Business, Domestic, Organizations — December 16, 2012 at 9:04 pm

Rigging the System

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Weihui Lu

Weihui Lu

The numbers alone are striking. In 2011, the World Bank estimated the gross domestic product (GDP) of the state of Ecuador at approximately $67 billion. Chevron Corporation, by contrast, reported sales of $236.3 billion for 2011, with nearly $27 billion in profits alone.

In the same year, a local Ecuadorian court ruling against Chevron in an $18 billion case over the company’s widespread pollution in the Ecuadorian rainforest marked an unprecedented victory in the global fight to hold multinational corporations responsible for their actions. Between 1964 and 1990, Chevron illegally dumped tons of contaminated wastewater directly into the forest, causing the land and water supply to become dangerously toxic. In the case, which started in 1993, thousands of poor Ecuadorians sued Chevron in New York federal court for the damage to their local environment, demanding the company pay for a proper clean-up as well as for the health care of those affected by illnesses caused by the pollution. After Chevron managed to have the case moved to Ecuador in 2003, the company continued to stall the court’s progress with brute force and dubious legal maneuvers – threatening laboratories that released unfavorable environmental assessments and harassing the resident’s lawyers with unfounded racketeering charges. The judgment in 2011, however, seemed to finally indicate that the underdog Ecuadorians had overcome the goliath Chevron.

As of December 2012, Chevron has still not paid. The company has appealed the court’s decision, insisting that interference by the Ecuadorian government invalidates the judgment. To be fair, there may be legitimate reasons to question the government’s objectivity – some evidence suggests it turned a blind eye to Chevron’s activities and is hoping to let the company take all the blame ­– but the broader implication is clear nonetheless: Despite overwhelming evidence that Chevron is at fault for the harm done to the local environment and its residents, Chevron is getting away with it.

The unfortunate reality of the situation, moreover, is that it makes perfect economic sense for Chevron to carry on with the tactic it has been using successfully for the past two decades – avoiding formally acknowledging any wrongdoing by spending millions of dollars to stall court proceedings into oblivion and disabling opponents from continuing their cases. Whereas admitting defeat would set an important precedent and could inspire innumerable other groups with grievances against Big Oil to launch similar cases, Chevron’s opting instead to invest a couple million dollars a year to pay legal fees and keep the case from closing is rational; the company makes billions in profits every year and, ultimately, is concerned with benefitting its shareholders. For the people of Ecuador and their independent legal team, however, maintaining adequate financial support for the continuing court proceedings has become an all-consuming struggle, a weakness Chevron is actively exploiting by drawing them out as long as possible. But even if Chevron’s strategy is logical and technically legal, it is definitively unethical. Indeed, the Ecuador case illustrates the fact that Chevron can often avoid the constraints of justice and international law simply by mobilizing its vast financial resources.

To this point, those who follow international affairs might object that such abuses of human rights and international law are typical of powerful states: Consider the United States’ reliance on torture of captives at Guantanamo Bay or on drone strikes in unstable countries. “Might makes right,” the saying goes, and that’s just the way it is.

Such objections would be valid, were it not for the fact that Chevron is not a state. Rather, it is a multinational oil corporation and acts in a fundamentally different way. Insofar as today’s multinational oil corporations play a key role in shaping American energy policy both at home and abroad, it is important to take their distinct characteristics into account when analyzing and attempting to regulate their behavior, rather than risk oversimplification by treating them like other political actors. Moreover, unless the United States enacts specific policies designed to change the incentive structure of how multinational oil companies operate, it risks allowing critical aspects of the country’s energy policy to be dictated by the financial interests of corporations that cannot be effectively held accountable by the American people.

The primary difference between the behavior of multinational corporations and states relates to this idea of democratic accountability. Simply put, modern democratic states provide concrete mechanisms – like elections – by which citizens can hold state governments accountable for their actions. While often flawed or weak, they force policymakers to “self-regulate” and take public opinion into account when determining state policy. Corporations generally lack such direct mechanisms, as they are only directly accountable to their shareholders, though to some extent consumers can hold corporations accountable by “voting with their wallets,” choosing to selectively buy products from companies whose policies they support. If a particular clothing manufacturer mistreats its foreign workers, consumers can express their disapproval by buying from a different company.

Second, breaches of international law and abuses of human rights by powerful states are often publicly perceived as more acceptable than those of multinational corporations because of differences in the way each organization explains its actions. For example, when the United States launches drone strikes against terrorist operatives in the Middle East, it justifies its actions on the basis of national security, something even the most human rights-conscious Americans tend to support. Goals like national security or promoting democracy, which are associated with ethicality in the collective American consciousness, are seen as “good” ends that can justify occasional “bad” means, such as drone strikes or torture. When a corporation commits some major impropriety, however, their purpose is inherently tied to increasing profits. American public opinion can excuse drone strikes when they promote national security, but few Americans consider it acceptable for multinational corporations to abuse human rights in order to further enrich their shareholders.

