James Rouse, the U.S. Army veteran who ran ExxonMobil’s Washington office, retired in 2004. Lee Raymond appointed Dan Nelson, previously the lead country manager in Saudi Arabia, as his successor. Nelson stood six feet eight inches tall. With his silver hair, broad shoulders, and Naval Academy–bred deportment, he seemed to embody the popular image of an oil industry lobbyist; among other things, he looked like someone who might be coming or going from a steakhouse. In fact, The Prime Rib on K Street, downstairs from the ExxonMobil office, was one of his favorite haunts. Through his background as a U.S. Marine infantry officer, Nelson had credibility with the war-saturated Bush administration, although in private, he could be skeptical about Bush’s military activism abroad.
One of Nelson’s closest friends was Chuck Hagel, the Republican senator from Nebraska, Nelson’s home state, and a fellow military veteran. Hagel was a leading opponent in Congress of the Kyoto Protocol and other prescriptions to control greenhouse gas emissions; he also was an increasingly outspoken critic of President Bush’s foreign policy. Hagel’s outlook was not easy to categorize, but in general, he saw himself as a skeptical realist about the ability of the United States to coerce and transform other nations, and he was put off by the belligerence of the Bush administration. Nelson increasingly shared Hagel’s views. The ExxonMobil chief lobbyist characterized himself to colleagues in Washington as fiscally and economically conservative, but a realist in foreign policy and a libertarian on social issues such as gay marriage. Increasingly, Hagel, Nelson, and other Republican realists in town worked on Lee Raymond to rethink his associations with the more outspoken, militarily activist sections of the Republican Party, those shorthanded as the “neoconservatives,” such as some of the scholars and advocates at the American Enterprise Institute, a free-market think tank. Raymond was in the running to become A.E.I.’s outside chairman, but Nelson warned him that while the institute had plenty of economists with whom Raymond would agree, its foreign policy thinkers had become doctrinaire and were too activist to be aligned with ExxonMobil’s worldview.
Nelson built connections to Democrats as well. He and his wife bought a $2 million town house on Leroy Place in Washington’s historic Kalorama area. Their neighbors happened to include Phillip and Melanne Verveer; the latter was a longtime confidante of Hillary Clinton’s. The Verveers got to know Nelson and persuaded him to encourage ExxonMobil to support a program called Vital Voices, designed to empower women in developing countries.
Nelson had no particular experience in lobbying. He had what ExxonMobil valued more: an insider’s knowledge of the oil industry, as well as business and political credibility, particularly in the eyes of Republicans.
“It’s time to do things differently,” Raymond told his K Street lobbyists around the time that Nelson arrived in Washington. He didn’t specify what he meant. Raymond had no complaints about the departing James Rouse, but the change in leadership offered a chance to become more active, more visible—not so much to lobby on specific legislation, but to try to educate Washington more successfully about ExxonMobil. Nelson expanded the number of outside lobbyists under contract with the corporation, building a network of about twenty former senators, congressmen, Capitol Hill chiefs of staff, and regulatory specialists to support the in-house K Street team.
Energy policy debate in Washington tended toward all-or-nothing pronouncements that were divorced from technical and economic reality—hydrogen would be the next big energy source, or ethanol, or wind. Raymond retained his long-held biases against federal subsidies for alternative energy, but he had learned through bitter experience that it was easiest to make his case by talking about the energy industry’s global structure and the embedded place of oil, coal, and gas. One of Raymond’s goals as Bush’s second term began was to launch an education campaign about fossil fuels in Washington.
On April 13, 2005, Raymond arrived at the White House with Dan Nelson. They passed through security at the entrance to the West Wing and crossed the carpeted hallways lined with photographs of the president to meet Allan Hubbard, the National Economic Council’s director and a close friend of Bush’s. Hubbard had attended graduate school at Harvard with the president, during Bush’s carefree period.
The president increasingly harbored doubts about America’s dependency on oil imports. Global oil prices had been rising steadily since 2004, from about $25 per barrel to above $40 per barrel. Rising demand from China and India, the Iraq War, and instability in Nigeria were among the reasons. Higher oil prices had sent retail gasoline prices in the United States soaring, touching off a wave of popular anger and threatening the pace of the country’s recovery from the 2001 recession. At the White House and the National Security Council, midlevel aides met continually to discuss policies and diplomatic strategies that might ease oil prices. The president seemed restless about the subject. He remained skeptical to agnostic about climate change. Bush also understood that global oil markets were liquid and interdependent and that “energy independence” was at best a complicated goal for the United States, if it was realistic at all. Nonetheless, he seemed increasingly focused on the costs the United States paid in security and in its economy for its reliance on volatile, expensive imported oil.
Bush thought out loud with his advisers about ways the United States might change the pattern of its relationship with the Middle East. He displayed excitement and curiosity about nascent hydrogen technologies that might revolutionize automobiles and eliminate oil as a source of transportation fuels. The president had hardly turned against the oil industry—he remained an ardent supporter of expanded domestic drilling, for example—but he was asking questions in private about whether and how it might be possible to find a technological breakthrough that would end America’s dependency on oil imports within a single generation.
Bush’s friend and adviser Al Hubbard became the vessel of the president’s ambivalence. He was a principal liaison for ExxonMobil and other oil lobbyists, and they had trouble figuring out where Hubbard was coming from on their issues. It almost seemed as if George W. Bush “felt like he needed to do something that disassociated him with the traditional oil and gas” corporations and yet, simultaneously, the president “was always very supportive” of ExxonMobil and the industry, recalled one executive involved.
In the face of the creeping White House doubts, ExxonMobil applied its standard medicine: PowerPoint education, laden with forecasting data. The meeting with the president’s leading economic adviser would be just one in a series, part of a sustained campaign to impress ExxonMobil’s energy policy analysis on decision makers.
