Oil Beneath $0, Exxon Dropped From the Dow
Less Wealthy Oil Companies Signals Breathing Room For the Environment, Yet Can Rentiers Replace Oil Rent With Other Rents?
August 31, 2020
Jeffery J. Smith

Seismic Shift In Economies

Exxon, the oldest member of the Dow, was as recently as 2011 the biggest company on earth. In 2007, the value of its stock was half a trillion; in 2014, more than $450 billion. However, in four of six years before 2020, its stock fell. Since January, dropped another 40% and now’s worth about $180 billion.

If a government were recovering oil rent—as do Alaska, Norway, and Muslim kingdoms—they’d notice a huge drop in income. That revenue shortfall shall increase as oil keeps losing value, as it must. People push for clean alternatives, and engineers advance more efficient power sources, storage devices, and power plants.

If society were to recover less rent from diminishing oil, what other source of rent could people in general tap? Well, what now spews rent as did oil fields? Answer: the monopoly patents that the tech giants hold and who’ve replaced oil corporations in the Dow.

Giantism, Subsidized

The Apples today and the Exxons yesterday corral not just natural rent but political rent, too. Exxon owns oil fields, Apple owns parts of the field of knowledge. Then, both firms receive government favors enabling them to amplify their revenue many times over.

Consider Exxon.
* Most basically was the near free title to an oil deposit.
* After that, government turned a blind eye when John D. Rockefeller (and perhaps his competitors were guilty, too) bribed employees of other companies to be his industrial spies, and when his thugs battled those of other companies in city streets, culminating in murder.
* The military, always waging war somewhere, was a big customer, especially after modifying battleships from burning coal to burning oil.
* Later, governments favored oil indirectly when it favored automobiles.
* Then in America government made it illegal for farmers to brew their own fuel with Prohibition. Rockefeller donated $6 million to get that amendment to the Constitution passed (about $720 million today).

In 1928, for the first time the Dow Jones Industrial Average included Rockefeller’s Standard Oil (SO), re-spelled as Esso, then rechristened Exxon. The Dow Jones Industrial Average is an index of 30 large US companies. It tracks their performance in the stock market to assess the major sectors of the economy.

The US federal government, after breaking up Rockefeller's empire in 1909, in 1999 allowed the two biggest spun-off companies—Exxon and Mobil—to remerge. The biggest merger in history, it created the world's largest privately held oil company. For years, Exxon Mobil was the world's largest publicly traded company.

The New Reality Reprices

Then the market had a different idea. Thanks to mild winters, Americans and Europeans bought less oil. A little slow on the uptake, oil companies kept extracting boatloads of fossil fuels. They created the quickest rise in supplies in history. The glut, with less demand lessened even more by the global, viral lockdown, evaporated price.

To save themselves, oil extractors agreed to extract less. But progress—and the market—are not on their side. The biggest extraction cuts in history won’t be able to offset the biggest drop in demand in 25 years, figures the International Energy Agency.

Global oil prices have shriveled. Oil and gas prices were already low leading into 2019. A year later, the price for Brent crude (the US benchmark) dropped by more than 5% to $28 a barrel. Then US oil prices tumbled to 18-year lows of $19.20 a barrel.

Like the disintegration of the Soviet Union, out with the old and in with the new can happen fast. A sign of the times: oil companies have shut down rigs that were extracting more than a million barrels a day. The stock market wiped billions from the value of the world’s biggest oil companies.
* Royal Dutch Shell shares lost 5%, BP 5.5%.
* In the last nine months, seven oil companies downgraded their assets by at least $87 billion.
* Over 1,200 institutions representing more than $14 trillion in assets have committed to fossil fuel divestment.

More amazing, for the first time in history, oil prices plummeted below $0 per barrel. May contracts for West Texas crude traded at a minus $37.63 a barrel. Oil companies had to pay buyers to take the ex-black-gold off their hands.

Socialists note there may never be a more opportune time to nationalize the fossil fuel industry. Socialists fail to note nationalizing is not necessary—and counterproductive as in Mexico where the national oil monopoly is broke—were government to recover the oil rents. Oh, well. Socialists.

The Shake-up

While Big Oil struggles, Silicon Valley stocks massively outperform them, immune to climate and coronavirus concerns. Once Apple split its stock, S&P Dow Jones Indices, which is responsible for the Dow, made their biggest shake-up since 2013.

