The Cowardly Giants

The top companies justify their approach by blaming Wall Street's obsession with maximizing returns on investment, which are better achieved through buybacks than by exploration (since buybacks increase earnings per share). The much-touted ExxonMobil especially likes to emphasize its "capital discipline"—that is, its unwillingness to invest without the likelihood of giant returns. But this justification is patently shortsighted. Since the 1990s, publicly traded shares of the U.S. independents and of the NOCs have risen in value at a much faster rate than those of the Big Five. Long-term investors are starting to recognize what the rest of us intuitively understand: that oil companies should be looking much harder for more oil.

What should Washington do to make sure this happens? The United States has until now avoided taxing windfall profits out of the belief that U.S. companies should be allowed to retain their capital so that they can respond to higher oil prices by investing more. The problem is that the top companies are now clearly not responding as they're meant to. Government should therefore step in and impose a "use it or lose it" tax on oil profits, spurring companies to spend more on exploration or alternatives or face a punitive tax. Washington should also embark on a serious national effort to lower oil demand and increase federal spending on alternative energy sources.

But if we do nothing, the United States will continue to transfer more and more of its wealth to OPEC countries. That might not seem problematic yet. But with a mounting U.S. deficit and plummeting dollar, it soon will be.

JAFFE is Wallace S. Wilson Fellow in Energy Studies at the James A. Baker III Institute for Public Policy and associate director of the Rice University Energy Program.

© 2007