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California Summit—Powering California’s Economy: A Conversation with John S. Watson

December 08, 2015
   
   

Being green may put Golden State in the red, Chevron CEO says

During a one-on-one exchange with CNBC anchor Brian Sullivan at the outset of the California Summit, Watson admonished policymakers that the campaign to make our economy greener is creating unintended and unwelcome consequences. Though the dramatic and recently quickening slide in the oil price has been the talk of Wall Street, Watson emphasized what he sees as barriers to business growth in the Golden State. That was entirely appropriate, considering that the Summit is largely about the interaction between business and public policy, and he did take time to speak to the volatile conditions in the oil patch.

“Energy is the backbone of the economy,” said Watson, who runs the second-largest company, by revenue, headquartered in California. Environmental legislation, however, makes that energy more expensive. Not surprisingly, going green remains the privilege of the well off, he and Sullivan agreed. “We talk often about the benefits, but we don’t talk about the costs,” Watson said. “Costs are the untold story.”

Regulatory actions that aim to curb carbon emissions encroach on the functions of business, Watson added. He called such initiatives as the state’s renewables portfolio standard and AB32, also known as the Global Warming Solutions Act, “aspirational,” imposing technology and forcing procedures on companies that they may not be able to implement. Further, Watson believes that regulation has had no positive effect. True, emissions are down, but he credits that to the replacement of coal with natural gas in power plants—thanks to fracking—and more efficient vehicle engines.

Businesses calculate these burdens in their cost-benefit equations. They “make rational choices,” Watson said, “and I think manufacturing is at risk in this state.”

Following the implication of Watson’s view, Sullivan provocatively asked whether, if Watson could re-create Chevron as a startup, he would build it in California, as his corporate forefathers did 135 years ago. To paraphrase the CEO’s response, California has many strengths, but it would require accepting high public-sector costs, stiff marginal tax rates, onerous regulation and a declining educational system. Yet he doesn’t plan to “pick up our marbles and leave.” Rather, it’s a question of where Chevron will choose to launch or expand operations in the future.

To get back to what the markets are chattering about—the descent of U.S. benchmark crude into the $30s (per barrel, that is)—well, Watson has seen numbers swing before. Oil has plunged by 50 percent or greater five times in the 35 years he’s been in the business, but you can’t just decommission your wells on a dime to shrink supply and shore up the price. If you’ve spent five years on a project and 90 percent of your budget, you’re going to complete the job and keep pumping to recoup what you can. That may exacerbate the supply-demand imbalance. Yet markets correct, he reminded the audience, though not on a predictable schedule.

What Watson does predict, however, will dismay environmentalists, among others, but cheer those who see fossil fuels as our most reliable and lowest-cost option. Twenty years from now, Chevron’s leader forecast, oil, natural gas and coal will still account for 75 percent of our energy output.


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