With Dan Nelson seated beside him, Lee Raymond told Hubbard that ExxonMobil had recently completed a detailed analysis of the world’s energy economy, looking out at the next twenty-five years. The forecast made clear, Raymond said, that much of the popular debate about transformational alternative energy sources was misinformed—it was laced with unrealistic fantasies about the pace at which the world’s energy economy would or could change. Oil and gas were here to stay, ExxonMobil’s economists and planners had concluded; fossil fuels would be central to global economics and security until 2030 and beyond. Raymond sought to brief this forecast to as many staff in the Bush administration and Congress who would listen. Raymond and Nelson offered to bring one of the ExxonMobil forecast’s authors, Scott Nauman, to Washington to present the findings in detail to White House policymakers. Hubbard agreed; he asked Vice President Cheney’s energy aide F. Chase Hutto III to make the arrangements. The next day, Hutto fired off e-mails to schedule ExxonMobil briefings for White House aides, environmental policymakers, and officials at the National Security Council.
In Washington and elsewhere that spring, ExxonMobil advanced a carefully designed, research-tested campaign to persuade political and media elites that while the oil industry should not necessarily be loved, it should be understood as inevitable. The “Conceptual Target” for this education and communications campaign, according to a 2005 ExxonMobil public affairs document, would be “Informed Influentials.”
These were people who “seek to be informed and pride themselves on being able to handle complex issues.” They would come from “all walks of life,” such as business, government, and the media, and they would be “aware of, and concerned about, the current debate and issues surrounding the world energy resources/use as well as climate change.” The ideal audience would be “open-minded,” as well as “information hungry” and “socially responsible.” The characteristics of the elites ExxonMobil sought to educate were derived in part from statistical modeling that Ken Cohen’s public affairs department had commissioned in the United States and Europe, to understand in greater depth the corporation’s reputation among opinion leaders. That model had allowed Cohen and his colleagues to forecast how elites would react to particular statements that ExxonMobil might make or actions it might take. The research found, among other things, that it would be beneficial for the corporation to brief elites about the findings of its in-house analysts’ long-term forecasts about the global energy economy.
The purpose of the campaign would be to “grow understanding and respect for [ExxonMobil’s] position [about] the tough energy challenges the world faces.”
The archives of ExxonMobil’s Corporate Strategic Planning department contained twenty-year forecasts of energy demand and oil prices from as long ago as the 1940s. Economists, analysts, and executives presented the projections to the Management Committee each year. In 2000, as he oversaw the first forecasts generated by the combined planning departments of Exxon and Mobil, Lee Raymond had asked the analysts, “What did you say about 2000 in 1980?”
Raymond’s subordinates “immediately thought that what I was trying to do was criticize them,” he recalled. That was, in fact, the typical impression he made.
“No, no, no,” he assured them. “What I’m trying to understand is, what did we miss? What things didn’t we see right?”
It turned out that in 1980, Exxon’s forecasters had been half right and half wrong about the future. They had correctly predicted, within 1 percent, the total amount of energy the world would consume in 2000—a remarkable feat. They had been wildly off, however, in forecasting oil prices; the price trends they had predicted, following the spikes and upheavals of the 1970s, had been much too high. Analyzing this failure, Raymond and his colleagues reached two conclusions. One was that they had badly underestimated the pace at which technological improvements within their industry would make it easier over time to find new deposits of oil, increasing global supply and tamping down prices. The second was that geopolitical disruptions played such an important role in the price of oil that normal forecasting based on supply and demand equilibrium was not realistic to pursue.
Raymond decided to stop asking for price forecasts as part of ExxonMobil’s long-term planning process. For one thing, the forecasts were so chronically inaccurate that they provided a built-in excuse for any manager whose project failed to meet financial expectations; the manager could just blame the economists for their inaccurate price predictions. “We cannot forecast the price of oil in the short term—so how do you run the business?” Raymond asked his colleagues. The answer, he said, was to manage on a “steady-as-you-go basis and try to make sure the fundamentals are right.” Rather than forecasting price, Raymond decided to concentrate instead on predicting volumes—the amount of oil and other energy sources global consumers would demand over time, and also the amount of available supply.
The internal forecasts typically looked out two decades, although some went longer. They complemented the extended cycles of ExxonMobil’s capital investments—up to fifty years, in the case of some oil and gas extraction projects, and up to a century, in the case of the longevity of its American refineries. Around 2004, the corporation’s forecasters began to shift their baseline target date to 2030. The work they completed seemed compelling enough to form the basis for the education campaign aimed at Informed Influentials. By the time of Raymond’s visit to the White House, the corporation had ordered up a glossy book filled with colorful charts entitled, “The Outlook for Energy: A View to 2030.”
The forecast opened with a comprehensive picture of the present. In 2005, the world’s 6.4 billion people consumed about 245 million barrels per day of “oil equivalent” energy—that is, actual barrels of oil and other liquids (84 million of those) and the equivalent of 150 million barrels per day of other sources of energy, such as natural gas, coal, hydropower, nuclear power, biomass, wind, and solar power. To calculate how this portrait might change by 2030, the corporation’s analysts first adopted the World Bank’s prediction that the world’s population would grow to 8 billion. They then examined, one by one, the economic growth prospects for about one hundred different countries and regions worldwide. Historically, ExxonMobil’s analysts believed, the pace of a country’s economic growth typically explained about two thirds of its changes in energy consumption; population changes explained only about one third. Economic activity, in other words, not the number of people, would be the most important factor in future energy demand. When they added up all of their individual country predictions, ExxonMobil’s analysts concluded that the world’s economy would grow on average by about 3 percent per year until 2030.
In each country they also examined what types of energy were likely to be consumed—how much transportation fuel for cars and trucks, and how much energy for generating electric power. They assumed, based on the historical experiences of the United States and Europe, that as poor people around the world grew richer, they would buy more and more cars. They calculated that national populations would feel sated in their automobile consumption only when they reached about eight hundred cars per one thousand people, a rate of ownership that America and the European Union were approaching. The ExxonMobil forecasters made additional assumptions about the rate at which hybrid cars were likely to be adopted, the rate at which office buildings and refrigerators would become more energy efficient, the rate at which wind farms and nuclear power plants would be built, and the rate at which governments around the world would impose taxes on carbon-based fuels or caps on greenhouse gas emissions.