But why, then, has Chevron managed to get away with just that for so long? The answer has to do with the unique features of the oil industry and of oil (and other hydrocarbons) as products.

Oil is a resource of nearly unparalleled economic and political value. States around the world desperately compete for access to oil reserves in those countries that have them, and a secure oil supply is essential to the healthy functioning of nearly all modern industrialized economies. For that reason, politicians and consumers are much less likely to seek intervention in the operations of the companies that provide their state with oil. In addition, because oil prices tend to have a direct effect on the prices of many goods throughout the economy, many people fear that heavy-handed government attempts to regulate oil companies may impose substantial personal costs and prefer to conveniently ignore the messy world of oil production altogether.

Still, even after wrongdoings as serious as Chevron’s abuses in Ecuador have come to light, how is it that virtually all Americans remain consumers of products that can be linked to Chevron oil? If it were true that self-interested concern about higher prices always trumps ethical conviction, it would be difficult to explain the popularity of “sweatshop-free” or “fair trade” products. Rather, when it comes to oil products, the structure of the industry is such that consumers simply have no choice but to continue supporting companies whose policies they condemn.

Since the beginnings of the international oil industry, the number of major production companies has always been small, but if there was a tendency toward cartel-like behavior in the early years, today’s multinational oil corporations compose a model oligopoly. As oil-producing states around the world began nationalizing their own oil industries, the multinational oil corporations were forced to turn to a smaller number of increasingly difficult-to-access oil reserves, and the greater risks and costs associated with tapping these reserves led to a need for larger economies of scale and expanded access to capital. As a result, today we have the so-called “supermajors” which emerged in the late 1990s: ExxonMobil (originally Exxon and Mobil), Chevron (which absorbed Texaco), ConocoPhillips, BP, and Royal Dutch Shell.

These five companies together provide around one-third of all US oil, so each has such a large market share that consumer efforts to avoid products connected to any of these companies’ oil are largely unrealistic. Since individuals only purchase refined oil products, like gasoline, and consumer goods produced with energy from oil, rather than raw crude oil itself, their attempts to refrain from supporting a particular company are frustrated by complex domestic networks of oil power plants and refineries, which may process crude originally pumped by any number of companies. Furthermore, because the incestuous cooperation of the supermajors ensures that each can enjoy stable access to the US market, none have a meaningful incentive to consider public opinion or government policies in their own policymaking. In this sense, they can all be understood as having a role in collectively protecting each other from the pressures of democratic accountability.

In sum, the United States has effectively ceded control over a major portion of its energy resources to a group of ultra-profitable multinational corporations that seek profit without regard for ethical norms or public opinion and that both politicians and consumers are unwilling or unable to regulate. This recognition should be uncomfortable for Americans who like to believe that the United States and its corporate representatives abroad act in accordance with the inspired ideals of democracy, justice, and the rule of law. Furthermore, while we expect that the government, which is elected by the people, should determine the path of the country’s foreign energy policy and that American multinational corporations should follow behind, historical instances of corporate direction of government policy illustrate that it sometimes works the other way around.

In 2001, for example, when separatist violence encroached on ExxonMobil’s facilities in the Arun gas fields in the chronically unstable state of Aceh, Indonesia, the company threatened to suspend operations unless the Indonesian government could create conditions under which its employees felt safe. Robert Gelbard, the US ambassador to Indonesia, reported concern that the loss of federal tax revenues from such a suspension could further weaken the already struggling new Indonesian government. Gelbard used that argument to help push the United States into an arrangement with the Indonesian government where the Indonesian military, which had an acknowledged history of flagrant human rights abuses, would protect ExxonMobil’s property and personnel in Aceh. In addition, he made it clear to the leaders of the GAM, the militant separatist group, that the United States would designate the GAM as a terrorist organization unless the attacks against ExxonMobil were stopped immediately.

Gelbard claimed later that his decisions at the time had nothing to do with preserving ExxonMobil’s business interests in the region, yet the extent to which ExxonMobil was involved in diplomatic negotiations about the US response to the Aceh crisis suggests that these business interests likely did play an important role. Regardless of Gelbard’s true intentions, moreover, this case illustrates the tendency of the US government to almost reflexively support the multinational oil corporations in their operations abroad without considering the consequences. Since supporting a famously brutal military and condoning the violent suppression of an Acehnese nationalist movement does not seem to be in line with the broader American foreign policy agenda, it is clear that ExxonMobil’s risky commitment to gas production in Aceh, rather than any well-reasoned analysis by policymakers, ultimately determined the direction and tenor of US policy in the region.

