Facing Some of the Hard Truths about Energy

Remarks by Lee R. Raymond, Chairman and CEO, Exxon Mobil Corporation Board and Council Dinner Woodrow Wilson International Center for Scholars

Jun 07, 2004

Thank you, Lee, for that introduction. I cannot recall a time when a Lee has introduced me. Two Lees at once may be difficult to deal with.

I would like to talk tonight about some of the hard truths regarding today's energy situation. And here, the link with Woodrow Wilson is instructive. In a 1911 speech in New York City, Wilson defined a "progressive" -- which is what he was himself proud to be -- as a person "who insists on recognizing new facts as they present themselves, [and] ... who adjusts legislation to these new facts."

This is still appropriate guidance for those who shape the policies of this nation. Where energy is concerned, we need to adjust policies to reflect the facts and realities of national and global energy markets. But first, of course, we need to identify and understand what those facts and realities are.

I want to share with you my perspectives on these facts and realities. And I also want to stress that in order to ensure we have enough energy in the future, we need to avoid wishful thinking, face the energy future realistically, and be committed to steps that will address the energy future practically.

Above all, we should not delude ourselves that this will be an easy area in which to succeed. Nevertheless, we should also recognize that we must succeed. And we can be optimistic that the serious issues surrounding energy will be successfully faced as long as we fully realize that a long-term view is critical.

Energy Outlook

But before I move to a discussion of energy policies, it is important to describe the future energy environment in which such policies will operate.

Fundamentally, oil will remain a commodity and the U.S. will remain only a participant in the world market.
Like it or not, we in the U.S. are only one of several players in the global supply and demand balance. In any future energy outlook, we cannot pretend otherwise. I'll have more to say about this later.

Many of you of course recognize that my company's business is dependent upon carefully and accurately assessing energy trends. We devote substantial resources to measuring what has been, and is going on in the world of energy, and to understanding the factors that will determine energy use in the future. Energy is our market, and understanding the market is the only way that we can remain a successful company.

One basic fact on which we can all agree is that energy is the engine that drives economic growth and increases living standards. Conservation and increased efficiency in energy can alter the numbers but not the fundamentals of the relationship. Recent strong economic growth in emerging economies like China, and resulting high demand for oil, coal and other sources of energy demonstrate the point.

Now energy use is rising most rapidly in the developing world, partly because this part of our world is experiencing faster economic growth than the developed world, and partly because developing countries use energy less efficiently. In fact, the developed world uses only one-third the energy of the developing world per unit of GDP.

We see overall global energy use growing by about 40 percent by 2020, as demand rises from about 215 million oil equivalent barrels per day to almost 300 million oil equivalent barrels per day.

That 300 million barrels daily total is a huge amount of energy. It is nearly 13 billion gallons per day. The scale of the world's energy system is truly enormous. It is arguably the world's largest industry.

And, inevitably, most of the energy that will be used for many decades will continue to be from fossil fuels: coal, oil and natural gas. For a variety of reasons, we expect fossil fuels to provide about 80 percent of the energy used in 2020, and to increase -- and I emphasize increase -- in absolute magnitude by about 65 million oil equivalent barrels per day.

Just how much is 65 million barrels per day? Well, it is close to eight times Saudi Arabia's current crude oil production.

At the same time, non-fossil fuel use will also increase, but only by about 8 million oil equivalent barrels per day. We expect only modest growth for nuclear power and hydropower, despite advantages in terms of greenhouse gas emissions, as each faces siting limitations and environmental obstacles.

While there can be little doubt that wind and solar will grow rapidly, these start from a very small base and even with extremely rapid growth will only supply about one-half of one percent of the world's energy in 2020.

The predominant energy sources will remain oil and gas, because with current technology these are at once both the least expensive and the most versatile. These are significant advantages and have proven to be enduring.

Now some will ask if we might be understating the roles for solar or wind or hydrogen in this two-decade outlook. And I can understand the question, because these as well as biofuels have enormous federal subsidies designed to accelerate their market penetration.

There are several reasons behind our outlook on these alternative energy sources:

Currently, ethanol from corn is neither an economic or energy-efficient choice, as it can require more energy to produce than it generates in the end. And it relies upon using significant land areas, land that would otherwise go to food crops or forest cover.

To give you some perspective, if we tried to replace just 10 percent of the gasoline the U.S. will use in 2020 with corn-based ethanol, we would need to plant an area equivalent to Illinois, Indiana and Ohio solely to grow the grain needed as feedstock. The difficulty of that can be appreciated when you realize that this area is about one-sixth of the land we currently use in the United States for growing all our crops.

