Let the Good Times Roll
The 1973 Chevy Monte Carlo was a beast of a car. While it no longer offered the hard top convertible options of the prior years, it came with your choice of two powerhouse engines. The base model was equipped with a 5.7 liter V8 putting out 145 horsepower, and the optional 7.4 liter V8 cranked out 245 horses. Notice was taken to the aggressive changes made by Chevy, and the car earned Motor Trend’s prestigious “Car of the Year” title. More importantly to Chevy, it went on to become the best-selling car of the year as well.
1973 was a time when muscle cars were king. Americans wanted their cars to be large, comfortable, and most importantly, powerful. Luckily for Chevlrolet, what Americans did not care about, was fuel economy. The Monte Carlo managed a paltry 13.4 miles per gallon. For almost 30 years post WWII the oil was flowing, gas was cheap, and Americans loved their horsepower.
All of that would change in late 1973. As a result of the United States supporting Israel in the Yom Kippur War, Saudi Arabia enacted an oil embargo on all nations supporting the Israelis. By March of 1974, oil prices had risen over 300% as the US struggled to meet demand with domestic sources.
The embargo put immense pressure on President Richard Nixon to reduce dependence on foreign oil, to which he responded by approving the long sought for Alieska Pipeline across Alaska, bringing access to the rich oil reserve of the North Sea.
The price to complete the 500-mile pipeline came in at over $8 billion when it was finished two years later. A price high enough that it demanded all the major oil company partner together to form the Alieska Corporation, which would be responsible for the construction and maintenance of the pipeline. In spite of the high price, oil companies quickly began raking in cash on the completed pipeline as America’s unquenchable thirst for oil continued to burn.
For oil companies, massive capital expenses like pipelines are part of doing business. They are some of the best in the world at planning for supply, demand, and expenses far into the future. Miscalculations can lead to massive losses if planned projects don’t pan out like they anticipate. On the surface, the Alieska Pipeline seemed like a sure thing. But analysts failed to account for one thing. A political move made three years prior. The clean air act of 1970.
The act required reductions in emissions of as much as 90% by 1975. Between 1973 and 1991 the average MPG for cars and light trucks in the US went from 12.9 to 19.6. That was due in part to changes made by domestic manufacturers like Ford and GM, but it was also due in large part to the sudden influx of cars from two new companies called Toyota and Honda. Their small fuel sipping cars had been wildly popular in Japan for decades. But it wasn’t until the oil embargo that Americans started to be interested in cars that needed less gas. Sales of Japanese vehicles slowly gained steam in the early 70’s, then erupted when the new emissions standards took effect. American automakers were scrambling to meet the requirements, and putting out substandard cars as a result. Toyota and Honda were already making small affordable cars that met the standard, and were vastly superior in quality.
It wasn’t just GM and Ford that felt the heat, however. Oil companies, mired in the debt of the Alieska Project, were now facing severely reduced revenue as Americans were consuming almost a third less gas than they had been prior. In order to remain viable, costs had to be cut.
The Alieska conglomerate reduced the staff on hand for spill cleanups. They reduced the capacity of their skimmers (boats used for cleaning up spills) and cut the hours of the employees they did retain.
It wasn’t just Alieska cutting costs though. In 1970 the average Exxon supertanker had a crew of over 40 sailors. They were given a days leave in Valdez while their tanker filled. They had annual training. The ships themselves, were designed to be double hulled, with two layers of steel protecting the cargo, but that plan had been scrapped.
When his ship departed on March 23rd, 1989 Captain Joe Hazelwood had a crew of just 18. They were tired. They had been given no leave in port. And they were cruising as quickly as they could toward long beach. At around 11PM heavy ice was spotted in the usual shipping lane, so Hazelwood requested permission from the coast guard to deviate course and go around the ice. Then, having been granted permission, he left his third mate in charge while he returned to his cabin to work on the mountains of paperwork Exxon required of him.
By law, Hazelwood was required to remain on the bridge until his ship was clear of Prince William Sound. But his crew had made this voyage dozens of times, and he had mountains of paperwork to do. So, as happens to many of us, he bent the rules. He gave his third mate instructions on when to turn the ship and return to the normal route. And he left.
Not an hour later he felt the ship lurch. To an experienced sailor like Hazelwood, he knew that could only mean one thing. He scrambled to the bridge, where his fears were confirmed. His third mate had not returned to course soon enough, and the ship had run aground. A call came into the bridge. His second mate had also felt the lurch but had run to the hold rather than the bridge. He reported as quickly as he could, that the hull of the Exxon Valdez had been breached, and oil was gushing into the sea.
In total over 10 million gallons of oil would be dumped into the sound resulting in one of the largest environmental disasters in US history. Captain Hazelwood would be fired immediately for his role in the disaster, and would become something of a scapegoat. Hazelwood certainly made a mistake. He shouldn’t have left his post. While that decision ultimately was the match that lit the fire, the kindling had been piling up for decades.
Alieska’s clean-up efforts took weeks to get underway. The prior budget cuts had left them without manpower, and without supplies. The chemical detergents available to clean the water, had never been tested. The skimming boats proved ineffective. The boat itself, may never have been punctured if it had been equipped with the originally planned double layered hull. Captain Hazelwood may have been on the bridge all night, but he had gotten behind on paperwork due to his covering a shift for his second mate who hadn’t slept in 48 hours.
Hazelwood’s choice caused the Exxon Valdez to wreck. Exxon’s poor projections and even worse budget decisions are what turned it into an environmental disaster.
We all work with limited resources. We make choices every day, every week and every month when it comes to what we spend our money on. Exxon’s undoing was making budget decision when times were good. They projected their cashflows as if the good times would never end. They used those projections to overleverage themselves, and when times got tough that had to cut deep to stay afloat. Your budget needs to be better.