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Keynote Address: Building Bridges of Energy Understanding

October 3, 2007 |  8:00:00  |  LBJ Library Atrium, 10th Floor

Building Bridges of Energy Understanding

Remarks by Rex W. Tillerson
Chairman and CEO, Exxon Mobil Corporation
University of Texas’ Strauss Center for International Security
October 3, 2007

Thank you for the opportunity to speak at the Strauss Center for International Security and Law at the University of Texas, my alma mater, this evening.

This new research institution is off to a promising start with the “Bridging the Gap” initiative, which aims to bring the academic, business and public policy communities closer together for the purpose of addressing the many global challenges we face.  I am really honored to be present at its launch.

Building bridges is a fitting mission for a center named after Ambassador Bob Strauss.  During his long career in public life, Ambassador Strauss brought together Presidents of both parties, like Jimmy Carter and George Bush Senior ” leaders of opposing sides, like Egypt’s Anwar Sadat and Israel’s Shimon Peres ” and even unlikely pairs of politicians, like George Wallace and George McGovern.

Building bridges is as important today as it was during the four decades of Ambassador Strauss’ service.  Advances in technology, communication, information, energy and other high-technology fields have created a dense web of interconnections across the world economy and given rise to the term “globalization.”  They have opened new opportunities for economic development, spurred social progress and brought people closer together than ever before.

But the continuation of such progress is neither inevitable, nor is it invulnerable.  To ensure it, we must not only overcome the geographic distances that separate us, but also bridge the social, cultural and political differences between us.

In the year 1901, John Maynard Keynes wrote that a Londoner of his day could order from the telephone at his bedside, “the various products of the whole earth” and reasonably expect their delivery upon his doorstep.” Keynes went on to say that his contemporaries regarded this state of affairs as, “normal, certain and permanent.”

Of course, the global economy at the turn of the last century proved neither certain nor permanent. By 1914, the world was at war and the international economy in tatters, due in part to misjudgments and misunderstandings.  History shows that progress is not necessarily permanent.

With this knowledge, we must build bridges of understanding, as Ambassador Strauss did, if we are to guarantee the benefits of an interconnected global economy.

Globalization and Energy
To understand the workings of today’s integrated world economy ” and the means of securing it ” it is crucial to understand the importance and evolution of the global market for energy.

Ready access to reliable, versatile and affordable supplies of energy has been and remains essential to economic prosperity worldwide.  Modern means of transportation depend on liquid fuels ” the nearly 23,000 aircraft flying across international skies at any given moment are filled with thousands of gallons of highly-refined jet fuel, for example.

All electrical devices ” from modems to microwaves, cell phones to ceiling lights ” require an energy source.  Energy is, in some ways, a “supercommodity” on which the production and distribution of most other commodities depend.  Maintaining our high quality of life depends upon it.

In other parts of the world, energy is not simply needed to maintain standards of living, but to lift them.  According to the International Energy Agency, about 1.6 billion people around the world lack electricity, and about 2.5 billion still rely on basic fuels such as wood and waste and dung.

Limited access to clean, safe and reliable energy limits access to critical social services, including food and water supplies, sanitation, health care and education.  In the hierarchy of modern needs, energy ranks very high.

Fortunately, ample hydrocarbon resources remain to meet these energy needs.  The U.S. Geological Survey estimates that approximately twice the conventional oil consumed since the Industrial Revolution remains to be recovered, with even greater amounts of unconventional oil resources, such as heavy oil and shale oil, potentially available.

Fossil fuels are not the only energy source available, of course.  Alternative sources play an important and growing role in meeting the world’s needs, as well.  However, because they build upon a relatively small base, they will not fundamentally change the world energy mix in the foreseeable future.

The Energy Innovation Challenge
The primary challenge is not overcoming a lack of resources, but overcoming the technological hurdles to developing them.  Oil and natural gas are increasingly found in remote or environmentally challenging locations, like the arctic conditions of Russia’s Far East, or the deep waters offshore West Africa.  Producing these resources safely, reliably and economically is a continuing technological challenge for the energy industry.

To many, the industry may not seem particularly innovative.  Perhaps this is because the fuels we produce appear simple compared to high-tech manufactured goods.  Gasoline may not seem as innovative as an iPod or plasma TV.