Solar and wind have other challenges. Wind power is usually more expensive than fossil fuels, though its costs can be competitive under ideal conditions. It is constrained by being site limited, intermittent and subject to growing objections due to its undesirable visual and noise impacts on the landscape.

Solar power is of course an energy source of significant potential, but it is currently far more expensive than fossil fuels, and also suffers from being intermittent. After all, the sun does go down every day.

And what about hydrogen?

Many have great hopes for hydrogen and it does have some considerable promise, but only some decades in the future. First, hydrogen is not an energy source. It does not exist freely in nature. Before it can be used as a fuel it must be separated from something else, such as petroleum or natural gas or water. Liberating hydrogen from oil and gas is well understood, but is expensive, and the process requires considerable energy. Liberating hydrogen from water is also understood, but even more expensive and energy consuming.

And then there is the matter of infrastructure to efficiently get such a new fuel into the broad consumer marketplace. We do not yet have practical and economic ways to make hydrogen available for use as a fuel in cars, trucks and buses. It does not have the inherent energy contained in an equal volume of petroleum, it is not easily stored, and there is today no fuels infrastructure to generate, distribute and dispense it.

Additionally, the potential risks associated with widespread use of hydrogen by the consuming public need to be highlighted, evaluated and dealt with to ensure safe use. The recent National Research Council report on the hydrogen economy reached similar conclusions, including the view that it will take decades to overcome these issues, if they can be overcome at all.

Now I have recited these various practical issues because they are often overlooked by well-intentioned people who, while concerned about the environment and our energy future, do not always consider the complexity and scale of the energy system.

So I'd suggest we accept that for the next several decades the United States and the rest of the world will need increasing amounts of oil and gas to meet energy needs and to underpin economic growth. What are the geopolitical and national political implications of that reality?

Outlook Implications

First and foremost, the rest of the world and the U.S. will increasingly need energy from the Middle East. This is not a matter of ideology or politics -- it is simply inevitable. A widely respected industry periodical estimates that about 50 percent of proved worldwide oil and gas reserves reside in the Middle East, with Saudi Arabia alone having about one-fifth of the world's oil reserves. We need to accept the reality of this rather than undertake expensive and risky steps trying to avoid it.

Without question the key to hedging the risks for America's and the world's energy future remains broadening the base of geographic locations from which we get our oil and gas. We should not fall into the trap of imagining that the U.S. can divorce itself from global energy markets.

We periodically hear calls for U.S. energy independence, as if this were a real option. The fact is that the United States is a part of the world energy market, and we must participate and compete in that market. And we need to recognize the rest of the world will also be petroleum importers -- China, Japan, India, nearly all of Southeast Asia, all of Europe except Norway, and much of Latin America.

These countries are competing with us for access to the world's supply pool. The U.S. has no guaranteed or preferential supply rights.

Similarly, we do not have the resource base to be energy independent. Even if we are prepared to develop more petroleum supplies here, we will still be far, far short of our needs. And in doing so, we simply cannot avoid significant reliance on oil and gas from the Middle East because the world's supply pool is highly dependent upon the Middle East.

Of course, there are other regions that will be increasingly important as suppliers of petroleum. Sub-Saharan Africa will be one of these, as will Russia and the Caspian. Very heavy oil from Venezuela is also an important source.

But I do not have to point out to this audience that these are individually and collectively very different places than East Texas, offshore Louisiana, northern Alaska, western Canada, or the North Sea. And I do not need to enumerate the differences.

As a country, we need to think carefully about the nature of our relationships with countries in these regions, as well as those in the Middle East.

Second, the areas from which much of our future petroleum energy will originate face quite serious problems of governance and development.

Many governments in the Middle East, Africa and other parts of the developing world, face enormous social needs. Yet they are also ill equipped to address those needs because they lack money and expertise and have institutional frameworks that are still maturing.

In some places, these governments continue to face strong internal dissent and armed opposition. Where we rely upon these countries for a considerable portion of our petroleum supplies, the risks that they face become -- albeit on a smaller scale -- our risks.

The United States therefore needs to continue a commitment to policies that recognize the challenges faced by many important oil and gas producing countries, policies that can play a significant role in addressing such challenges.

For example, I would urge continued attention to trade liberalization, continued support for sensible economic development assistance, and support for programs that can lead to better governance and infrastructure improvements.

I also think it is in the U.S. interest to continue to support international financial institution participation in energy projects in these areas, particularly where host-country governments and key private-sector participants seek it. Our experience with the World Bank in Chad and Cameroon has been a key factor in the successful development of our oil and gas project there -- a project that offers the promise of being a major contributor of economic benefits to the local population.