They concluded that worldwide energy demand would grow by about 35 percent overall by 2030 and that demand for oil and gas liquids would rise by about 22 percent, to 108 million barrels per day. Far from a green or clean energy future, they foresaw that energy-poor countries would burn fossil fuels increasingly as they industrialized. Flat or declining oil consumption in the United States and Europe, due in part to more efficient hybrid cars, would be more than offset by gasoline consumption in Asia’s fast-growing economies, particularly in China, where ExxonMobil’s forecasters expected that the number of cars and light trucks in service would grow from about 12 million in 2005 to about 110 million in 2030. (By comparison, there were about 220 million vehicles in the European Union in 2005, and about 240 million in the United States.)
The transportation sector—cars, pickup trucks, heavy trucks, airplanes, ships, and trains—was the most important factor in the global market for liquid oil. Three quarters of the roughly 20 million barrels of oil the United States consumed each day was as transportation fuel; the rest went to industrial uses, such as the manufacture of plastics. Virtually no oil went to generate electricity—coal, natural gas, hydroelectric, and nuclear energy provided the main sources of electric power generation. It drove the analysts and forecasters in ExxonMobil’s Strategic Planning department in Irving crazy when they heard radio talk-show hosts and politicians advocate that the United States should quickly build more windmills to free itself from dependency on oil imports from the Middle East; unless all-electric cars and vehicles spread very rapidly in the United States, windmill construction, whatever its pace, would have little impact on the amount of foreign oil the United States consumed.
Cohen’s public affairs colleagues digested the 2030 analysis into a series of PowerPoint slides and texts. After 2004, the forecast became the predominant topic of speeches and briefings delivered by ExxonMobil executives and managers around the United States and in Europe. ExxonMobil systematically scheduled private briefings with policymakers, background sessions at think tanks, talks at universities and colleges, presentations to Wall Street analysts, and speeches at economic clubs and chambers of commerce. The rollout had all the automated, charmless tone of other O.I.M.S.-influenced campaigns by the corporation—a tsunami of color-coded pie charts, bar graphs, and global maps, read out unemotionally by executives wearing dark suits. By placing ExxonMobil’s presentations, speeches, and lobbying briefs in a dense vernacular of statistics and economic forecasting, the 2030 campaign sought to reposition the corporation by eschewing political and ideological arguments that often provoked instant and emotional resistance from opponents. Instead, the corporation would let the facts, as ExxonMobil’s analysts conceived them, speak for them. “Realistic” and “reality check” became two of Lee Raymond’s favorite phrases as he presented and analyzed the 2030 forecast in public appearances.
“I note that Raymond is no longer seeking to gainsay the science behind climate change,” Andrew Warren, director of the Association for the Conservation of Energy in Great Britain, wrote in frustration after sitting through one of the chief executive’s presentations in London, early in 2005. “Instead he simply predicts an endless rise in the demand for the fossil fuels his company sells, and maintains that there is nothing that can be done to alter that.”
This was, in crude summary, the judgment ExxonMobil sought to infuse through its elite-targeted education campaign. Hardly anyone outside of the industry truly grasped the gargantuan scale of global energy production. Titanic changes in the patterns of energy use over decades would be required to create even modest changes in fuel consumption patterns. ExxonMobil’s analysts did not downplay alternative energy’s prospects. They projected that solar, wind, and other rising alternative sources would grow very rapidly until 2030—by more than 10 percent per year. Yet, because of the concomitant increases in worldwide economic activity and population, at the end of the forecast period wind and solar would still make up only about 2 percent of total supply.
Growth in oil consumption was inevitable, ExxonMobil’s analysts held, because the movement of large numbers of poor people into wealthier lifestyles was also inevitable, particularly in Asia. Did anyone seriously expect middle-class Chinese or Indians to fashion their lifestyles and buy cars any differently from how Japanese, Koreans, Germans, or Californians had done? The oil industry’s growth patterns would shift toward Asia, but the industry’s expansion and profitability seemed assured.
ExxonMobil’s 2030 exercise suggested, by implication, the distinctive role that climate policy would play in oil’s medium-term future. The essence of the forecast’s message was that the development of the global economy and population ensured that oil production would rise. By midcentury, some breakthrough in battery technology or solar panel arrays might reduce the costs of those energy sources so radically that they could compete economically with oil and coal in free markets, but ExxonMobil’s in-house scientists did not believe such a breakthrough was conceivable before 2030. Until then, there was only one unexpected development, one “black swan” intervention that could shift the curve of rising global oil demand: a decision by governments to limit greenhouse gas emissions by heavily taxing or capping the use of carbon-based fuels.
The ExxonMobil forecast numbers suggested that to make an impact on oil demand, the world’s governments would have to reach a unified conclusion that climate change presented an emergency on the scale of the Second World War—a threat so profound and disruptive as to require massive national investments and taxes designed to change the global energy mix. European governments had come closest to attempting such a policy, and ExxonMobil’s forecasters had figured Europe’s carbon pricing policies and alternative energy subsidies into the 2030 numbers. To reshape the global oil industry, however, the governments of China, India, the United States, and many other countries would have to adopt similar or even more aggressive carbon taxing policies. ExxonMobil’s planners concluded that this was highly unlikely, if not all but impossible; they predicted, therefore, that CO2 emissions would rise by an additional 30 percent worldwide between 2005 and 2030.