Largely hidden from public view is the exceedingly complex and high-tech process for finding, developing, processing and delivering these seemingly simple products.  Technology is at work at every stage in the energy supply chain.

Innovation in the energy industry has facilitated the integration and growth of the world economy.  One contemporary example of this is the development of the global natural gas market, made possible by advances in liquefied natural gas transportation.

LNG is not a new technology ” the process for supercooling natural gas to a liquid state so that it can be more easily stored and transported has been in operation for decades.

The more recent innovation has been the development of large scale facilities and enormous cargo ships capable of transporting LNG safely over long distances at affordable rates.

For example, an ExxonMobil joint venture has developed the “Q-Max” ship, which is scheduled to enter service next year.  This vessel will have a capacity nearly double that of conventional LNG ships, thus enabling us to achieve world-class economies of scale for delivering gas from the North Field of Qatar to any place in the world including the coast of Texas.

With U.S. natural gas demand on the rise, such LNG supplies are not only essential to meeting Americans’ economic needs, but also to bridging the gap between importing nations and the relatively few nations exporting this environmentally-advantageous fuel.

Innovations such as those in the LNG business have transformed local markets into a global one, helping bridge gaps and interconnect the world economy.

Such innovation, however, does not come easy.  It has been said that the “era of easy oil is over.”  But in truth, there never has been an era of “easy oil.”  Our industry has constantly operated at the technological frontiers.  Oil only seems easy after it has been discovered, developed and produced.

Changes in Global Energy Markets
The innovation challenge is one the energy industry has always faced.  The need for technology in our industry has not changed.

What has changed recently is the energy landscape in which we operate.  In fact, a significant shift is currently underway, one that will have important implications for our future: the center of gravity in the global market for energy is gradually moving from developed countries to developing countries.

This is most obviously true for global energy demand.  Between now and the year 2030, 95 percent of the world’s population growth will occur in developing nations, and the rate of their economic growth will be almost twice that of the developed world.  As a consequence, the world’s demand for energy will grow by one third between now and 2030, with most of this increase coming from developing countries.

To put this potential for growth in perspective, consider the United States and China.  Today, there are 78 cars or light duty vehicles for every 100 U.S. citizens, and only one for every 100 Chinese citizens.

Per capita electricity use in the United States is seven times that of China.  Considering these figures, it is easy to see why continuing economic growth in countries like China will lead to steep increases in global vehicle ownership and electricity use ” and consequently, increased energy demand.

Energy production is also shifting to the developing countries.  The International Energy Agency predicts that more than 90 percent of new oil supplies will come from developing countries in the next 20 years.

The vast majority of the world’s oil and gas reserves are controlled by national oil companies based in developing countries ” approximately 77 percent of the total.  To put that figure in perspective, my company, ExxonMobil, the largest publicly-traded international oil company, accounts for about three percent of total world oil demand.

Developing countries are playing an increasingly important role in the global energy industry.  In 1991, each of the industry’s 20 largest companies by market capitalization was based in the United States and Europe.  Today, seven of the industry’s largest companies are based in developing countries.  The landscape is changing.

These developments underscore a fundamental reality about global energy markets today ” and tomorrow.  Consumers need producers, and producers do need consumers.  Developed countries depend on developing countries.

To ensure Americans can continue to have access to reliable, affordable energy in the future, we must manage the structural shift in the global energy landscape effectively.

The Dangers of Resource Nationalism
How this is accomplished is, in part, a matter of energy policy.  Governments play a critical role in shaping global energy markets.

In this country, the debate on energy policy has taken on not only economic importance, but national security and environmental importance as well.  Concerns about gasoline prices, reliance on imported oil, and the risks of climate change are claiming center stage in the U.S. public debate.

In response to this confluence of concerns, policymakers of all persuasions are calling for U.S. “energy independence.”  However, cutting off imports of oil and isolating the United States from global energy markets ” as the notion of “energy independence” implies ” is not only impractical, it is counterproductive.

Currently, the gap between U.S. energy consumption and domestic energy production stands at about 15 million barrels of oil equivalent per day, or 30 percent of Americans’ daily demand of energy from all sources.  This gap is filled primarily with imports of fossil fuels, including oil.

