“Energy Is Not a God-Given Right,” Says Chevron’s O’Reilly
April 2008
STANFORD GRADUATE SCHOOL OF BUSINESS—During four decades spent working for U.S. oil giant Chevron, Chairman and CEO David O’Reilly says his biggest leadership challenges haven’t been the disgruntled customers, ticked-off labor unions, obstructionist political dictators abroad, pointed U.S. Congressional inquiries, or even persistent environmental activists.
The most elusive achievement has been getting people to understand how the energy business works so they realize that “energy is not a God-given right,” O’Reilly told a View from the Top audience on April 8. Energy, O’Reilly said, is “something we have to work to produce and that we ought to use carefully, because it is a very valuable resource that we sometimes take for granted.”
With operations in more than 180 countries, Chevron is engaged in every aspect of the oil and gas industry, including exploration and production, refining, marketing and transportation, chemicals manufacturing and sales, and power generation. Soaring prices of crude oil have bolstered Chevron’s financials. Last year, the company reported a record $18.69 billion in profits, or $8.77 a share, on $220.9 billion in revenue.
Coming up with alternatives to oil that can be implemented widely and quickly will be nearly impossible in the short term, O’Reilly said, because the amount of energy required globally is so huge.
To illustrate the magnitude of demand, O’Reilly cited a recent newsmagazine story concluding that even if the United States took all of its corn and soybeans out of the food system and used them for fuel instead, “you would satisfy only 25 percent of the transportation fuel requirements. This is an enormous challenge. There is not a silver bullet.”
O’Reilly illustrated that point by outlining how much energy would be consumed just during his hour-long speech. Add up all the oil, coal, and nuclear power used by the end of his presentation, O’Reilly said, and: “The world will have consumed the equivalent of 10 million barrels of oil in the one hour you are sitting here. That’s 44,000 gallons a second. The scale of the system is absolutely enormous.”
While synonymous with oil, Chevron also produces more geothermal renewable energy than any other major oil firm, through a production business in the Philippines and Indonesia, O’Reilly said. “It’s a profitable business for us, but it represents only 2 percent of our energy production today.”
Even with the development of fuels like ethanol and cars powered by electricity, he said, it will take decades before those alternatives become ubiquitous enough to dramatically cut demand for today’s important but dwindling energy sources—oil and coal.
“Yes, renewables can help moderate the demand for hydrocarbons,” said O’Reilly, “but it can’t substitute it all, certainly not in the next generation or two. One hundred years from now … perhaps something else will come along, but it’s not going to happen in 10 or 20 or even 30 years. So, we've got a long period of time where we will have to recognize and cope with hydrocarbons.”
Much of the demand for energy comes from the United States and other Western nations. But consumption is growing in developing nations as people there earn better salaries, raise their standard of living, and consume more energy as they buy cars, household appliances, and the like.
Boosting production of biofuels has created problems in the United States, O’Reilly said, as more corn is being diverted for use as energy. “You can already see it in what’s happening to food prices, you can see it in what’s happening to the environment” in areas where corn is grown for fuel, he explained. “There’s a limit to how far we are going to be able to take corn-based ethanol in this country.”
O’Reilly said Chevron announced in February a joint venture with Washington State-based timber firm Weyerhaeuser Co. to jointly develop a non-food alternative fuel. Their product, which is not on the market, must be “not too farming intensive, too land intensive, and not too water-consumption intensive,” said O’Reilly. “If we can come up with that alternative so you are not using a food crop for the fuel, then I think there is a big commercial opportunity there.”
O’Reilly also spoke about General Motors’ failed effort a decade ago to produce small numbers of the all-electric EV1 car a decade ago. GM shut down the endeavor after a few years, saying there was weak consumer demand. “The cars were out there, but they only had a range of 40 to 50 miles, and people just wouldn’t buy them,” O’Reilly said.
But the newest breed of electric vehicles under development could gain popularity if the battery range issue is solved. “I am convinced you will see more electric cars, but you’re not going to see them really take off until they can offer customers a range of 300 to 400 miles without having to plug them in for eight hours,” he said.
The son of a menswear buyer and a homemaker, O’Reilly grew up in Ireland. After earning a BS in chemical engineering from University College in Dublin, he joined Chevron as a process engineer in 1968. He was named chairman and CEO of Chevron Corp. in 2000. Less than a year later, O’Reilly engineered his company’s merger with another oil giant, Texaco.
MBA students, in cooperation with the School’s Center for Leadership Development and Research, organize The View from the Top speakers series in which executives explore leadership issues.
—Michele Chandler