strengthening U.S. energy security through engagement and education

Remarks by Rex W. Tillerson
Chairman and CEO, Exxon Mobil Corporation
Council on Foreign Relations Annual Corporate Conference
March 9, 2007

 

Although this is my first time speaking at the Council on Foreign Relations, it feels a little like home. And that’s not just because this building was once the private residence of Harold Pratt, a former director of Standard Oil.

I feel at home because the Council was founded on a belief that I share and I trust most of you do, too.

 

International Energy Engagement
That is a belief in the promise of international engagement and in the potential for global approaches to meeting this nation’s challenges.

In the very first issue of Foreign Affairs, statesman and founding Council member Elihu Root wrote, “No nation whose citizens trade and travel… need consider whether it will be a member of the community of nations… It is compelled by the situation.” Because of this, he said, there is a “pressing demand for popular education in international affairs.”

Root wrote at a time when Americans were debating whether to choose an isolationist foreign policy or an internationalist one. The Council on Foreign Relations advocated the latter, and thankfully, this view eventually carried the day.

Today, a similar debate is taking place regarding energy security. Should the United States seek so-called “energy independence” in an illusive effort to insulate this country from the impact of world events on the economy? Or should Americans pursue the path of international engagement, seeking ways to better compete within the global market for energy?

Like the Council’s founders, I believe we must choose the course of greater international engagement. We are compelled by the situation.

Such a global approach is important to achieving greater U.S. energy security, and it is also the key to achieving greater economic and environmental progress.

 

Energy Challenges and Industry Fundamentals
Greater international engagement requires we meet the pressing need for popular education in energy affairs, beginning with a broader public understanding of the energy challenges before us.

By 2030, the world’s energy needs will be about 50 percent greater than they were in 2005. This growing demand for energy reflects a growing demand for an improved quality of life, especially in developing nations. In fact, most future energy demand growth will occur in non-OECD countries.

Meeting this tremendous demand requires an enormous industry, the sheer scale of which escapes most people. Each day, consumers worldwide use over 230 million barrels of energy, measured in oil equivalent, from all sources. Oil alone is consumed at a rate of 40,000 gallons a second.

Developing and delivering energy involves thousands of producers, refiners, contractors, and retailers in a vast global network. To provide you a sense of the industry’s magnitude, consider this: ExxonMobil is the largest publicly-traded energy company in the world, yet we produce no more than two percent of the world’s total energy.

Meeting this demand also requires long-term thinking. The timeframes involved in the energy industry are often hard for policymakers to grasp. Many elected officials think in terms of two, four, or six years, based on campaign cycles. The energy industry thinks in terms of two, four or six decades, based on the lifecycles of our investment projects.

To take just one example, the resources ExxonMobil are currently producing at Sakhalin Island in Russia were first discovered in the 1970’s, and production will likely continue through mid-century — all told, about 75 years.  Seventy-five years ago, Franklin D. Roosevelt was elected President and beginning the first of his four terms.

Massive investments are also required. The International Energy Agency estimates $8 trillion will be needed by 2030 for oil and gas development alone. Between 1991 and 2005, ExxonMobil invested a total of $210 billion – about half our total current market capitalization and a figure exceeding our total earnings during that period.

 

Energy Security: Perceptions and Realities
It is within this context that we must consider the issue of energy security. At its most fundamental level, energy security means the availability, reliability and affordability of fuel and power supplies.

Increasingly, however, energy security has taken on not just economic meaning, but political and environmental meaning as well. In fact, for some, energy security has evolved into the sum of nearly all fears.

Allaying these fears and finding workable ways to achieve greater energy security requires first that we distinguish between perceptions and realities.

A Council on Foreign Relations’ Independent Task Force led by Jim Schlesinger and John Deutch, and coordinated by Dave Victor, made an important contribution in this regard, outlining several so-called “myths” about U.S. oil dependency and presenting the facts to dispel them. I would like to take a similar approach and review some current perceptions and realities of U.S. energy security.

First is the perception that the world may soon reach the point of so-called “peak oil” production, after which it is all downhill.

The reality is that, while oil and other fossil fuels are indeed finite, they are far from finished. In fact, according to the U.S. Geological Survey, two trillion barrels of conventional oil resources remain – twice the amount that has been produced and consumed from the dawn of human history to date. Add to that at least an additional one trillion barrels of unconventional oil resources, such as heavy oil and shale oil, and it is clear that abundant supplies exist to be tapped.

Another perception is that the United States is mostly dependent upon imports of oil from the Middle East. The oil producing countries of this region do indeed play a pivotal role in global energy markets.

