energy challenges and the free market framework

Remarks by Rex W. Tillerson
Chairman and Chief Executive Officer, Exxon Mobil Corporation
World Economic Forum Annual Meeting 2007: Energy Summit Davos, Switzerland
January 25, 2007

 

Thank you for the opportunity to speak today, and thank you to the World Economic Forum for hosting today’s Energy Summit.

 

The Free Market Framework
In my remarks, I would like to address the summit theme: “Mitigating Disruptions: Steps Towards the Framework.”

This theme suggests that a new framework may be required to strengthen international energy security.

I would like to suggest today that a framework is already in place which not only mitigates energy disruptions, but also is extremely resilient. 

It balances global supply and demand for maximum economic benefit. It promotes energy efficiency, and offers an effective means for addressing the global environmental impacts of energy use, such as climate change. 

That framework, of course, is our global free market system. And our challenge, in my view, is to take steps towards fortifying it. In short, global free markets work — if we allow them. 

 

A Foundation of Understanding
Understanding how the global free market for energy works is essential to understanding how we can strengthen it.

I do not need to explain the workings of our industry to this audience.  Together, however, we need to better explain these workings to the broader public.

First, we need to better explain the global dimensions of the energy industry. The sheer scale escapes most people. Each day, consumers worldwide use over 230 million barrels of energy, measured in oil equivalent, from all sources. 

An enormous industry comprised of thousands of producers, refiners, and contractors connected in a complex global network is required to safely, reliably and efficiently meet these huge energy requirements. 

In this context, national or regional policies have limited global impact.

Second, we need to better explain our investment horizons. 

Many policymakers think in increments of two, four or six years, based on election cycles. In contrast, those of us in the energy industry often think in terms of decades, based on project timelines. 

Policy decisions made in reaction to normal commodity volatility have historically proven to be doomed to fail.

To put the time frames in perspective, last October, ExxonMobil announced the first exports of oil from our Sakhalin-1 project in Russia’s Far East. We began work on the project ten years ago, and expect it to produce for about 40 years. By comparison, fifty years ago Sputnik was still on the launch pad.

The long timelines inherent to our industry make long-term policymaking an imperative.

Third, we need to better explain the importance of technology in our industry.

Perhaps because the oil industry’s principal consumer products – gasoline and diesel fuel – seem relatively unsophisticated, 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 directional drilling, floating deepwater platforms, LNG transportation, hydrocarbon molecule management — these and many other groundbreaking innovations testify to the high-tech nature of our complex business.

Finally, we need to better explain the dynamics of global commodity markets such as ours. Oil, and increasingly natural gas, are goods that are fungible and freely traded in markets worldwide. All consuming countries have access to the same global resource pool — and all producing countries are contributing to the same pool. 

In this context, the nationality of the raw material means little.

 

Global Energy Challenges
With this understanding of the energy industry, the way forward in addressing the energy challenges we face becomes clearer.

First, to address the security challenge, the most effective means is through continued diversification enabled by increased international trade and investment. 

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

What would happen if, say, two million barrels of oil per day currently produced — which would represent about three-fourths the production of a company the size of ExxonMobil — were unexpectedly shut-in for a period of six months, starting tomorrow? The answer is there would be little lasting impact on the international economy.

Why? In large part because free markets work to efficiently balance supply and demand. This scenario was tested during the immediate aftermath of hurricanes Katrina and Rita. In addition, economies are less oil-intensive than in decades past. Further, IEA countries currently hold 4 billion barrels of crude oil and product stocks, which can be used to fill localized shortfalls. 

The global oil market today is more diversified and therefore more resilient than it was, say, thirty years ago. From day to day, it can be volatile, as all commodity markets are. But over the long term, it is remarkably stable.

By further reducing barriers to trade and investment, and by strengthening trading partnerships, we can fortify the free market framework that provides this fundamental energy security. 

Second, to address the economic challenge of growing energy demand, the most effective means is by lifting government-imposed limits to resource access, and by promoting stable legal, tax and regulatory frameworks conducive to international investment.

