Last Thursday, in my second appearance on Fox Business, Neil Cavuto asked me whether or not I thought it was a good idea to tax the "windfall" profits of Big Oil, and let Congress spend them on alternative energy.

I said no: "The profits that big oil might make at this point I don't think are necessarily off the table in terms of being available to invest in the technologies of energy of the future. I think instead of taxing income and profits, we ought to be looking at ways to incentivize the fuels of the future."

Just two days earlier, a group of heirs of John D. Rockefeller, the founder of Standard Oil (the precursor to Exxon) had made the same point, but in a different way.

They had staged a media appearance, declaring publicly that they weren't satisfied with the direction the company was taking, and wanted it to invest more in exploring alternative energy. They also wanted the company to tackle the climate change challenge head-on, rather than resisting it.

The press was quick to pick that story up, along with the $10.9 billion in profit ExxonMobil reported for the first quarter of the year.

But most of them missed the real point.

This wasn't just a story about a shareholder revolt, with the Rockefellers wanting to split the CEO and board chairmanship into two positions, to gain leverage over the direction of the company. Nor was it really about Exxon's enormous profits.

It was a nothing less than a major milestone in the history of Big Oil.

A Turning Point for Big Oil

Just a few years ago, Exxon's CEO Rex Tillerson said he wasn't interested in getting into the alternative energy business. Oil and gas was enough for them. (This was before Sen. Jay Rockefeller sent them a letter in 2006, demanding that they stop funding denialist "research" designed to confuse the public about global warming.)

Now, the old money in the company is telling him to get with the times, or step aside.

"They are fighting the last war, and they're not seeing they're facing a new war," said Peter O'Neill, the founder's great-great-grandson who now heads a Rockefeller family committee of shareholders.

The "war" he's referring to, though perhaps an unfortunate choice of words, is the struggle to maintain profitability in an oil industry where:

• The capital costs are enormous,
• The investment horizons very long,
• The good prospects are diminishing, and
• The price of your product fluctuates to extremes.

The company's management has been around long enough to remember when oil fell from $37 in 1980 all the way down to $12 in 1998. Consequently, they are reluctant to commit billions of dollars to the remaining drilling prospects even with oil at $120, fearing that it could fall back to $60 well before the investment has paid off.

Their charge has been to manage the company to maximize shareholder returns over the long run, not to solve the impending energy crisis.

Downplaying peak oil, injecting squid ink into climate change science, and minimizing investment in environmental protection are all in pursuit of their goal.

But Big Money has different objectives than Big Oil.

The shares the Rockefellers own were handed down from the very formation of the company in 1870. As shareholders, they are less concerned with next quarter's balance sheet than they are with long-range macro issues, like overpopulation, the future of energy, the health of the environment...and the future of their business.

Their perspective has brought the enormous challenges of the immediate future into view-challenges that the ExxonMobil leadership may be too micro-focused to think about.

The Rockefellers' case was made clearly by Neva Rockefeller Goodwin, a PhD economist and great-granddaughter of the family patriarch, in a Fox Business interview on May 1:

The problem isn't the past, and it isn't the present, it's the future. We see a world that's changing very rapidly, with resources becoming more scarce, particularly compared to demand, and of course with petroleum this is obvious; everyone's feeling the pain of the price at the pump. And with the prospect of climate change, which is causing governments to put on regulations to raise taxes to think of things like cap and trade, which is only going to increase further the price of oil, and it's causing consumers to wonder, should we be using so much fossil fuel energy, which is causing climate change?

With all these changes happening, Exxon does not show the nimbleness and the entrepreneurial imagination that my great-grandfather had, to make the change. He saw the need to change from whale oil to petroleum-based fuels. Equally important changes are in the winds right now and changes can come very fast. And this company isn't responding, because it has a corporate culture which is so aware of how well they do in so many ways that they're not as open as they should be to the need to do things differently. Our hope is that their excellent board, if given more power in the company, can be the portion of the company which thinks more broadly, thinks more strategically, is more open to information and analysis to allow them to move forward.

[Transcription mine.]

She went on to chastise the company for investing only $10 million a year into a Stanford grant for alternative fuel research, when BP and Chevron are investing billions in similar initiatives.

Asked what she would like the company to do, she said, "I would be very happy to see a billion dollars a year into alternatives."

