Facing the oil giants: labor bargaining in the 1990's

Now I'd like to turn to the energy and oil industries. On the demand side, as always, a serious recession like the present one means stagnant demand for energy and oil. In the last three years, overall U.S. energy consumption has increased by less than half a percent a year, while oil consumption has actually decreased at about the same rate.

At the same time the industry has experienced increasing environmental problems which affect both supply and demand. In particular, the demand for oil has been weakened by the Clean Air Act of 1990 and tougher state regulation of pollution emissions, as well as the push to use renewable energy resources. On the supply side the oil companies have been hobbled by the efforts of environmentalists, in my view happily successful, to block exploration in the Arctic National Wildlife Refuge and on the Outer Continental Shelf.

As a result of these adverse factors, the oil industry has been downsizing, reducing its level of capital expenditures, particularly in exploration and production. At the same time, oil exploration in the United States has practically died out, as exploration has been increasingly shifted abroad, particularly to the Third World, with an eye toward future prospecting in the countries of the former communist bloc. Of course, the major companies have been moving their efforts abroad for a number of years, but now the U.S. independents are beginning to do the same. Thus the Oil and Gas Journal (April 27, 1992, p.14) notes that "buoyed by examples of success by Triton Energy Corp., Dallas, in Colombia and Hunt Oil Co., also of Dallas, in Yemen, and faced with few available frontiers, in the United States, independents of all sizes are exploring the international option."

Since historically oil industry management likes to use this kind of situation as a bargaining lever to pressure its workers, we need to step back a little and see that there have been cycles in the industry's love-hate affair with the United States. While the industry was born in the United States and built its base here in the early part of the century, even in this early period it was drawn abroad by the prospects of finding large amounts of low-cost high-profit crude oil. Nevertheless, security of supply considerations, both for governmental leaders and for individual companies, have always tended to put a brake on moving abroad completely. Most recently we saw this in the companies' reaction to the OPEC revolution, which cost them outright control of the world's most profitable crudes and drove them to expand wildly in the United States until 1985, thus setting the stage for the current crisis in the oil patch. The fundamental reason for going abroad has been succinctly expressed by the president of Hondo Oil and Gas Company of Roswell, New Mexico: "We simply think we can do better investing our money abroad." Since this man is Robert O. Anderson, former chairman of ARCO, we need to take seriously his further observation that all is not gravy overseas. Among the negative factors he notes are higher capital costs, longer lead times to bring discoveries into production, and higher foreign government tax rates. Less discussed publicly, but clearly at the forefront of oil company concerns, are the demands of corrupt foreign political leaders as well as the ultimate nightmare, outright nationalization.

Perhaps nowhere are these problems more evident than in the former Soviet Union, where oil companies are circling like vultures over the vast oil resources of the broken pieces of the body politic. While western oil executives would like nothing better than to plunge their beaks into these reserves and there is much talk of how the companies will revive the industry there, we would do well to heed the advice of John Mitchell, former Nixon attorney general and convicted felon, to "Watch what they do, not what they say."

On that score, the Oil and Gas Journal last December headlined a story, "Soviet business chaos seen lasting five years." (December 16, 1991, p.22) More recently, on March 16, 1992, a Journal headline bemoaned "Political chaos reigns progress on new joint ventures in Russia," while this summer the New York Times discussed oil company doubts about how long highly educated Soviet petroleum engineers and economists would allow western oil investments to suck huge profits out of the country. Since one of the first acts of the newly born Soviet Union in 1917 was to nationalize it's oil industry, the oil company officials can hardly be unaware of the dangers.

Meanwhile, until the time, if ever, that the companies can completely replace U.S. crude oil production, they still must deal with their domestic workers. And this is even more true in refining, since there are no signs that the companies can afford in the very short run to move this key function abroad. Here what we are seeing, as this audience can detail far better than I can, is a savage process of layoffs, speedups, contracting-out, and erosion of safety standards and working conditions, along with unremitting pressure on wages and benefits--all designed to squeeze every drop of blood out of labor as a whole in order to squeeze every drop of oil out of the barrel at minimum cost, all under the euphemism of "restructuring."

Unfortunately the future is likely to bring more of the same, and in even more vicious form. The basic reason is that as the overall economic crisis continues and deepens, pressures on oil company management will be even greater. We are already seeing the penalties inflicted on even top management for failure to deliver immediate high profits--for example, the recent abrupt replacement of Robert Horton as chief executive of British Petroleum. Middle management and labor are both even more vulnerable than golden-parachuted top management.

To fully appreciate this situation, you need to hear it from the horse's mouth. So I want now to quote at some length from an important article in the November 18, 1991, issue of the Oil and Gas Journal, whose cover headline is "Managing in the '90s." The article, labelled as an American Petroleum Industry Report and hence clearly representing the industry's official position, was written by Jeffrey A. Schmidt, vice-president of the management consulting firm of Towers Perrin and director of their worldwide petroleum, mining, and chemicals operations.

Schmidt begins the article, which is entitled "Cost Restructuring: Challenge of the 1990s," by laying out in clear terms what managements' goals should be. "Management must also have a sense of urgency and single-minded commitment to the corporate mission: namely to create value for shareholders and to be among the best performing companies in the peer group. Such a commitment should be framed in terms of nonnegotiable performance goals that management will attain by specific dates."

He then goes on to note, "While every management hopes to have seen the last of severance programs, a recent survey we conducted suggests more cost cutting, not less." Lest some in management feel a little bit queasy about this, Schmidt goes on to remind them about the new realities: "Over the past three years, 40 percent of the positions eliminated in the Fortune 500 through cost restructuring programs have been white-collar positions. Similarly, most of the job eliminations in the petroleum industry have also focused on white-collar employees."