The corporation’s forecasters assumed, essentially, that the world’s governments would lack the political will to tax fossil fuels heavily enough to force any big shift away from oil. The issue here was not whether the world had the technologies to forswear oil; it was whether governments, panicked about climate change, would intervene to change price incentives to favor clean energy, knowing that such an intervention might curtail overall economic growth, at least for a time. In August 2004, the Princeton University scientists Robert Socolow and Stephen Pacala published an influential article in Science that declared, optimistically, “Humanity already possesses the fundamental scientific, technical, and industrial know-how to solve the carbon and climate problem for the next half-century. A portfolio of technologies now exists to meet the world’s energy needs over the next 50 years and limit atmospheric CO2 to a trajectory that avoids a doubling of the preindustrial concentration. Every element in this portfolio has passed beyond the laboratory bench and demonstration project; many are already implemented somewhere at full industrial scale.” However, Socolow estimated that the technologies he and his coauthor had in mind—solar, wind, and nuclear power, among them—would require a carbon tax of about $100 per ton to be economically competitive fast enough to stabilize emissions before midcentury. For world governments to enact such a tax, or set equivalent caps on greenhouse gas emissions, they would have to be galvanized by deep fears about a warming world.
Raymond continued to fund advocacy groups that promoted skepticism of mainstream climate science; he considered such funding just another example of the corporation’s possessing the courage of its convictions when others lacked them. ExxonMobil traded spots from year to year with Walmart as the largest corporation in the United States, by revenue, and its reach and influence continued to exceed that of many of the world’s midsize governments. Its employees, retirees, shareholders, and customers numbered in the millions. Lee Raymond did not believe, however, that ExxonMobil’s scale required it to act as some sort of consensus-building institution on matters of public policy.
The criticism he received for funding anti-Kyoto groups was exaggerated, Raymond told a reporter. “The facts are you don’t have to spend a lot of money to aggravate the proponents” of greenhouse gas limitations. “We think we have a responsibility. If we think people are about to make some bad policy decisions that are going to have a big impact for a long period of time, somebody’s got to say something.”
William Freudenburg’s work as a sociologist at the University of Wisconsin touched upon environmentalism, law, and society. He had earned his doctoral degree at Yale University and had published over the years in academic journals on subjects such as risk assessment. “A funny thing happened to me one day when I picked up the telephone,” he recalled in an essay published in Sociological Forum in March 2005. “I learned something new about the mechanisms of corporate influence in science.”
As ExxonMobil appealed the punitive damages verdict imposed against the corporation by Alaskan jurors in the Exxon Valdez oil spill case, it funded a complex, quiet campaign to bolster its prospects. The effort unfolded in tandem with Ken Cohen’s 2030 forecast campaign and the corporation’s residual attempts to seed doubts about climate science. Freudenburg’s experience was distinctive in part because it offered a rare, contemporaneously documented account of the strategic analysis that undergirded ExxonMobil’s most subtle forms of campaigning to shape policy and ideas.
One of the corporation’s executives telephoned Freudenburg to explore whether he might accept funding to develop an article about the impact of punitive damage awards on American society. “Naturally, we have a range of expert witnesses and so forth, but we find that it’s also helpful to have people working on articles that come out in academic publications,” the executive explained. “We’ve often worked with economists, for example. A lot of them feel that punitive damage awards are very inefficient, compared to other approaches such as regulation. . . . That’s a perspective we’re quite comfortable in supporting. But we’re exploring whether we might want to work with professors in publishing things from a few other perspectives, too.
“Basically, what we’re exploring is whether it’s feasible to get something published in a respectable academic journal, talking about what punitive damage awards do to society, or how they’re not really a very good approach,” the ExxonMobil executive continued. “Then, in our appeal, we can cite the article, and note that professor so-and-so has said in this academic journal, preferably a quite prestigious one, that punitive awards don’t make much sense. . . .”
Freudenburg scribbled notes; he decided that the details of corporate influence strategy he was absorbing might ultimately be more interesting than the commissioned consulting work ExxonMobil had in mind. He decided to string out the offer, not to undertake it, but to study its purpose.
His handler continued: “Or maybe it could be something along the lines of how difficult it is to prevent these kinds of things [accidents like the Valdez wreck] under any circumstances. It’s a little like the Challenger. . . . The people involved weren’t really all that venal.”
A few days later, Freudenburg spoke again with his ExxonMobil contact. He asked questions about how the corporation constructed its influence campaigns. He found that the ExxonMobil executive assigned to him “doesn’t come off at all like an ogre.” He was always careful to stress the corporation’s “interest in a rational approach.”
Freudenburg asked how publication of an essay in an obscure academic journal that hardly anyone read could be of any help to a corporation as large and well resourced as ExxonMobil. The executive admitted that such work “wouldn’t do much good” with trial juries, who tended to reach their verdicts on a “nonfactual” basis. Once a case was appealed to panels of judges, however, the prospects to shape their thinking improved. ExxonMobil would submit a copy of the academic journal article with its legal briefs. “The judges themselves don’t usually read them, but often their clerks will read them . . . and quite a few of the clerks, nowadays, are pretty open to these kinds of arguments. . . . Quite a few of them now come out of a law and economics program or something like that. . . .
“It’s possible to offer small amounts of support to academics who already show some tendency to express views that [ExxonMobil] finds congenial,” the executive said. In addition, “You can sponsor workshops and so forth, but that gets tricky. For one thing, once you get to that point, you pretty much have to invite both sides.”
Eventually, ExxonMobil submitted findings from this academic work to the United States Supreme Court to support its challenge to punitive damages arising from the Exxon Valdez spill. The decision ultimately went the corporation’s way and made important new law favorable to American businesses. David Souter, the Supreme Court justice appointed by President George H. W. Bush, joined in the majority’s opinion. In a footnote, however, Souter mentioned the social science evidence submitted by ExxonMobil. “Because this research was funded in part by Exxon, we decline to rely on it,” he wrote dryly.
Lee Raymond turned sixty-seven years old in August 2005. He had spent almost forty-two of those years as an employee of Exxon and had served as ExxonMobil’s chairman and chief executive for a dozen years, a long run at the top by the timelines of corporate America; he was an informal dean of his oil industry class. When he was at headquarters in Irving, Raymond often ate lunch in the subdued formality of the alcohol-free Rockefeller Room with his most senior lieutenants, including, the two who were competing to replace him, Ed Galante and Rex Tillerson. When he traveled out of Texas, he flew on the Challenger Global Express designated as One Hundred Alpha and he lingered in Hawaii, Augusta, and Pebble Beach to play golf and relax. He and Charlene, his wife, were building a new home in Palm Springs, California, and they would soon acquire another home near Phoenix. The Raymonds remained highly private. A luxurious, subdued retirement now awaited them—if the corporation’s board of directors could persuade Raymond to take it up.
