On May 12, the top executives from the five biggest international oil companies re-enacted a familiar ritual: the Capitol Hill perp walk that accompanies every spike in gasoline prices. Sen. John D. Rockefeller IV (D-W.Va.) -- himself the scion of the United States' greatest oil dynasty -- accused the oilmen of being "deeply, profoundly out of touch" with ordinary Americans. "I find it hard to understand how you can come here before this committee and the American people and say, when you are projected to make $125 billion in profits this year," Sen. Robert Menendez (D-N.J.) said, "that somehow the loss of $2 billion a year ... is somehow so punishing, somehow not part of shared sacrifice, somehow you need to go back at them at the pump to make up for it."
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But these days, Big Oil has bigger problems than the U.S. Congress -- and Congress has bigger problems than Big Oil. This weekend marks the 100th birthday of the modern oil industry, and few energy observers would contest the fact that Big Oil is showing its age. A century after the breakup of John D. Rockefeller's Standard Oil empire gave birth to the modern oil industry, Rockefeller's heirs are being eclipsed by nimbler rivals with less to lose -- as well as less nimble but powerful state-owned companies around the world. Meanwhile, Big Oil has mostly turned inward over the past 25 years, pursuing a strategy of ever-greater industry consolidation without either producing new significant sources of oil and gas or addressing the need for alternative energy sources.
To understand their current position, the oil majors would do well to look at the history of a very different industry: information technology. There is a reason why IBM could not create Microsoft, Microsoft could not create Google, and Google could not create Facebook. While a company's performance may require economies of scale, innovation often benefits from the opposite, since it necessarily comes at the expense of the existing business -- and therein lies Big Oil's problem. Big Oil either must reinvent itself -- and quickly -- or become obsolete.
Big Oil's business model served a useful purpose in its day. In the post-World War II period, major international oil companies developed vast oil fields in Saudi Arabia, Kuwait, Iran, Iraq, Venezuela, Nigeria, Indonesia, and elsewhere. To create markets to absorb this increased supply, they built refineries, distribution systems, and retail stations in Europe and Asia, in addition to the United States. The postwar economic boom in the industrialized world was largely fueled by oil (and natural gas) discovered, developed, produced, transported, refined, and sold by these megacorporations.
This spurt of development was, at least in part, enabled by the Supreme Court's 1911 ruling. The breakup of Standard Oil introduced more market competition and drove industry efficiency and technical and business innovation, which spread globally. The companies were still big and technologically adept enough to conduct risky exploration in far-flung places; their vertical integration enabled them to sell as much oil as they could produce. Even after the rise of OPEC, the majors continued to contribute major new oil and gas supplies to the global energy portfolio from the North Sea, Alaska, the Gulf of Mexico, Australia, Angola, the Caspian region, and elsewhere.
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