But in reality, only 15 percent of Americans’ oil needs are met by Middle Eastern imports. The largest U.S. suppliers historically are Canada and Mexico, which along with our own domestic production, meet about 55 percent of U.S. oil demand.

Some believe dependence on oil imports leads to economic weakness, but this belief is not backed by the facts. Eight of the world’s ten largest economies are net importers of oil. This includes the United States. Our economy has doubled in size since 1983 at the same time the percentage of our energy needs met by imports has increased.

Another perception is that oil exporting nations are inevitably unstable or threatening. But the reality is that there are many examples of oil exporting countries which are neither unstable nor threatening — and, in fact, even the exporting countries of the Middle East have a remarkable record of reliable supplies, even through periods of war and internal strife. The world’s endowment of fossil fuels is a blessing, not a curse. The challenge is how we manage it.

Some believe that Americans can insulate themselves from price volatility by reducing our dependence on energy imports. A look at Canada’s experience suggests that the reality is different.

Canada is major oil exporter, and yet the prices Canadians pay for fuels parallel prices Americans pay. Worldwide energy supply and demand drive energy prices — even in so-called “energy independent” countries.

Finally, a perception that has gained in popularity recently — the belief that Americans can effectively meet their energy needs through homegrown sources, such as corn-based ethanol.

Ethanol is making a growing contribution to the U.S. energy supply. And given the enormous energy demand challenge the world faces, any source that can be economically developed is helpful. But, because of inherent limitations of scale and cost with current technologies, ethanol can only play a limited role.

For example, in 2006, it is estimated that domestic corn-based ethanol supplies totaled close to five billion gallons, meeting about three percent of U.S. gasoline demand. To achieve this share required roughly 20 percent of the U.S. corn crop.

At this rate, even if Americans were to devote our entire current corn harvest to the production of ethanol, it would only meet about 15 percent of our current gasoline needs.

Other sources of bioenergy could prove technically and economically viable in the future. ExxonMobil is the leading sponsor of the Global Climate and Energy Project based at Stanford University, which is conducting research in cellulosic sources of energy, for example.

However, without significant breakthroughs that would enable broad, commercial application of cellulosic ethanol technology, biofuels will continue to have a limited role in meeting the country’s and the world’s growing energy needs.

 

Global Energy Market Security
Those are some of the perceptions and realities. But the central reality is this: The global free market for energy provides the most effective means of achieving U.S. energy security.

By promoting resource development… enabling diversification… multiplying our supply channels…encouraging efficiency… and spurring innovation, the global markets for oil and natural gas help mitigate the impact on American consumers of sudden supply shocks, price spikes and chain breaks.

To understand how, look at Wall Street. As any investment banker would attest, the best hedge against market risk is a diversified portfolio. The same holds true for the international oil and gas supply portfolio. More energy from more geographic sources mitigates the impact from a downturn or interruption in any one supplying country or region.

The security inherent in the global market system was perhaps best demonstrated in the aftermath of Hurricanes Katrina and Rita two years ago.  At one point, nearly 30 percent of all U.S. refining capacity was shut-in as a result of these storms. But thanks to a rapid influx of refined product imports from Europe prompted by market price signals, Americans suffered only short-lived shortages and price spikes. The market proved extremely resilient.

In this global market, the nationality of the resource is of little relevance. Energy “made in America” is not as important as energy simply made, wherever it is most economic.

Look at it this way: Our global market system essentially creates one vast pool of energy in which all producers deposit and from which all consumers draw. Enlarging this global energy pool — not dividing it, draining it, diverting it or damming it – helps lift all energy security boats, including our own.

 

Energy Policymaking
This has important implications for energy policymaking.

Trade barriers, punitive taxes, artificial subsidies and other market manipulations may appear to some to be in the interests of U.S. energy security, but to the extent that they inhibit development and diversification of global economic energy supply, they are not.

A more effective means of strengthening U.S. energy security is by facilitating free trade and investment… promoting stable fiscal, tax, and regulatory systems… strengthening partnerships between producing and

consuming countries… and taking other steps that expand and fortify a global free market for energy.

Lifting restrictions on oil and gas development in this country is one step U.S. policymakers can take immediately.

The United States has been endowed with the second largest oil and natural gas resource base in the world, but much of it – nearly 50 billion barrels of oil equivalence — is currently off-limits to development. Allowing the industry, with its latest technology and operating know-how access to this potential could easily boost U.S. oil production by millions of barrels a day.