Some on the board felt they had struggled since 2001 to persuade Raymond that he had to take succession and retirement seriously. Raymond felt he had done so; he had set up a contest between Tillerson and Galante over the top job, a competition that Raymond told his board was entirely genuine—a close call. “It will be a few years before you are able to figure out how good they really are,” he had said when he first appointed the pair.
By 2005, fearful of Raymond’s stalling, the board “communicated softly” with him that the directors felt that it was time to make a definitive move. The message they delivered was, “Gee, Lee, you’re now sixty-six.” Raymond understood their worry that he might become, as he quipped privately, “the next Sandy Weill,” referring to the banker who had hung on at Citigroup until he was seventy-three, finally retiring as chairman just two years before the bank nearly collapsed from imprudent bets on the American mortgage market. He assured them that he was ready to go. “Believe me, I will never be the new Sandy Weill.”
He understood that he was plugging up career movement down the executive ranks, he told the board. He was less certain, he said, about which of the two finalists for his job the board should endorse.
“Why don’t you just tell us who ought to do this?” James R. Houghton, a director who served as chairman at the international glass and ceramics maker Corning, Inc., asked at one board meeting.
“I’m not sure that’s my job,” Raymond answered. “It’s the board’s job.”
“But you’re the only guy who really knows them.”
“I accept that point, but I am interested in any perspectives any of you have—and you have an obligation.”
It seemed clear to some within ExxonMobil and on the board that for all of Raymond’s achievements in financial management and corporate strategy, his Dick Cheney–like bluntness had become a liability. Worldwide scientific and engineering talent recruitment and retention as well as lobbying strategy in Europe and the prospect of a post-Cheney Washington all argued for a leader of ExxonMobil, after Raymond, who could maintain the same level of financial and operational discipline, but project a gentler, quieter, more modern and inclusive voice.
It was not obvious which of the two finalists would be the better communicator. Galante had grown up in Queens, New York, and on the South Shore of Long Island. As he rose, he managed Exxon’s massive Baton Rouge refinery and later served as Raymond’s executive assistant in the years after the Exxon Valdez disaster—“the most thankless job in the world,” as a former Exxon executive put it, in part because as the chief operations officer on Raymond’s staff, Galante had to decide when to wake up the boss with news in the middle of the night. “Sometimes it’s not much fun to wake Lee up at four a.m.,” the former executive noted. As the succession contest solidified, Raymond appointed Galante to run the corporation’s worldwide downstream portfolio—massive refineries from China to the Middle East to the American South. Some visitors found Galante to be affable, outgoing, and comfortable in comparison with his rival, Tillerson. A Fortune reporter, Nelson D. Schwartz, went so far as to offer ExxonMobil directors advice in print as they approached their decision: “If either of the candidates to succeed Raymond can address the company’s tattered image . . . it’s Galante.”
Tillerson drawled unabashedly. He was a lifelong Texan bred in its small towns, and as his wealth accumulated, he bought a ranch outside of Dallas. His office in the third-floor executive suite in Irving contained a “Frederic Remington-style sculpture of a horse,” which struck Schwartz as part of a style that “might be called masculine not-so-moderne.” It was true that Tillerson was not one to toss around French terms. Yet he did seem comfortable in his own skin, relaxed, willing to hear different views. He was credible in industry circles but more accessible and less defensive than Raymond when addressing skeptical audiences.
How important were communication skills, anyway? The board was choosing a leader at an operations-focused, highly profitable corporation in an innately unpopular industry, not a game-show host. Raymond knew that his board worried chronically about ExxonMobil’s public image. Some of the corporation’s outside directors had come to ExxonMobil from liberal university campuses or industries such as retail sales or telecommunications, where a corporation’s public reputation was fundamental to the ability to attract customers. Raymond didn’t see ExxonMobil or the oil industry as comparable.
“The facts are, with the exception of the service stations, everything we produce has no interface with the public,” Raymond told his directors at a meeting in Japan, as the internal evaluations of Tillerson and Galante neared their end. “Crude oil, natural gas, chemical products—the public doesn’t know where it comes from. The only interface we have is the service stations.”
The retail gasoline stations so ubiquitously visible and so familiar to Americans returned notoriously low profit margins to all large oil companies. If the goal of ExxonMobil was to have a better public reputation, Raymond continued, maybe it should consider getting out of the retail business altogether and become a lower profile, highly profitable industrial company, with visibility more comparable with a company like Dupont. The public and politicians became inflamed when ExxonMobil reported its gargantuan quarterly profits in part because many people thought those profits were extracted from their wallets at the retail gas pumps where they stopped to fill up twice a week. When they drove to and from work or to the grocery store, ExxonMobil signs blared at them from street corners, reminding them of the corporation’s presence—and of the rising price of gasoline. Rather than choosing a new chief executive whose job would emphasize the rehabilitation of ExxonMobil before that hostile public, why not just retreat from view?
This was not as radical an idea as it might have sounded, but it was not going to be the basis for the board’s succession decision.
After the succession contest was established, at the annual board meeting each October, when Raymond asked all ExxonMobil executives to leave and then spoke to the directors about Galante and Tillerson, he always framed his report by saying that he could offer his views about the men’s strengths and weaknesses relative to each other. He did not know, however, how strong a leader either of them would prove to be in an “absolute” sense, tested over many years and compared with other Fortune 500 chief executives. Raymond told the board that the most important quality his successor would require was toughness—the ability to stand up to governments, pressure groups, environmentalists, and special pleaders of all types. His advice was a projection of how he saw himself.
Galante had supporters on the board until the final decision was made. Gradually, however—one board road trip or meeting retreat after another—the weight of opinion gathered around Tillerson. Raymond finally recommended Tillerson directly. He told colleagues that he felt he owed whoever followed him a firm endorsement, so that he would not leave any lingering doubts in the minds of directors who had deliberated over the decision.
