University of California Los Angeles

UCLA Extension

Doing Business in the US

David E. French

Written by: Luiz Guilherme Osorio

Los Angeles

2015

The Oil industry and the implications of its influence over the State

Report about the article: ‘We Need an Energy Miracle’: Bill Gates has committed his

fortune to moving the world beyond fossil fuels and mitigating climate change.

http://www.theatlantic.com/magazine/archive/2015/11/we-need-an-energy-miracle/

407881/

Introduction:

Bill Gates has recently given an interview for The Atlantic Magazine talking

about fossil fuel energy, the end of its cycle and what could be done to find a solution

for this matter. In this interview, Gates talks about the need of changing energy systems

in which the western societies are based on, in order to avoid the consequences of global

warming and climate change. Although he is totally right, this is not quite a new idea

and most parts of the world are already aware of such threaten and are thinking about a

possible solution. But that’s not the best part in his interview.

What he says that is really worthy is about the role of the State in Research and

Development in different study fields and industrial areas, and the question rose about

‘why US Government invests such a small part of its budget in new energy research?’

The same thing doesn’t happen to pharmaceutical or medical R&D, he reminds. As a

bonus, we also testify an implicit challenge made to the oil industry by donating $2

billion dollars to new energy sources research.

The State and R&D

Development of any new technology is a combination of hard work, resources,

funding and creativity that lead to a successful result. But in reality this equation is not

so simple to solve. It takes an enormous period of time and a big number of failures, a

huge amount of money wasted, to reach a model that maybe can be reproduced in big

scale and maybe will fill the needs and tastes of buyers and consumers. This is a very

big investment and an even bigger risk to be taken.

Risk taking is not a really popular business and only a few adventures like

practicing this kind of activity. Most business men prefer safe and trusty negotiations

that could make a reasonable and clean profit. The point is, someone has to do this

heavy work, and it is usually attributed to the State. There is a very good quote in Gates’

interview that explicit considerably well what it meant to the technology industry:

In the case of the digital technologies, the path back to government R&D is a bit more

complex, because nowadays most of the R&D has moved to the private sector. But the

original Internet comes from the government, the original chip-foundry stuff comes

from the government—and even today there’s some government money taking on some

of the more advanced things and making sure the universities have the knowledge base

that maintains that lead. So I’d say the overall record for the United States on

government R&D is very, very good. (Bennet, Nov. 2015 issue)

But guess what? This is also not quite new either. Mariana Mazzucato, an

Economics Professor in the University of Sussex wrote a book named The

Entrepreneurial State: debunking public vs. private sector myths (Anthem, 2013), in

which she explains the importance and the responsibility the State has in developing

new technologies. Basically what Mazzucato says is that private companies only find

themselves safe enough to invest in a particular sector, after the State have taken most

risks and did the hardest part on the research.

It basically means that almost none of the technology we consume today would

exist if it wasn’t developed by State “Excellence Centers”, on its early stage. As

Mazzucato reminds us, this infant stage is the most expensive and less rewarding

moment in any kind of scientific work, product or industry. This is the moment when a

huge number of different resources are needed, and basically the only one that could

provide it quantitatively and qualitatively is the State. (Mazzucato, Issue 2, 2015)

So, what is new in all those things? First the fact that one of the biggest capitalist

entrepreneurs in the world admits that the State is essential in the economic

development of any kind of industry. This is really big, because it questions all the

ideological speech of the “invisible hand” of the market, created by Adam Smith, and

follow by all sorts of Liberal writers since XVIII Century. Second because he is also

implying that there is something wrong about the fact that the American Government

subside a whole bunch of industries and leave the energy sector behind. Indirectly he is

pointing there is a closer relation between oil companies and the US Government, and is

inviting his fellows private entrepreneurs to join him in this odyssey for green and

sustainable energy.

Of course Gates knows $2 billion is nothing to solve a problem like that, but he

also knows that the message he is addressing is “we are reaching the limit over this oil

driven economy and we don’t want to see the boat sinking to finally take an attitude”, is

being heard. Otherwise he wouldn’t expose himself going to the press and speak up

about such a delicate matter. This is a way of gently putting pressure in Washington,

and showing his dissatisfaction about the path things are taking.

The oil industry

As mentioned by Gates, Capitalism history worked mostly in cycles in which

one energy source was responsible for feeding the production systems and engines that

run the economic expansion. In the very beginning, the mechanical production started

using wood, energy source exploited for thousands of years all around the world. It was

followed by coal and finally oil. The oil industry began to have a real relevance in the

second half of the XIX Century, mostly in the US, and later in Europe.

Although the oil exploitation and the need of guaranteeing a “stable” supply for

the developing industry in western countries has a big and controversial history,

especially in the Middle-East and some parts of Africa, and South America, we will not

discuss it in this analysis. This is a very deep discussion that demands time, sources and

a better bibliography. We understand that this history is fundamental for the

comprehension of oil companies’ roles in today’s scenario, but this is not exactly our

focus. Of course the connection between the State and oil companies have been built in

a long term relation, but we want look at its consequences, not at its genesis.