Similarly, over the past two years, both ExxonMobil and Chevron have made oil exploration deals with the autonomous government of Kurdistan in northern Iraq, a move that has outraged Iraqi government officials in Baghdad, who maintain that the companies are legally obligated to get their approval for any deal involving territory in the region. Both companies have actively ignored Iraq’s claims, implicitly contributing a great deal to the credibility and authority of the beleaguered Kurdish government. Furthermore, without legal control over Kurdistan’s oil industry, Iraq can no longer exert the same kind of influence over Kurdistan as before, and the multinational oil corporations are largely to blame. Indeed, Steve LeVine, a commentator on energy and geopolitics for Foreign Policy, suggests that the companies now represent “an unintentional fifth column in Kurdistan’s march toward economic autonomy.”

Of course, opinions diverge on whether this enhancement of Kurdish authority is a good thing, but the most notable aspect of the situation is the conspicuous absence of any other state actors, especially that of the United States. Just a year after pulling its troops from the country, and despite impassioned requests by Iraqi leaders for President Obama to pressure ExxonMobil and Chevron into stopping their exploratory efforts, the United States has not played an active role in negotiating the developing conflict. Instead, by its inaction, the United States is enabling the multinational oil corporations to shape the future path of the Kurdish and Iraqi nations. Whereas US foreign policymakers might have significant ideological, security, or geostrategic reasons for supporting one side or the other, the companies’ support of Kurdistan is based purely on economic interests. Frustrated with the greater regulatory demands of the Iraqi government, the companies decided to throw their weight behind the Kurdish government, which promised them more generous financial terms for the oil exploration deals.

While the cases of Aceh and Kurdistan illustrate the continued influence multinational oil corporations have over US foreign policy in regions where fossil fuels are involved, their foreign policy involvement has steadily decreased over the past few decades as the world’s oil reserves have been nationalized. In contrast to the middle of the twentieth century, when the multinational oil corporations were the sole producers extracting from oil fields around the globe, today, approximately 80 percent of the world’s proven oil reserves are controlled by companies that are either wholly or partially owned by the states in which they operate. This trend has forced multinational oil corporations to operate on a more contractual basis, often helping develop oil fields that new state-owned companies lack the technical capabilities to exploit, but it has also, to some extent, pushed them out of international affairs. However, it would be a mistake to suggest that their era has ended. Multinational oil corporations are in fact continuing to direct US policy on what may be the most pressing global issue of this generation: climate change.

In a Rolling Stone piece published earlier this year, famed environmentalist-journalist Bill McKibben makes the case that the fossil-fuel industry should be considered “Public Enemy Number One” and that we should regard it as “a rogue industry, reckless like no other force on Earth.” McKibben notes the fact that the amount of carbon contained in the proven (and thus financially accounted for) reserves of fossil-fuel companies around the world, if released, would far exceed the upper limit of the range of emissions designated by mainstream climate models as safe. The financial health of these companies, he argues, has therefore become directly dependent on energy policies that will eventually wreck the planet. The companies then have powerful incentives to use their resources to prevent adoption of stricter climate change policies by lobbying and supporting political candidates who eschew such policies. Though McKibben is excessive in his blanket characterization of fossil-fuel companies as “enemies” of the planet, he is insightful in his emphasis on the importance of restructuring these companies’ corporate incentives such that they are more consistent with efforts to limit climate change.

So we are left with a vivid understanding: Multinational oil corporations cannot be properly held accountable, and, if left unchecked, they are capable of strongly influencing United States foreign policy and policies on energy and climate change in ways that are inconsistent with government’s ultimate goal of promoting the well-being of the American people. The specific policy measures necessary for fostering more accountable multinational oil corporations are less obvious, but the basic contours are clear. In general, increased government regulation and oversight of corporate activities is crucial, especially for industries (like the oil industry) whose products are integral to the country’s economic health. Additionally, the United States should codify and legally mandate corporate adherence to basic ethical standards along the lines of Corporate Social Responsibility, standards that should apply even to corporate activity outside of the United States. In terms of climate change more specifically, the American government should embrace the widely-endorsed concept of a tax on carbon, which would allow market forces to help promote more sustainable behavior throughout the economy by forcing fossil-fuel companies to revalue their assets in a way that accounts for the costs of climate change.

Lastly, but perhaps most importantly, campaign finance laws must be reformed to limit the ability of corporations to determine the direction of American politics. In October, Chevron proudly made a $2.5 million donation to a Republican Super PAC, and the Center for Responsive Politics estimates that Mitt Romney received nearly $5 million in donations from the oil and gas industry. It is unacceptable that corporations, as McKibben puts it, “have far more free will than the rest of us,” and campaign finance reform should put an end to this dangerous inequality. However, despite the efforts of the fossil-fuel companies and other major corporations, Barack Obama’s successful re-election once again demonstrated the irrepressible power of collective action by motivated individuals. Corporations may be rigging the system, but they will never be invincible.

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