ExxonMobil ended the succession contest publicly in 2004 by appointing Tillerson as president and the sole number two. In the summer of 2005, the corporation confirmed that Raymond would retire at the end of the year and that Tillerson would follow him as chairman and chief executive.
In the last year of Lee Raymond’s leadership, ExxonMobil earned a net profit of $36.1 billion, more money than any corporation had ever made in history. That broke the previous record of $25.3 billion, set by ExxonMobil the year before. Even if the profits made during the late 1950s and 1960s by such postwar corporate giants as General Motors, Ford, International Business Machines, and General Electric were adjusted for inflation, none could match the size of ExxonMobil’s 2005 profit. During the span of Raymond’s tenure, from 1993 to 2005, ExxonMobil’s market capitalization—the total value of the corporation’s shares in the stock market—rose from $80 billion to $360 billion. The company also paid out $68 billion in dividends during that time. It was difficult for an oil corporation of ExxonMobil’s size and experience to fail, particularly after oil prices began to rise in 2004. Yet ExxonMobil’s performance reflected in substantial part Raymond’s relentless focus on cost and efficiency. Raymond’s record on behalf of the corporation’s shareholders was by now less well known than his record as a self-appointed climate scientist. As part of his transition to retirement, Raymond was in the running to become the chairman of the John F. Kennedy Center for the Performing Arts in Washington, D.C., a prestigious and visible position, but environmentalists in the Kennedy family blocked him. On Wall Street and within the industry, however, Raymond commanded considerable respect. Competitors such as Royal Dutch Shell hosted farewell dinners for him, where he was feted as one of the most accomplished leaders in oil industry history and perhaps the most effective in the United States since John D. Rockefeller himself.
Whose profits were they? Under the law, of course, they belonged to ExxonMobil’s shareholders, to be managed for the shareholders’ benefit by the corporation’s board of directors, subject to the rule of law. In political terms, however, oil profits were distinct. They arose from the sale of energy products, particularly gasoline, that the American public had no practical choice but to purchase. Some energy industry profits—those made from the sale of electric power to homes and businesses—were capped and regulated in the United States by state utility commissions whose mission expressly included protection of the public interest. It was in some respects an accident of American political history—as well as an expression of the enduring power of the largest oil corporations—that electric energy was treated as a public entitlement subject to close regulatory scrutiny, while gasoline was not. Even setting aside all ideological arguments about the costs and benefits of free versus regulated capitalism, the incentives ExxonMobil and its peers followed—Wall Street signals, competitive signals, and obligations under the law to maximize shareholder value—had practical consequences for working- and middle-class families. As Petroleum Intelligence Weekly put it, “What many of the companies have in common is a reluctance to sacrifice high financial returns for stronger output growth.” There were surely many efficiencies in this system, but one of its problems proved to be poor long-term performance and underinvestment by the big companies in oil exploration and production, which contributed to tighter supply and more volatile prices that occasionally socked American consumer budgets unexpectedly.
Unarguably, the margin for error in the global oil supply system was shrinking. Just a few weeks after ExxonMobil announced Lee Raymond’s prospective retirement, Hurricane Katrina gathered force over the Bahamas, crossed into the Gulf of Mexico, and came ashore near New Orleans; the storm claimed more than eighteen hundred lives and caused about $80 billion in property damage. A month later, Hurricane Rita smashed into Texas and caused about $11 billion in damage. America’s five largest oil refineries lay in the paths of the two storms. Chaos and shutdowns in the gasoline supply chain caused retail gas prices in the United States, which had been rising steadily during the previous year, to spike suddenly toward three dollars per gallon. In general, gasoline prices rose and fell in tandem with global prices for crude oil, but occasionally, as in this case, bad weather or strikes or other local disruptions could cause a spike upward. Within a few weeks, senators and congressmen responded to outraged phone calls and e-mails from angry, financially strapped constituents by introducing legislation to prevent ExxonMobil and other large oil corporations from reaping windfall profits from popular misery. It did not help ExxonMobil’s public relations position that it announced on October 25 record third-quarter profits of just under $10 billion.
Lee Raymond flew to Washington on an ExxonMobil jet and arrived around 9 a.m. on November 9 at the Dirksen Senate Office Building on Constitution Avenue. There were few Washington rituals that more aggravated Ken Cohen and his colleagues in Irving’s public affairs department than congressional hearings called for the purpose of theatrically interrogating Raymond and other oil industry chiefs about rising retail gasoline prices. Faced with the complex problem of the oil industry’s role in America’s economy and environment, about which it was not prepared to act seriously, the U.S. Senate could be relied upon to hold inflammatory and partisan hearings. Ted Stevens of Alaska gaveled a joint hearing to order as Raymond took a seat beside David O’Reilly, his counterpart at Chevron, as well as senior executives from Shell and BP. “Energy Prices and Profits” was the title Stevens had selected for the day’s questioning.
The eighty-two-year-old senator immediately fell into argument with Barbara Boxer, a liberal Democrat from California, about whether it was necessary to have Raymond and the other witnesses stand before the cameras, raise their hands, and swear to tell the truth, as tobacco industry executives had been forced to do at a 1994 congressional hearing, before they testified falsely that cigarette smoking was not addictive. Stevens refused; he said it was not necessary. “I remind the witnesses as well as the members of these committees, federal law makes it a crime to provide false testimony,” he declared.
“Did your company or any representatives in your companies participate in Vice President Cheney’s energy task force in 2001, the meeting?” Senator Frank Lautenberg of New Jersey asked Raymond.
He answered in a single word: “No.”