In one documentary called “Pump”, Josh Tickell, an energy activist, starts

raising a question about ‘why Americans have only gasoline and diesel as options when

they go to gas stations?’ He points that there are different options for almost every

consumption product but fuel. Similar to Bill Gates, he raises the argument that there is

research about almost every aspect in the industry except for energy. And he starts

showing that it wasn’t always like that by exposing different initiatives in the

automotive industry to use different fuels. Most of them have been aborted in the early

stage by legislative interference.

It is not hard to infer that there was a strong lobby behind the scenes, dumping

any kind of change in that energy model. He also shows how big is the oil consumption

in a country like USA, which means how lucrative this business can be. From the four

major private oil companies in the world (Exxon, Chevron, BP and Shell) two are

Americans. Most of their production fields are abroad, and “coincidentally” most US

military bases are quite near those production areas.

We can also add to this discussion, the fact that the fourth biggest Treasury

Security holders from the US bonds are Oil Exporters 3/ as we can see on the chart

below.

The relations between those countries and US Government is really close. We

can also understand that they have a huge economic power, figuring among the biggest

sovereign countries as holders of Treasury Securities. It seems to us that all the matters

that Gates and Tickell had pointed in their arguments are not merely coincidence. The

oil industry has indeed a huge power, and work together with governments to leave

things the way they are.

It’s important to say that we are not analyzing all the atrocities, wars, murders

and destruction that this fossil fuel fever have caused along the XX Century. For the

matters of this discussion, those human rights aspects could diverse the focus and

obscure the conclusions. The point here is identifying the problem and come up with

solutions. Those solutions are not necessarily the end of oil companies, because apart

from energy, oil is used as basis for most of chemical, medical and even food industry.

These applications will continue to be operating successfully, as a guarantee of profit

for the companies. The point here is questioning other alternatives for the energy

industry. The next Capitalist cycle will surely be based on other(s) energy source(s), and

any change into our status quo, our production ways and lifestyle will be the causes and

consequences of that. That’s why there is few interest in subsiding new energy sources

and fuels; because not only to the US State, but to a huge number of other countries and

companies are depend on what is still a very profitable business.

A new path on a new order

What Tickell points in his movie that have a big relevance is that there is a way

out for this vicious cycle. However it remains on research and development, it is already

happening. The lack of subsidies to this kind of field is causing something like losing

the track of history. Even with all economic and political power those companies have

to keep things the same, while the world, the production and the consumption are

changing whether they want or not, and Bill Gates’ statement shows it clearly.

Helmuth Ludwig and Eric Spiegel in their text “America’s Real Manufacturing

Advantages” points the importance of the software innovation, 3D printing and

reproduction of models in highly advanced systems as the new path for a new cycle of

development. But just in the beginning of the text they justify this analysis by saying:

The most visible of these trends has been the availability of inexpensive shale-based oil

and natural gas in the United States. By lowering energy prices and broadening access

to the supply of gas, this has created a competitive advantage for the country as a

manufacturing location. By late 2013, natural gas was selling in the U.S. at roughly a

third the price it commanded in Europe, and at a quarter of the price in Asia. This makes

the U.S. particularly attractive for manufacturers in energyintensive industries such as

chemicals and fertilizer, steel and aluminum, and plastics. (Ludwig, Spiegel, Issue 74,

Spring 2014)

Although what they say is true, low energy prices are really appreciated in any

manufacturing activity, this is only providing more of the same. Using the highest

technology or the most efficient engines won’t change the fact that they are still based

on fossil fuels used on the last development cycle. It means that there is no big change;

it is just an improvement on the process and results. It can be a “renaissance” for the

manufacturing industry, but it will not be the beginning of a new development cycle.

Even if the efficiency in energy consumption is taken to its zenith, the model is

still based on the same kind of energy source. The only thing that has the ability to make

a true change in the entire industry (manufacture, services, technology) is the

development of new sources of energy. Bill Gates and lots of other people (including

Lula, Angela Merkel and even Xi Jinping) have already understood this need. But any

change in today’s world just has any chances to succeed if it is endorsed and subsided

by the USA. While American government continues to be influenced by oil and finance

companies, no change can be achieved, and even worse, the democratic values that it is

so proud of supporting is in real danger.

References:

US Treasury, MAJOR FOREIGN HOLDERS OF TREASURY SECURITIES(in billions

of dollarsI, Aug. 2015. URL < https://www.treasury.gov/ticdata/Publish/mfh.txt

Mazzucato, Mariana; THE CREATIVE STATE Innovation driven by the state could be

the catalyst that takes our economy in the right direction, RSA Journal, Issue 2 2015.

URL < http://marianamazzucato.com/wp-content/uploads/2015/09/2015-01-08-RSA-

Journal-The-Market-Creating-State.pdf

Thornhill, John; Lunch with the FT: Mariana Mazzucato, Financial Times, URL <

http://www.ft.com/intl/cms/s/0/f4109fae-40df-11e5-b98b-87c7270955cf.html

Bennet, James; ‘We Need an Energy Miracle’: Bill Gates has committed his fortune to

moving the world beyond fossil fuels and mitigating climate change. The Atlantic

Magazine. Nov. 2015 Issue. URL<

http://www.theatlantic.com/magazine/archive/2015/11/we-need-an-energy-miracle/

407881/

Ludwig, Helmuth; Spiegel, Eric; America’s Real Manufacturing Advantage: A new

wave of software innovation is about to transform industry—and give the United States

the chance for a lasting edge. strategy+business issue 74; Spring 2014.