Oil Slicks

BP’s new eco-friendly ad campaign makes no sense.

Most advertising campaigns are superficially dishonest. There’s no empirical evidence that Avis really tries harder or that Quizno’s subs are superior to those of Subway. British Petroleum’s flashy new campaign—in which its initials are made to signify Beyond Petroleum—is dishonest in that way. But it’s also dishonest in the cosmic business strategy sense.

The high-profile print and TV ads run by BP—such is its newfound aversion to the product it has depended on for more than a century that it no longer even calls itself British Petroleum—trumpet the company’s investments in solar energy. TV ads feature man- and woman-in-the-street interviews with consumers who muse about the virtues of a world in which fossil fuels are bit players. It’s a little like McDonald’s running ads in which Eric Schlosser, author of the exposé Fast Food Nation, discusses the horrors of ground beef.

The current campaign notwithstanding, BP, the world’s seventh-largest company, generates the overwhelming majority of its $160 billion in annual revenues from the oil and gas business. In the past 20 years, it curtailed diversification efforts into animal feed, chemicals, minerals, and coal, and has acquired oil companies like Standard Oil, Arco, and Amoco. Today, BP is the largest producer of oil and gas in both the North Sea and the United States. BP’s 17,150 service stations—Amoco and BP in the East, Arco in the West—make it the second-largest marketer of gas in the United States. The company is sitting on 19 billion barrels of oil and gas reserves.

So what’s with this “Beyond Petroleum” stuff? BP has a huge investment in an intensively competitive commodity business. By and large, you’ll get virtually the same performance, price, and customer experience at Sunoco as you will at BP. Cars don’t develop tastes for brands of gas the way humans develop tastes for brands of soda or potato chips. Neither, by my own unscientific polling, do people. Oil retailers differentiate themselves by offering premium coffee in the stores or providing ease of payment through gizmos like Mobil’s Speedpass or, in BP’s case, by projecting a favorable brand image.

Highlighting environmentally friendly products has emerged as a popular way for retailers and consumer-product companies to strengthen bonds with discerning customers. Think Home Depot’s rainforest-free lumber, McDonald’s biodegradable Big Mac wrappers, and the entire Body Shop. Ford briefly aspired to eco-friendliness with its drive for greater fuel efficiency but canned it when the financial going got tough.

By running these ads and by doing things like powering gas pumps with electricity generated by photovoltaic cells, BP sends a message to conflicted SUV drivers—I’m one of them—who sleep better after filling the 14-mile-per-gallon Jeep from an energy-efficient pump. What’s more, it obtains what no global oil conglomerate can buy: positive coverage in the media. (The New York Times in particular seems to have a soft spot for anything that smacks of renewable energy.)

BP’s campaign inspires no small amount of cognitive dissonance. The company proudly notes that it will invest $15 billion in oil properties in the next 10 years. But while a release notes that “BP holds a leading share in the global market for photovoltaic modules, which turn sunlight into electricity,” you’ll search far and wide on its Web site without finding any dollar figures attached to it. You can be sure that “leading share” is a lot closer to $15 million than $15 billion.

More significantly, the Beyond Petroleum campaign seems to argue for the disappearance of the company’s core product. If our kids should be so fortunate as to live in a world beyond petroleum, one in which cars, factories, and electricity plants are powered by an alternative power source—hydrogen, fuel cells, electric batteries, ethanol, fission, or fairy dust—it’s a virtual certainty BP won’t be the one to get us there.

Big players in industries—especially dominant ones—can survive and even profit from dramatic inflection points. IBM adapted from the mainframe to the PC, and Microsoft has survived the transition to the Internet. But giant companies in competitive, capital-intensive businesses, which are owned by shareholders with short time horizons, have difficulty mustering the will to develop a new product that will render existing ventures obsolete.

In The Innovator’s Dilemma, Harvard Business School’s Clayton Christensen argued that established players are constitutionally disinclined to develop disruptive technologies on their own. Why? Incumbents spend too much time and resources satisfying their customers’ current needs—in BP’s case, the need for cheap oil and gas. As a result, they fail to latch on to new technologies that may turn into products that customers might need or don’t even know they need.

Quite apart from Christensen’s argument, the managers of BP lack the incentives to develop the next big energy source. In good and bad economic times, big oil can be a highly profitable business: Extract the crude stuff, add value to it, and sell it into the distribution channel. The value proposition looks even better down the road. Demand will likely increase with the proliferation of cars into giant untapped markets like India and China, and supplies are expected ultimately to decrease.

So, let’s say BP scientists hit upon a solar energy technology that, after an investment of hundreds of billions of dollars over 20 years, might—might—prove as profitable and effective as oil. And let’s say that starting today, BP commits the same amount of resources to solar panels as it does to oil exploration. After a few years without positive returns, shareholders would grow restless. Oil companies that continued simply to pump and refine crude would boast higher profit margins, higher dividends, and lower costs of capital. Since BP’s ownership, like that of most giant companies, is diffused among hundreds of thousands of shareholders, it lacks a controlling shareholder who can steer a bold course for the future, the minority shareholders be damned. Capital markets are willing to fund innovation on a large scale—remember Webvan? But they tend to keep managers on a pretty short leash—still remember Webvan? The executives of a publicly held company will find it difficult to justify plowing cash generated by oil into an unproved alternative energy system that would decrease the utility of and demand for oil—especially since BP has already paid for a massive inventory of the stuff.

In fact, as Christensen notes, it is too much to expect any giant corporation to be an early adapter and promulgator of disruptive technologies. Those waiting for Microsoft to fully embrace Linux’s free operating system, or for EMI to embrace file-sharing shouldn’t hold their breath. Hewlett-Packard-Compaq has a massive R and D budget, but you can bet its scientists aren’t trying to develop a printing technology that would eliminate the need for toner cartridges, which provide most of its profits. Under Jack Welch, General Electric started an initiative called, in which business managers were challenged to use the ultimate disruptive technology—the Internet—to undermine their own businesses. But the guys who run GE’s engine systems unit didn’t start noodling around with a new means of making jets fly; they used information technology to figure out how to run the existing business more efficiently.

In the early 20th century, hundreds of companies profitably made carriages, train cars, and other vehicles. They had far more resources, market knowledge, and technology available to them than did tinkerers like Henry Ford. And yet, as per Christensen, the companies that came to dominate the disruptive automobile industry were startups like Ford, not incumbents like the Brewster Carriage Co.

I have no doubt that in my dotage I’ll be tooling around in a vehicle that is not powered by the internal combustion engine. But I doubt it will be made by General Motors, and I doubt that the fuel for the contraption will be provided by BP. There’s too much money to be made on petroleum between now and then.