Lautenberg moved on; all of the other executives at the witness table issued similar denials. His question, with its reference to “the meeting,” was in some respects ambiguous, but Raymond’s answer could be defended as truthful only in the most technical, lawyerly sense. He had met one on one with Cheney to discuss the energy task force’s broad mission, ExxonMobil’s Washington office had been in contact with the White House during that review and the parallel review of climate policy, and Raymond had spoken with Energy secretary Spencer Abraham a few weeks before the task force finished its work, in what Abraham later called a “telephonic meet and greet.” By commonsense definition, these were forms of “participation.” It would have been easy enough for Raymond to construct a truthful but self-protecting explanation about his energy policy contacts in Washington, but seven weeks from retirement, he evidently could not be bothered. Nor would he ever be held accountable for his testimony.
With apparent weariness, Raymond addressed question after question from both Republican and Democratic senators about the nature of global oil markets, how prices were set, and what ExxonMobil might do to control them. Afterward, Senate staff composed dozens of questions and submitted them to Raymond. The ExxonMobil chairman spent some of his last hours in power at the corporation signing off on answers to the same fundamental questions about oil, science, and American power that he had been attempting to control for more than a decade.
“The National Oceanic and Atmospheric Administration has projected that the country and the Gulf of Mexico have entered a cyclical period of twenty–thirty years during which the Gulf and coastal areas are likely to experience a greater frequency of hurricanes and higher odds of those hurricanes making landfall in the U.S.,” Jeff Bingaman of New Mexico began. “What preparations has your company made to deal with a greater hurricane frequency?”
“Whether there will be a greater hurricane intensity or frequency in the future remains unclear,” Raymond answered. “Evaluating the future frequency and impact of weather events is an imprecise and uncertain area of science.”
“What is the relationship between the price of oil that Americans are paying and the profits you are making?” asked New Mexico’s senator Pete Domenici.
“In fact, the vast majority (approximately 70 percent) of ExxonMobil sales and profits are made outside of the United States,” Raymond replied. “Because oil is a globally traded commodity, the absolute level of crude oil price, established on a global basis, is a key factor impacting American consumer costs and energy industry earnings.”
“Do you believe that Americans are dangerously dependent on oil and its refined products?”
“No. The emergence of abundant, affordable energy over a century ago provided a key foundation for the tremendous gains in living standards and quality of life achieved in the United States and throughout the world. . . . We do not view the projections for increases in production from the Middle East as a significant concern.”
Lee Raymond leveraged his friendship with Vice President Cheney one last time. ExxonMobil’s upstream division was negotiating with the Abu Dhabi National Oil Company over a stake in a 50-billion-barrel complex oil field called Upper Zakum. The government of the United Arab Emirates was willing to sell a 28 percent interest in the field in exchange for technology and engineering work that would enhance production and profitability. The terms offered by the U.A.E. were tough—“The government takes something like 99 percent” of revenue, Frank Kemnetz, ExxonMobil’s regional president, remarked. Yet it was an immense prize, one of the largest undeveloped fields available in the world, hosted by a small, friendly emirate that possessed just less than 10 percent of the world’s oil and the fifth largest reserves of natural gas. The U.A.E. depended upon American military protection for its very existence, yet American oil companies had managed to secure only 13 percent of the foreign participation available to international majors; European and British firms had 60 percent. The Upper Zakum sale would provide the corporation that bought in with a substantial boost to its booked oil reserves. Initially, ExxonMobil, BP, Chevron, Shell, Total, and a Japanese company submitted bids. The Supreme Petroleum Council narrowed the field to ExxonMobil, BP, and Shell, and the negotiation ultimately came down to a competition between ExxonMobil and Shell. A wide gulf of perceptions emerged between how the U.S. embassy in Abu Dhabi saw its efforts on ExxonMobil’s behalf and how the corporation saw them. The embassy “has a long tradition of advocating on behalf of U.S. oil companies for government contracts and tenders,” the post reported to Washington. “Our close and continuing relationships with the powerful elite in the U.A.E. has no doubt led to increased U.S. exports, selection of U.S. firms for various contracts and tenders, and positive resolution for U.S. firms in commercial disputes.” Yet in the clinch on the Zakum talks, ExxonMobil believed that State was not doing enough to pry the deal loose from Shell.
Finally, Dan Nelson persuaded Raymond to place a call to Cheney. “What in the hell is with this country?” was the thrust of Raymond’s message. The largest corporation headquartered in the United States by profits, a locus of American employment and shareholder wealth, could not persuade State to intervene aggressively in a prospective overseas deal even when the only competitor was a non-American firm? The vice president’s office later reported back that even they had been unable to persuade State diplomats to lobby hard for ExxonMobil—an early indicator, perhaps, of Cheney’s declining stock during Bush’s second term, or else a confirmation of Raymond’s long-standing hypothesis about State’s general uselessness and antipathy toward American oil companies. Ultimately, ExxonMobil’s representatives were told, Vice President Cheney had picked up the phone and called contacts in the U.A.E. government himself. ExxonMobil won the exclusive right to negotiate for the project, pushing Shell aside. Raymond flew to the emirate early in October 2005 and met U.A.E. president Khalifa bin Zayed “in order to allow Abu Dhabi to raise any major outstanding issues” in the deal. The issues that remained were “mostly about money” and Zayed appeared sanguine. And now that ExxonMobil was on track, it wanted the Bush administration to back off: When Energy secretary Samuel Bodman arrived the following month, the embassy briefed him: “ExxonMobil would prefer that we do not carry a strong, specific advocacy message on its behalf for the Upper Zakum bid, citing the sensitive nature of the negotiations and the timing.” ExxonMobil could be as maddening a partner for State diplomats as for its peers in the oil industry; the corporation wanted what it wanted, and it was not easy to please. ExxonMobil soon finalized a twenty-year contract to raise production in Upper Zakum; a U.A.E. official involved in the talks emphasized that “Exxon’s technical proposal was the deciding factor” and that given the geological complexity of the oil field, Abu Dhabi was “more interested in know-how” than money. The corporation’s “capabilities to increase oil recovery and efficiently build production capacity were key considerations” in its success in winning the deal, ExxonMobil reported publicly. The corporation’s executives often claimed that they did not require favors from the U.S. government, did not take direction from the White House, and preferred global independence. The reality was more complex. The corporation had a direct line to Cheney and negotiated with State and Abu Dhabi as its interests dictated.