Concerns about the environmental impact of developing these resources prompted lawmakers to first rule them off-limits in the early 1980’s. But over the years since then, our industry has made tremendous strides towards reducing our footprint and improving safety, and have successfully developed the capabilities in offshore developments the world over — offshore the U.K, offshore Norway, offshore the Netherlands, offshore Australia, offshore Russia… and I could go on.

For example, at the project in Russia I mentioned earlier, ExxonMobil is using precision directional drilling techniques to reach undersea fields from an onshore site through a well drilled one mile deep and six miles horizontally.  That’s the distance from this spot to Yankee Stadium. And our drilling technology will allow us to place the bit on target on a line between home place and the pitcher’s mound. Technology is a great enabler.

But unlike Manhattan, this project is located in extreme arctic conditions and in an earthquake-prone area. Despite these obstacles, we are producing today in a safe and environmentally-sound way. We can certainly do the same offshore the United States, where conditions are considerably less challenging.

 

Global Energy Markets and the Environment
The global market system also has important implications for the issue of climate change.

This is an extraordinarily serious but complex issue. While there are a range of possible outcomes, the risks posed by rising greenhouse gas emissions could prove to be significant. So, it has been ExxonMobil’s view for some time that is prudent to take action while accommodating the uncertainties that remain.

ExxonMobil is taking action to address the risks by working to reduce greenhouse gas emissions in our worldwide operations, in our partnerships with auto and engine makers, and through our support of such research initiatives as the Global Climate and Energy Project, which I mentioned earlier.  Consumers can take action, too, by using energy more efficiently.

In terms of public policy, many proposals with the objective to reduce emissions have been put forward. ExxonMobil hopes to be a constructive participant in the dialogue about these proposals and help move forward on this important issue.

To that end, we are participating in discussions with industry participants, environmental leaders, think tanks and trade groups.

In our view, the most effective policies will maximize the use of the markets. This will promote global participation and facilitate the rapid spread of successful technologies and initiatives. Consistent with a market-based approach, effective policies will maximize transparency… minimize complexity… and provide sufficient flexibility to adjust to new developments in both the climate science and the future economic impacts of such policies.

 

Innovation and Education
Strengthening U.S. energy security and advancing environmental progress depends on continued development and deployment of new technologies.

Perhaps because the oil industry’s principal consumer products — gasoline — seem less sophisticated than a cell phone or a plasma TV, we are not viewed as being particularly innovative.

But ours is an industry that has throughout its history operated on the edge of new, developing technologies. The extended reach directional drilling technology I referred to earlier is just one of the innovations that testify to the high-tech nature of our business.

Such technologies would not be possible without the applied intellect and ingenuity of thousands of trained scientists and engineers. This expertise begins in our nation’s classrooms. To innovate, we need to educate.

The United States is currently failing to do so adequately, and as a consequence, we as a nation are losing ground. One recent study showed that, between 2000 and 2003, the United States fell 5 places among 32 countries ranked in terms of undergraduate science degrees earned.

The United States must add to, not subtract from, the number of math and science graduates from this country if we are to meet the energy security and environmental challenges of the future.

Fifty years ago, after the launch of Sputnik, Americans realized that security and education were linked.  Our defense depended upon new technologies like satellites, which depended upon cultivating new generations of scientists and engineers to develop them. This nation rose to the challenge by passing the National Defense Education Act and taking other measures to promote math and science education.

Today, we face a similar challenge in regards not just to our national security, but to our energy security. Which is why I am announcing today — in fact, immediately following this event – the ExxonMobil Foundation’s commitment to contribute $125 million to support the National Math and Science Initiative, a non-profit organization helping to scale-up proven math and science programs to a national level.

By 2020, the goal of this initiative is to provide 15,000 new degreed math and science teachers in thousands of school districts nationwide with the training to instruct and inspire an entire generation of young Americans in these subjects.

 

Conclusion
In conclusion, our global free market system currently enables Americans to achieve energy security by encouraging further development and diversification of our energy resources.

Misperceptions, however, are leading policymakers to consider protectionist policies that threaten to undermine this global market system.

Our focus should instead be on strengthening this system while fostering a culture of innovation through the promotion of math and science education.  Technology is vital to our future energy security.

During the last century, Americans chose the path of international engagement over isolationism, thanks in part to the efforts of the Council of Foreign Relations. This choice ultimately strengthened U.S. national security.

In this century, we face a similar choice in regards to U.S. energy security.  And, as it did then, the situation compels us to choose the course of international engagement, and in the words of Elihu Root, meet “the pressing demand for popular education.”

And if we do, I am confident the United States can lead the world towards a more secure and prosperous future.

Thank you.