Apple's stock had soared so high—the tech giant recently reached a valuation of $2 trillion—that the company decided to split it to bring the price of a single share down. Everyone with one share of Apple will then own four shares. Each will be worth a quarter of its previous price.

The lower price of Apple stock lowers the average value of tech industry shares. To get that sector back closer to what S&P Dow Jones considers ideal, the Indices removed Exxon Mobil, pharmaceutical giant Pfizer, and weapons contractor Raytheon, replacing them with cloud software company Salesforce, biotech company Amgen, and manufacturer Honeywell International.

Founded in 1999, Salesforce was one of the best-performing stocks during the bull market after the home+site crash of 2006-2010, AKA “global financial crisis”. Since early 2009, its value multiplied 27 times. And Amgen has become one of the world’s largest biotech firms.

Investors quickly priced in the shake-up. Exxon fell 2% as Salesforce rose 4%. Pfizer dropped 1.9% and Amgen rose 4%. Raytheon fell 3% while Honeywell climbed 3.5%.

Not keeping up with technology had been skewing the Dow. In 2020 its average return frequently trailed S&P 500’s. The 500, rather than admit companies based on stock price as does the Dow, includes companies based on total capital value. Hence the 500 counts behemoths like Amazon that magnify the 500’s average. OTOH, the Dow excludes such companies whose shares sell for $1,000 per and more.

Roughly $31.5 billion of assets are benchmarked to the Dow, with $28.2 billion of passively managed funds linked. For the S&P 500, the figures are $11.2 trillion and $4.6 trillion—hundreds of times more massive.

Coddle Corps Or Cushion Society?

While Americans have used oil somewhat less, they’ve begun to use the wind and sun somewhat more. Whether accepting their fate or just paying lip service, some oil and gas giants announced they’ll reduce their contribution to climate change. Going against the grain, ExxonMobil planned huge new investments in oil and gas. Then reality set in. Exxon slashed its investments and expenses so it can keep paying dividends to shareholders.

Due to climate change, demand reduction, and tech growth, there are some three dozen companies more valuable than Exxon. Chevron is the only remaining energy stock in the Dow. Its days appear numbered.

Burning less oil, of course, results in emitting less pollution. This present drop in demand should decrease pollution by more than did all the largest recessions of the last 50 years combined. That includes the Great Recession after the US home+site market tumbled, beginning 2006.

Selling less, the fossil fuel industry lobbies more. To date the shake-up has been in stocks, not in insider political power. Exxon is still worth $175+ billion and has most politicians in its pocket. If trends continue, however much rent oil companies lose, tax subsidies may make up the difference.

As government coddles energy corporations, more recently it repeated its performance with tech companies.
* Principally, it grants patents for a mere filing fee, and
* grants the monopoly whether the recipient uses it to develop a product or just keep others from developing a product.
* Often, government funded the research that led to early profitable breakthroughs.
* Government was one of the first and hugest customers, agreeing to generous contracts.
* When Y2K was a legit fear, government even further limited the liability of Microsoft et al, saving them billions on insurance costs.
* When Microsoft lost anti-trust suits, the fine was too small to alter Bill Gates’s business decisions.
All those favors and others reveal that an immense portion of the value of tech companies is rent, a value that’s socially-generated.

Although economies self-correct more quickly than do policies, were government to recover patent rent, it’d barely notice the drop in resource rent (if indeed it were recovering any). If government used the revenue to pay citizens a dividend, then at long last the promise of techno-progress to lessen the toil and want and stress of human existence would come true. That favor for humanity would be far greater than government’s favoritism toward Rockefeller’s Exxon.

Find Out More.
Inside information on economics, society, nature, and technology.
Jeffery J. Smith

JEFFERY J. SMITH published The Geonomist, which won a California GreenLight Award, has appeared in both the popular press (e.g.,TruthOut) and academic journals (e.g., USC's “Planning and Markets”), been interviewed on radio and TV, lobbied officials, testified before the Russian Duma, conducted research (e.g., for Portland's mass transit agency), and recruited activists and academics to Progress.org. A member of the International Society for Ecological Economics and of Mensa, he lives in Mexico. Jeffery formerly was Chief Editor at Progress.org.