of resources, like oil and gas, timber, water, and minerals. We extract resources from this natural "bank account" and combine them with human ingenuity and technology to produce things we can use, such as tractors, houses, and clothing. Our socio-political system then overlays monetary tokens: stocks, bonds, bank deposits and cash that function as markers of our real wealth, markers that are increasingly disconnected from the reality of our natural resource balance sheet.

But energy is different from iPads or Doritos in its impact on our lives. The laws of economics (more like guidelines) state that energy, capital and labor are all substitutable. This turns out not to be true; there is no substitution for energy in our economy — every single economic product created requires first an expenditure of energy.

The amount of human labor that oil and other fossil fuels have been able to replace or allocate to other pursuits is gargantuan. The average human can generate only about 0.6 kilowatt-hours per day from physical effort, which, based on median U.S. salaries, equates to more than $300 per kWh generated by human labor. Oil, even at $110 per barrel, costs us just 6 cents per kWh, or 500 times cheaper than human labor. This replacement of human effort with fossil fuels has been the single primary driver of economic riches of the past couple of generations. For all intents and purposes, on human time scales, oil in our lives is indistinguishable from magic.

And it is depleting. U.S. oil production has been in steady decline since its peak in 1970. World production has been stagnant since 2005, despite a tripling in price last decade. The marginal barrel of oil now costs $85, as we are drilling deeper and in harsher environments, and now having to include fuels with lower net BTUs like tar sands, natural gas liquids and ethanol into the oil category just to stay even.

So when Exxon reports $10.7 billion in earnings, this is the monetary accounting of the chemical and kinetic energy it contributed to society in the form of oil and gas sales. This oil and gas then went on to perform myriad other activities in our economy — and 4 million barrels per day is the equivalent of over 2 billion human-days of useable energy. About equal to the working population of the world. Quite a deal actually, for us.