Why Haven't Fossil Fuel Companies Adjusted Their Business Models?

December 1, 2016
Elliott Negin
Senior Writer

Ask a Scientist – December 2016

The Union of Concerned Scientists recently released a report rating the business practices of eight top investor-owned fossil fuel companies that are either US-based or have a North American affiliate. In order of emissions magnitude, the scorecard evaluated Chevron, ExxonMobil, BP, Royal Dutch Shell, ConocoPhillips, Peabody Energy, Consol Energy and Arch Coal. In response to the scorecard, UCS supporter R. Andrews of Glendale, AZ, asked:

Your report says those large oil companies knew that ‘an alternative path forward was available’ and that ‘they could have adjusted their business models.’ It defies logic that they wouldn’t adjust their business models. Why in the world wouldn’t they?!” and is answered by scorecard co-author Gretchen Goldman. Ph.D., the Center for Science and Democracy’s research director:

If the companies in our report were smart, they would have reinvented themselves. They should have seen the writing on the wall—changing economics, a need to address climate change, and the need to transition to renewable energy sources. Instead, they bet that governments would be slow to act, and they have done all they can to make sure that would be the case, much in the same way the tobacco industry staved off stronger regulations for decades.

History provides examples of success—and failure. Back in the mid-1800s, whaling, which provided oil for the lamps that lighted much of the Western world, was the fifth-largest industry in the United States. By the second half of that century, whale oil was replaced by kerosene, which in turn was rendered obsolete by the electric light. The whaling industry collapsed.

By contrast, the Fisher Brothers, who manufactured horse-drawn carriages at the turn of the 20th century, adapted to the changing times. Realizing that their future was tied to the fledgling auto industry, they redesigned their product to handle the stresses and strains of the new technology. They morphed into the fabulously successful Fisher Body Company, which eventually became a division of General Motors.

The fossil fuel industry is at a similar crossroads today, and at least two of the companies in the UCS survey—BP and Chevron—ventured into the renewable energy business a decade ago. When they did not realize quick profits, however, they sold off their holdings. Others, notably ExxonMobil, flatly reject the idea of diversifying into renewables because, as the oil giant’s CEO Rex Tillerson told his shareholders, “We choose not to lose money on purpose.”

Given that scientists project that energy companies worldwide will have to leave 60 to 80 percent of their reserves in the ground to ensure average temperatures do not rise more than 2 degrees Celsius, that’s shortsighted thinking at best, especially when governments around the world are finally getting serious about curbing global warming emissions. In any case, maximizing quarterly profits at all costs to placate Wall Street stifles innovation. When Toyota first introduced the Prius, the company lost money on every one it sold. Now it dominates the hybrid market because it was willing to invest in a long-term strategy.

The oil and gas companies we surveyed had a choice and, by and large, they chose to dig in deeper, further entrenching themselves into fossil fuel dependency when they could have morphed into low-carbon and carbon-free energy companies and diversified their portfolios.

They are now paying a price for their negligence. ExxonMobil , for example, is currently under investigation for fraud after evidence surfaced indicating that the company knew about the risks of climate change for decades yet continued to sell a product it knew was harmful. Meanwhile, several coal companies—including Peabody Energy and Arch Coal—have declared bankruptcy.

We are not going to end the world’s dependence on fossil fuels immediately. Coal, oil and gas companies are going to continue to operate for years to come. That said, they can no longer be allowed to mislead the public and their shareholders about the threat their products pose to the planet. Likewise, governments must require them to fully disclose the risks of climate change to their operations and the full extent of their global warming emissions—and come up with credible plans to reduce them. To ensure their own future—and our children’s and grandchildren’s future—fossil fuel companies must develop new low-carbon and carbon-free products and technologies and support sensible public policies to curb global warming emissions.

Gretchen Goldman is the research director for the Center for Science and Democracy at the Union of Concerned Scientists. In her role, Dr. Goldman leads research efforts on the role of science in public policy, focusing on topics ranging from scientific integrity in government decision-making, to political interference in science-based standards on hydraulic fracturing, climate change, sugar, and chemicals. She holds a Ph.D. and M.S. in environmental engineering from the Georgia Institute of Technology, and a B.S. in atmospheric science from Cornell University.

About the author

More from Elliott

Elliott writes about UCS-related topics for a range of news organizations. Prior to joining UCS, Elliott was the Washington communications director for the Natural Resources Defense Council, a foreign news editor at National Public Radio, the managing editor of American Journalism Review, and the editor of Nuclear Times and Public Citizen magazines.