By 2030, the world’s energy needs will be about 60 percent greater than they were in 2000. Such growing demand for energy reflects a growing demand worldwide for greater economic opportunity and an improved quality of life.

Abundant fossil fuel resources exist to meet these growing needs. According to the U.S. Geological Survey, an estimated two trillion barrels of conventional oil remain — a figure twice as much as all the oil produced and consumed by the world to date. 

Alternative energy sources play an important role, also, and some — like wind and solar — will likely see double-digit growth over the next 25 years.  However, because these sources build upon a relatively small base, and because energy needs are also growing, the world’s energy mix will not fundamentally change in the foreseeable future. Fossil fuels will necessarily remain the world’s predominant energy sources.

Producing these resources requires first that governments grant access. In the United States alone, for instance, an estimated 31 billion barrels of recoverable oil and 105 trillion cubic feet of natural gas are currently ruled off-limits. 

The issue is not the sufficiency of the world’s resource endowment. The issue is whether the industry’s technology, know-how and investment will be brought to bear on the resource base to develop the capacity needed to fuel the world’s economies.

Massive investments — an estimated $8 trillion by 2030 for oil and gas, according to the International Energy Agency — will be required. 

These investments are only likely to flow if governments allow timely access and promote stable legal, tax and regulatory regimes.

Finally, and very importantly, we must also address the environmental challenge of climate change. Here, too, free markets can play an important role. 

Climate remains an extraordinarily complex area of scientific study. But the risks to society and ecosystems from climate change due to greenhouse gas emissions could prove to be significant. So, despite the areas of uncertainty that do exist, it is prudent to develop and implement strategies that address these risks. 

Improving energy efficiency and developing new, emissions-reducing technologies are two such strategies. 

ExxonMobil continues to pursue both — in our worldwide operations, in our partnerships with automakers, and through our support of such research initiatives as the Global Climate and Energy Project, based at Stanford University.

Our efforts are making a difference. For example, steps taken since 1999 to improve energy efficiency at our facilities around the world resulted in CO₂ emissions savings of 11 million metric tons in 2005. That’s equivalent to taking two million cars off the road.

The strategies policymakers adopt to address climate risks are also important. A global approach is needed that promotes energy efficiency, ensures wider deployment of existing emissions-reducing technologies and supports research of new technologies. It is also critical to maintain support for fundamental climate research to inform policy and the pace of response.

Specific policy approaches should be assessed for their likely effectiveness, scale, and costs… weighed against the implications for economic growth and quality of life... and weighed against the demands to address other well-known and well-defined global health and poverty challenges. 

In our view, the most effective policies will maximize the use of markets.  This will help promote global participation and facilitate the rapid spread of successful initiatives. 

Consistent with a market-based approach, effective policies will ensure a uniform and predictable cost of reducing carbon emissions, maximize transparency, minimize complexity, and adjust to new developments in climate science and the economic impacts of policies.

 

Fortifying the Framework
In conclusion, our current global free market framework enables us to address each of these energy challenges. Increasingly, however, this framework is being tested.

This is, in part, a function of current crude prices. When prices are high, passions can run high. Oil importing nations can feel the pressure to assert their independence, as can oil exporting nations. The temptation to tamper is great. 

We must, however, resist this temptation. Now is the time to reinforce, not undermine, the global free market system by facilitating trade, encouraging investment, opening access, creating stable business conditions, and building international partnerships.

Ultimately, free markets allocate available resources efficiently across thousands of uses and billions of consumers. They enable consumers and suppliers to make informed choices based on unique knowledge of their own needs and alternatives. As the pace of innovation and knowledge grows globally, free markets provide the clearest signals to guide our way forward effectively. Because government mandates and subsidies sometimes confuse these market signals, they can have unintended consequences.

By fortifying our global free market framework, we can not only mitigate disruptions, but maximize new possibilities — and, in the words of the World Economic Forum’s motto, “improve the state of the world.”

Thank you.