US must pursue a path of international energy engagement
ExxonMobil’s chief offers his thoughts on US energy security, the role of international markets and the need for more engineering and scientific education.
Rex W. Tillerson, Chairman and CEO, ExxonMobil Corporation
In the very first issue of Foreign Affairs, statesman and founding Council on Foreign Relations (CFR) 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. Thankfully, the latter view eventually carried the day.
Today, a similar debate is taking place on energy security. Should the US seek so-called “energy independence” in an illusive effort to insulate itself 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? 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 US energy security, and it is also the key to achieving greater economic and environmental progress.
ENERGY CHALLENGES AND INDUSTRY FUNDAMENTALS
Greater international engagement requires that 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% 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 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 bbl of energy, measured in oil equivalent, from all sources. Oil, alone, is consumed at a rate of 40,000 gal/sec. Developing and delivering energy involves thousands of producers, refiners, contractors and retailers in a vast global network. To get 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 2% of the world’s total energy.
Meeting this demand also requires long-term thinking. Energy industry timeframes 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.
One example is the resources that ExxonMobil produces at Russia’s Sakhalin Island. They were first discovered in the 1970s, and production will likely continue through mid-century—all told, about 75 years. Seventy-five years ago, Franklin D. Roosevelt was elected President for the first of his four terms.
The Chayvo Yastreb land rig was engineered and built exclusively for Russia�s Sakhalin 1 project, and is believed to be the most powerful unit of its kind in the global industry. Photo courtesy of the Sakhalin 1 Consortium.
Massive investments are also required. The International Energy Agency estimates that $8 trillion will be needed by 2030 for oil and gas development, alone. Between 1991 and 2005, ExxonMobil invested $210 billion—about half of our total 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 energy security issue. 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 an economic meaning, but a 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 CFR Independent Task Force made an important contribution in this regard, outlining several so-called myths about US oil dependency and presenting the facts to dispel them. I would like to take a similar approach and review some perceptions and realities of US 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 US Geological Survey, 2 trillion bbl of conventional oil 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 1 trillion bbl 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 US is mostly dependent upon Middle Eastern oil imports. This region’s producing countries do, indeed, play a pivotal role in global energy markets. But, in reality, only 15% of Americans’ oil needs are met by Middle Eastern imports. The largest US suppliers historically are Canada and Mexico, which, along with our own domestic production, meet about 55% of US oil demand.
Some believe that dependence on oil imports leads to economic weakness, but this belief is not backed by the facts. Eight of the world’s 10 largest economies are net importers of oil. This includes the US. 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 oil exporting countries that are neither unstable nor threatening. 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 fossil fuel endowment 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 a different reality. Canada is a major oil exporter, and yet the prices that Canadians pay for fuels parallel prices that 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 is 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 US energy supply. And, given the enormous energy demand challenge that 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 gal, meeting about 3% of US gasoline demand. To achieve this share required roughly 20% of the US 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% 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 to 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% of all US 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 essentially creates one vast pool of energy in which all producers deposit, and from which all consumers draw. Enlarging this pool—not dividing it, draining it, diverting it or damming it—helps lift all energy security boats, including that of the US.
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 US 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 US 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 is one step that US policymakers can take immediately. The US has been endowed with the second largest oil and gas resource base in the world, but much of it—nearly 50 billion bbl of oil equivalence—is off-limits to development. Allowing the industry, with its latest technology and operating know-how, access to this potential could easily boost US 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 1980s. But over the years since then, our industry has made tremendous strides toward reducing footprints and improving safety, and has successfully developed capabilities in offshore developments the world over—offshore the UK, Norway, the Netherlands, Australia, Russia, and I could go on.
For example, at the Sakhalin 1 project in Russia, ExxonMobil is using precision directional drilling to reach offshore fields from an onshore site through wells drilled one mile deep and six miles horizontally. And our drilling technology will allow us to place the bit on target. Technology is a great enabler. Yes, this project is located in extreme arctic conditions and in an earthquake-prone area. But despite these obstacles, we are producing in a safe, environmentally-sound way. We can certainly do the same offshore the US, where conditions are considerably less challenging.
GLOBAL MARKETS AND THE ENVIRONMENT
The global market system also has important implications for climate change. This is an extraordinarily serious but complex issue. While there is 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 it is prudent to take action while accommodating the uncertainties that remain. ExxonMobil is addressing the risks by working to reduce greenhouse gas emissions in our worldwide operations, in our partnerships with auto and engine makers, and through support of such research initiatives as the Global Climate and Energy Project. 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 to help move forward on this important issue. To that end, we take part in discussions with industry participants, environmental leaders, think tanks and trade groups.
In our view, the most effective policies will maximize the use of 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 US energy security and advancing environmental progress depend on continued development and deployment of new technologies. Because the oil industry’s principal consumer product—gasoline—may 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. Extended reach drilling technology is just one of the innovations that testify to our high-tech nature. 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 US is failing to educate adequately and, as a consequence, is losing ground. One recent study showed that, between 2000 and 2003, the US fell five places among 32 countries ranked in terms of undergraduate science degrees earned. The US 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. The US 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 regard to not just our national security, but to our energy security. Which is why I recently announced the ExxonMobil Foundation’s commitment to contribute $125 million in support of 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, this initiative’s goal 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.
Our global free market system enables Americans to achieve energy security by encouraging further development and diversification of energy resources. Misperceptions, however, are leading policymakers to consider protectionist policies that threaten to undermine this global market. The US 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. In this century, we face a similar choice with regard to US 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.” If we do, I am confident the US can lead the world toward a more secure and prosperous future.
Editor's note: This article is based on a speech delivered to the Council on Foreign Relations Annual Corporate Conference, March 9, 2007, in Washington, DC.
Rex W. Tillerson is chairman and CEO of Exxon Mobil Corporation. A native of Wichita Falls, Texas, he earned a BS degree in civil engineering at the University of Texas (Austin) before joining Exxon Company, U.S.A. (EUSA) in 1975 as a production engineer. In 1989, he became general manager of EUSA’s Central Production Division, responsible for oil and gas production throughout a large portion of Texas, Oklahoma, Arkansas and Kansas. Further promotions included production advisor to Exxon Corp. (1992); president of Exxon Yemen Inc. and Esso Exploration and Production Khorat Inc. (1995); V. P. of Exxon Ventures (CIS) Inc. and president of Exxon Neftegas Limited (Jan. 1998); executive V. P. of ExxonMobil Development Co. (Dec. 1999); and senior V. P. of Exxon Mobil Corp. (August 2001). He was elected president of the corporation and a member of the board on March 1, 2004. His current duties began on Jan. 1, 2006. Mr. Tillerson is a director and a member of the Executive and Policy Committees of API. He is also a director of the US-Russia Business Council and a trustee of the Center for Strategic and International Studies. Other affiliations include the National Petroleum Council; the Business Roundtable and its Energy Task Force; the Business Council for International Understanding, the Emergency Committee for American Trade; the Executive Board of the Boy Scouts of America; the United Negro College Fund and the Engineering Foundation Advisory Council for the University of Texas (Austin) and SPE.