Raymond retired on January 1, 2006. Between the day he started work at Exxon in 1963 and the end of his career, he had seen whipsawing change in the global energy industry: the nationalizations and price shocks of the early 1970s, the price collapse of the 1980s, the cold war’s end and the opening of new oil frontiers in Africa and Central Asia, two oil-fueled wars in Iraq, the emergence of global warming as a threat, and the market-upending growth of China and India as oil importers. Since 1993, Raymond had steered the corporation through these events with his eye firmly fixed on ExxonMobil’s profits. “This is perhaps the single biggest and most powerful legacy of Lee Raymond—raw profitability,” wrote Paul Sankey and Adam Sieminski of Deutsche Bank, in an assessment timed to Raymond’s retirement. “The current level of cash flow being generated by the company is unprecedented by historic standards.”
ExxonMobil’s return on capital employed, the metric Raymond had long promoted as the best indicator of an oil company’s performance, came in at 31 percent during his last year, a jaw-dropping number and the best in the corporation’s peer group that year. The gap between ExxonMobil and its competitors in this self-assigned category reflected in part the superior performance of its chemical business and its downstream refinery division, where Raymond and his colleagues had driven annual profits to $8 billion, a fourfold rise in four years. Raymond had risen within Exxon mainly as a downstream performer and he left behind the oil industry’s “strongest refining and petrochemical businesses—bar none,” as the Wall Street analyst Mark Gilman put it.
For all of these stellar financial accomplishments, yellow warning lights were blinking about ExxonMobil’s future. Annual oil and gas production remained flat, no higher than it was at the time of the Mobil merger, despite repeated promises from Raymond and other executives that production would rise. Upstream oil and gas production generated industry-leading profits because of ExxonMobil’s discipline in project investment and operations, but strategically, in Gilman’s view, Raymond “did not position the company properly in the upstream business,” where most of the industry’s profits and potential lay. The Mobil acquisition was a triumph, Gilman believed, but afterward, “they milked the developed inventory that had been previously established—there was little left for his successor to draw on.” The rise of state-owned oil companies meant that in the long run, access to new oil and gas properties would require cooperative partnerships with myriad governments and foreign rival companies, but Raymond had exacerbated Exxon’s historical “organizational arrogance,” and so they were “not, in my view, the favored partners.”
Gilman was something of a contrarian about ExxonMobil’s performance; many other Wall Street analysts praised the corporation while offering few caveats. But in Gilman’s analysis, the failure to find new oil was also inextricably tied to ExxonMobil’s relentless drive for superior profits. The very discipline that ExxonMobil bragged about to Wall Street analysts at the annual presentation—its insistence that it would release cash to invest in new oil projects only if the returns would be 15 percent or more annually—had imprisoned the company in a cycle of flat or declining production and reserve replacement struggles. “The basic problem is that their threshold returns are too high—way too high—so they end up with gobs of excess cash” without a sound strategy for long-term production growth. This was not necessarily a problem limited to ExxonMobil: “As big oil announces record profits,” wrote the analyst Amy Myers Jaffe, “you have to ask yourself: Can anyone out there find oil anymore? What happened to those wildcatters of yesteryear? Do they only search for stock dividend plays now, not promising extensions to geologic structures?” The corporation claimed that 2005 was the twelfth consecutive year in which it had found enough proved reserves of oil and gas to replace the amount pumped and sold, but this was true only if an investor accepted ExxonMobil’s self-generated rules for reserve counting and ignored the rules issued by the S.E.C.
Doubters like Gilman and Jaffe might question long-term strategy, but ExxonMobil’s reputation as the best steward of shareholder capital delivered a premium share price, in comparison with its oil industry peers. UBS Warburg estimated toward the end of Raymond’s run that ExxonMobil’s stock, because of market expectations about its superior future performance, enjoyed a 7.3 percent price premium in comparison to BP’s and even more in comparison to Royal Dutch Shell’s. The corporation’s net income in 2005 was greater than the combined profits of the next five largest publicly traded American corporations, as ranked by revenue. To be sure, sheer size and rising oil prices caused by factors outside of ExxonMobil’s control were largely responsible, but Raymond had forged the management systems that put the corporation into position to reap the rewards.
After the 1999 merger, ExxonMobil had jockeyed with Microsoft and General Electric for the status of largest American company by total stock market value, but as Raymond retired, ExxonMobil moved into the top spot. Walmart earned more revenue in some years, but as a retailer, its profit margins were relatively thin. ExxonMobil generated more profit than any other company in the world. The corporation had 83,700 employees and 2.5 million individual shareholders. If that community of interest was defined as ExxonMobil’s “population,” it was about the same size as tiny, oil-rich Kuwait’s, yet the latter’s national income in 2005 was only about $100 billion, or less than a third of ExxonMobil’s revenue. ExxonMobil citizenship, then, particularly for senior managers and executives with lucrative restricted stock packages, had become highly rewarding, even if it involved constraints on personal freedom that a Kuwaiti subject might also recognize. Even the corporation’s lower-paid employees enjoyed wages, retirement security, and income growth unavailable to the vast majority of comparable American workers.
After he formally retired, as part of a $1 million per year transition consultancy, Raymond embarked with his wife, Charlene, on an ExxonMobil Challenger jet from Dallas Love Field to Paris. For almost a month, the Raymonds circled the world on a farewell tour, touching down in Norway, London, and Singapore before they cleared customs and reentered the United States in Hawaii. They stayed a few days on the Big Island. Raymond’s journey from Watertown, South Dakota, was over, and his family was now wealthy beyond imagination. Following formulas for executive retirements the corporation had previously established, and taking into account the compensation he had deferred over the course of his forty-year career, ExxonMobil’s board of directors awarded Lee Raymond pension benefits as a lump sum of $98 million, restricted shares worth $183 million, stock options with a potential value of $70 million, the $1 million consultancy, and reimbursement of his country club fees. Altogether, his retirement package was worth just under $400 million.