Third, we will need to muster the political will, based on a realistic energy outlook, to allow further development of the energy resources to be found in the United States. This includes those that may be offshore California and Florida, in the Rocky Mountains and in northern Alaska.

This is not to ignore the central importance of policies to encourage the more efficient use of energy -- or for that matter other resources such as water and people. But that's a discussion for another time. And, by the way, significant improvement in efficiency is built into our energy outlook -- probably more than will be achieved.

Nevertheless, if we do not, as a nation, explore and develop energy from prospective areas in the U.S., and remain committed to use energy more efficiently, the consequence will be even greater dependence on energy from areas such as the Middle East. There is no realistic alternative, at least for the foreseeable future.

Of course, developing resources in any part of the world is meaningless if we cannot get these supplies to markets. You are all aware that natural gas prices have risen significantly, as regional supply is shrinking and demand is growing. Particular emphasis is needed today to ensure that liquefied natural gas, commonly called LNG, can be used to meet growing natural gas demands. The energy industry must have not only the incentive, but also timely and visible government support, for investment in new regasification and pipeline facilities.

This leads to my fourth point. The energy investments required to meet the world's growing demands will be huge.

For example, the International Energy Agency last year estimated that an average of $200 billion, or its equivalent in inflated dollars, would need to be invested each year to develop and supply the oil and gas that the world will need out to 2030. The investments required for power generation are even larger.

200 billion dollars annually is a lot of money, and the industry will need to compete with a host of alternatives available to investors for those funds. And it is investors that will be the primary determinants of whether the opportunities are attractive. At the same time, governments have much to do with creating the essential conditions necessary for favorable decisions by investors.

The fifth point I would make also stems from the energy outlook. And that relates to carbon emissions.

In the decades ahead, carbon dioxide emissions from greater fossil fuel use will climb. We simply do not yet have the economical solutions or technologies that would permit us to meet future energy demands without carbon emissions growth. And, as important, we do not know how to increase economic growth without increasing energy use.

This reality is one that many people recoil for accepting, but the United States and other industrial nations will continue to increase carbon emissions for some time, regardless of Kyoto. And because in all likelihood the developing world will experience faster economic growth than we will see in the OECD countries, carbon emission increases there will be responsible for the majority of the growth in global emissions.

As you know, developing countries are not obligated to reductions under the Kyoto framework. At the same time, the developed countries that have adopted such policies run the risk of losing competitiveness in the global marketplace.

Thus overall, I do not expect the steps identified to date to lead to a significant global decline in overall emissions. Yet, the danger exists that economic activity will be compromised due to the efforts to meet the commitments that have been made. This is the fundamental reason that the developing world has been cool to Kyoto, and is also a major factor behind the difficulties that signatories are having in meeting Kyoto commitments.

And this brings me to my sixth and final point.

In my view, the most sensible and most fundamental avenue to meet rising energy needs throughout the world as well as to address greenhouse gas emissions concerns is through a long-term effort in energy research and development. Much if not most of this will be privately sponsored research.

There must be several fundamental objectives of such research:

- It must improve our ability to discover and produce the increasing amounts of oil and gas the world will need.

- It must enhance our capabilities to reduce the environmental effects of fossil fuel use.

- It must lead to the development of new ways to generate energy for the long-term.

- Finally, the long-term research has to be attentive to real costs and to the practical ability of the developing world to use the new technology.

These have been central goals of ExxonMobil's research program for many years, and are also consistent with the objectives of the Global Climate and Energy Project, a research project being led by Stanford University that we are co-sponsoring with other global companies. These goals will be quite difficult to achieve, but we remain optimistic.

And, of course, the various efforts by the Federal Government and others to support research on hydrogen and other energy options have the potential to find meaningful alternatives for adequate and clean energy.

I am hopeful that subsidies will not become a permanent feature where these alternatives are concerned, because an approach that relies on subsidies rather than market forces rarely leads to wise or sustainable outcomes. I would also stress that solutions for the developing world will need practical approaches also.

Yet while I am optimistic about the longer-term, I am also mindful that we have to get there first.

And getting there means adopting policies and approaches that recognize the central role that petroleum will play in our economic life for many decades, and that also recognize that we will increasingly need to rely upon energy from others as well as develop our own resources.

For this reason we must maintain appropriate and constructive relationships with oil-rich countries in the future. They will be very important for our prosperity and our security.

Each of these realities will need to be reflected in our national policies and attitudes if we as a country and more broadly the world at large are to meet our future energy needs and secure our economic aspirations. My company can and will do much to contribute in this massively important effort. But, where the politics of nations are concerned, it is obvious that wise, energetic and prudent actions by our government are of central importance.

Thank you.