Last year, for those who assume most of the oil Americans use originates in the Middle East, Americans imported oil from over 35 countries, ranging from Norway to Nigeria, Brazil to Brunei.   No single region, except for North America, accounted for more than 15 percent of U.S. oil imports in 2006.

To reduce imports, Americans can moderate demand by using energy more efficiently, and can open access to greater domestic energy supplies.

An estimated 31 billion barrels of recoverable oil and over 100 trillion cubic feet of natural gas in the United States have been declared “off-limits” by federal and state governments.

Regardless, no conceivable combination of demand moderation or domestic supply development can realistically close the gap and eliminate Americans’ need for imports.  To leave the gap unfilled would have dire consequences for our economy and possibly our security.

Not only is “energy independence” unrealistic, the accompanying rhetoric can have a chilling effect on existing trading relations.  As a recent report by the National Petroleum Council concluded, “Policies espousing “energy independence’ may create considerable uncertainty among international trading partners and hinder investment in international energy supply development.”

The debate about energy independence in the United States is a mirror image of the debate occurring in several energy producing countries around the world.  Some oil-rich nations are aspiring to become so-called “energy superpowers.”

Others are going beyond the rhetoric to unilaterally change existing contracts with international oil companies or further nationalize their energy industry.

Such actions have detrimental impacts.  If international oil companies cannot trust that contract terms will be honored ” that the risks and rewards from a given project will not be shared as agreed upon ” they are less likely to make the needed technological upgrades or the future investments.  Considering the long-term, high-tech, capital-intensive nature of today’s enormous energy projects, respecting the sanctity of contracts and preserving continuity and stability in national energy policy is as important as ever.

Resource nationalism ” either in the form of “energy independence” for importing nations or “energy superpower” status for exporting ones ” threatens to stymie innovation and slow energy development critical to continuing economic progress worldwide.  It stands in direct opposition to the shifts underway which I mentioned earlier, and it is antithetical to the principle of international partnership and cooperation at the core of the global energy system.  Resource nationalism builds walls, not bridges.

Global Energy Market Security
A more effective course of action is a policy directed at energy security through resource internationalism through the global market for energy.

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.

Our global market system essentially creates one vast pool of energy in which all producers deposit and from which all consumers withdraw.  Enlarging this global energy pool ” not dividing it, draining it, diverting it or damming it ” strengthens energy security for all countries, including the United States.

The Education Imperative
These challenges to global energy markets ” and to the world economy as a whole ” highlight the importance of education to securing our energy and economic future.

The continued innovation on which our industry and our nation depend requires new generations of scientists and engineers.  To innovate, we must educate.

The University of Texas is a national leader in science and engineering, and in innovative ways of inspiring students to pursue teaching careers in these crucial subjects.  ExxonMobil is proud to support the work here at the University, and to share its success with other educational institutions through our $125 million commitment to the National Math and Science Initiative2.

Education also refers to raising awareness and increasing public understanding of the workings of our international economy, including global energy markets.  The Strauss Center can play an important role in this regard.

By providing a forum for thoughtful discussion of global issues, by building networks across disciplines to address the complexities that define these issues, and by serving as a “transmission belt” for this understanding to policymakers, the Strauss Center is helping enrich the public debate.

In conclusion, the integrated world economy, from which this nation and all nations can benefit, is neither inevitable nor invulnerable.  Global energy markets, driven by innovation, play an essential role in the functioning of the international system, but are facing new challenges.  The shift in the center of gravity from developed countries to developing ones has the potential to widen gaps of misunderstanding ” and policies of resource nationalism threaten to exacerbate them.

To preserve our system amid these developments, and to spread its benefits, we must work to strengthen the global energy markets on which our security and our prosperity depend, and broaden understanding of their dimensions and their dynamics.  Energy, the fuel of economic progress, involves challenges that no single company nor single country can solve alone.

Ultimately, energy should unite us, not divide us.  The work of the Strauss Center, and other educational institutions like it, can help ensure this, and in the spirit of its namesake, build stronger bridges of global understanding.

Thank you for your kind attention.

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