One might ask why we need all this cost-cutting, and Schmidt gives us the answer, which may seem obscure to us but is crystal clear to management: "Recent productivity gains notwithstanding, current returns on investment capital remain below costs of capital (12 percent on average) and reinvestment hurdle rates for most of the major integrated companies (usually 15-20 percent)." In plain English, this means oil companies want to get at least a 12 percent a year profit rate on their existing assets and 15 to 20 percent on any new investments. These are the kind of historically obscene profit rates that the oil companies expect as their due, while in a free market economy oil workers can only take what little savings they have to the bank and get 3 percent! The enthusiasm of the oil companies for this market system is reminiscent of the elephant who cried out, as he danced among the chickens, "Every man for himself!"

Schmidt concludes his clarion call to industry as follows:

Cost cutting will be necessary for these companies, but significant productivity improvement is also imperative....As with productivity, containing growth in total employment costs will become an especially important priority of petroleum management in the coming years....reducing total employment costs will be among the most vexing challenges for oil and gas company management in the 1990s. Given the composition of these costs and the rate of their escalation (e.g., due to retiree medical expenses), management will need to contain pay and benefits at affordable levels while exhorting employees to work harder and smarter. This will be no mean feat.

No mean feat indeed! I trust this conference will give a suitably resounding reply to the industry as it throws down the gauntlet. As you go into battle with management, you need to remember that despite all their poor-mouthing, oil company profits are still at record levels. Since your very impressive briefing notebook goes into this question in detail, I need not dwell on it. Instead, I will just mention the following summary data from Value Line's continuing survey of the leading thirty integrated oil companies. To wit, while their net profits peaked in 1990 at $28 billion, and fell back to an projected $26 billion in 1992, cash flow, or profits plus depreciation allowances, continued at record highs in both years, about $61 billion. Moreover, while Value Line's projections for a 1996 cash flow of $81 billion may be based over-optimistically on a cyclical recovery in the economy, their underlying projection of depreciation increasing from $35 billion in 1992 to $45 billion in 1996 is likely to be close to the mark, since depreciation charges are mere bookkeeping entries based largely on past events.

To put these profit and cash flow numbers into context, my old boss Exxon's 101 thousand employees received total wages, salaries, and benefits of $6.1 billion in 1991, compared to Exxon's net profits of $5.6 billion and its total cash flow of $10.4 billion. In other words, while all employees at Exxon, management and workers combined, averaged about $60 thousand per year, the company pocketed net profits per employee of $55 thousand and a cash flow of over $100 thousand. One doesn't have to be a rocket scientist to realize that in this situation there is ample room for increasing workers' wages and benefit, or improving working conditions by trickling some money down from either the shareholders or from overpaid top management. The top twenty three executive officers at Exxon last year paid themselves $14 million, or over $600 thousand apiece. And since these are salaries to kill for, you can surely expect to face some real pit bulls in your upcoming negotiations!

One final problem facing you, which I have time only to mention, is the global environmental crisis, which in my view is as important a backdrop to industry prospects as the international economic crisis. This view was reinforced by my attendance in June at the Earth Summit in Rio de Janeiro as a correspondent for The OCAW Reporter. The bottom line of the environmental issue is a message from the scientific world which is not good news for OCAW members, and I trust you will not stone me for bringing it. Unbiased scientists generally agree that for the survival of all of us, as quickly as possible the hydrocarbon industry has to be shrunk and the nuclear power industry eliminated completely, to be replaced by renewable and non-polluting energy sources such as solar and wind power. And while the energy companies may fight a rear-guard action like that of the tobacco companies, which tried to deny the harmful effects of their products in order to preserve their profits, surely the OCAW does not want to participate in such an unholy crusade.

After all, OCAW members are the first to be hurt by environmental pollution originating in the industries in which they work, and even more important, OCAW members are not just workers but citizens who breathe the air and drink the water both on and off the job. And they are also neighbors, parents, and grandparents. As such, they have a concern not just for their jobs but for the survival of their communities and their families. Indeed, OCAW above all other unions can take great pride in its pioneering efforts to put forth rational solutions to the short-run conflict between jobs and the environment, by uniting with environmental groups to oppose pollution and by calling for the setting up of a superfund to pay for meaningful retraining of the workers whose jobs must go in order to save the environment.

Nevertheless, the message I wish to bring you today is that global warming, the hole in the ozone layer, and the other crises of the environment are far more serious and pressing than we are being told by political and corporate leaders, whose short time horizons make them want to go on with business as usual. When combined with the problem of a stagnating international economy, I believe that the pressures for job layoffs in the energy industry are going to be enormous. So while the workers' superfund is a great idea, I believe it needs ultimately to be expanded to a retraining fund for all energy workers who get laid off, regardless of cause. And in a rational and humane world, would it be too much to give pensions to older laid-off workers who have given their life-blood to provide the vital energy used by this country?

Moreover, while I am confident that you will do all that you can in upcoming negotiations to preserve oil workers' legitimate jobs, clearly it is unfair to place the burden of dealing with what is an overall societal problem on one union--and a union which is facing the mightiest aggregate of capital in world history.

And that brings me to the punch-line of this talk. To provide realistic long-run solutions for the oil and energy workers' problems requires more than the efforts of one union, or even of organized labor as a whole, which now represents less than 15 percent of the labor force. No, in the long run--and I might note that with the environmental crisis growing rapidly the long run may not be very long at all--broad elements of society must unite behind really progressive political action. And such action must, in my opinion, have a truly internationalist outlook. Just as this nation came to see 130 years ago that it could not survive half free and half slave, today this world must come to see that it cannot survive with 10 percent of humanity living in relative affluence and 90 percent living in dire poverty.

COPYRIGHT 1993 Monthly Review Foundation, Inc.
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