Shape Up, Don't Ship Out

Have the Rockefellers gone off their rockers? Have they swallowed the green Kool-Aid?

Not at all. They simply have their eye on the long term. They want the company to remain alive and viable for another 100 years.

But Exxon seems to be looking to close up the shop.

As my regular readers know, I have viewed Big Oil's increasing rate of stock buybacks and dividend distributions as a signal that they're finding fewer and fewer good sites to drill for more oil. Instead of prospecting in the ground, they've been prospecting on Wall Street, buying up smaller companies to replenish their reserve numbers.

Now even those prospects are diminishing. In the absence of good investment opportunities, they're giving the profits back to the shareholders.

According to Neil McMahon, an analyst at Sanford Bernstein, "At the rate of current stock buybacks, Exxon will have no privately held stock within 15 years."

That would simply not be the case if there were accessible gushers out of oil out there, just waiting for somebody to stick a drillbit in them.

Exxon vice-president Ken Cohen obliquely confirmed this point, saying the company was able to "fully fund all the attractive opportunities we have."

The operative word here is "attractive."

The best remaining unexploited fields in the world are either completely under the control of national oil companies and off limits to the oil majors, or they only offer a limited production partnership role for the oil majors, while keeping the reserves and windfall gains for themselves.

For example, Exxon's production in Africa, where a large part of those remaining and accessible global reserves lie, fell a whopping 20% as it was required under contract rules to give more of the production to host country governments as oil prices rise. Said McMahon, "Over the next five years their slow production growth guidance may not come to pass at these high oil prices given production sharing agreements."

Exxon's dispute with Venezuela over the nationalization of its oil fields also cut into its production for the year.

The company's worldwide oil production now stands at just under 2.5 million barrels a day. That's right, the world's largest publicly traded oil company accounts for just 3% of the world's oil production.

Exxon isn't alone in having such troubles.

BP's oil production has been stagnant since 2005. Shell's has been falling since 2002. And ConocoPhillips only managed to increase its production last year due to its stake in Russia's Lukoil.

So where is all the money going?

ExxonMobil by the Numbers

Let's look at Exxon's numbers, on an annual basis (some annualized from Q1 2008).

• Net Income: About $40 billion
• Capital spending and exploration: $21 billion last year, reportedly growing to $25 billion a year over the next five years.
• Spending on share buybacks: $32 billion, or about a third more than its capital budget
• Dividends: $7.6 billion

Cash on hand: About $41 billion-again, after fully funding its "attractive opportunities."

Yet, despite spending about half their income in new oil, Exxon's oil production actually fell 10% year over year, and its oil and gas production overall fell 5.6%.

With this perspective, Big Oil's profits look less like a "windfall" than they do prudent management of a business in decline.

And going after those profits as a way to force funding in renewable energy is a bad idea. History shows that the market is a far better allocator of investment capital than the government.

Government can offer incentives, but we should let the shareholders of Big Oil chart a new course for their companies to invest appropriately in the energy of the future.

"We Should Leave Oil Before It Leaves Us"

The need to transform the energy industry was made clear in a brief essay by Fatih Birol, the chief economist of the International Energy Agency (IEA), back in March.

"We are on the brink of a new energy order," he wrote. "Over the next few decades, our reserves of oil will start to run out and it is imperative that governments in both producing and consuming nations prepare now for that time. We should not cling to crude down to the last drop - we should leave oil before it leaves us." [Emphasis mine.]

He went on to say, "Oil production by public companies is reaching its peak. They will have to find new ways to conduct business."

Dr. Birol and the Rockefeller clan are on the same page. They all realize that the best days for the oil industry are in the past, and that a transformation to a new energy regime, particularly electric transport, is urgent and necessary.

As Dr. Birol concluded, "The really important thing is that even though we are not yet running out of oil, we are running out of time."

Hopefully, Exxon's management will get the message, and start taking a more proactive approach to the challenge, as its peers have done.

Whether they do or don't, though, we have an abundance of ideas here at Angel Publishing. We put out trading recommendations on the next generation of energy and transport all the time in such newsletters as the Alternative Energy Trader and The $20 Trillion Report.

As our favorite young startups gain momentum, they'll be perfect takeover targets for Big Oil.

Until next time,

Chris