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Speech

Oct. 1, 2009

Promoting Energy Investment and Innovation To Meet U.S. Economic and Environmental Challenges

Rex W Tillerson

Rex W. Tillerson Chairman and Chief Executive Officer

Economic Club
Washington, D.C.

Thank you for the introduction. It is my pleasure to be here tonight at the Economic Club of Washington, D.C.

Before I arrived, I did some looking back on the history of the Economic Club, which has been around for just over a quarter of a century. It plays a valuable role in our nation’s public discourse. Its founders understood that Washington’s business community needed a place to discuss and debate the pressing policy matters of the day, and they understood that the decisions made in our nation’s capital affect the long-term strength and viability of our economy.

I think that the Economic Club has since risen to become a premier venue for discussing economic growth, job creation, and America’s future.

For this reason, I can think of no better place – and no better time – to speak. The American people are looking for answers to re-energize our economy. Congress and the Administration are debating policy options on a range of fronts, including approaches to reduce the risks of climate change. And America’s entrepreneurs and businesses are looking for sound, long-term energy and fiscal policies so they can invest in the future with renewed confidence.

Today, I want to talk about the role America’s energy industry plays in strengthening our economy, creating jobs, and generating value for the American people. It is a role that is often overlooked, and, in my view, terribly underestimated.

During the course of my remarks, I will discuss the importance of the energy industry to our economy, the growing demand for energy around the world, the most effective means to reduce emissions and other environmental impacts from energy use, as well as the need for putting in place public policies that spur investment and innovation to ensure we reach those shared goals.


Economic Challenges
We meet, of course, at a time of tremendous economic challenge, not just in our nation, but around the world.

Since December 2007 when our current recession began, nearly 7 million Americans have lost their jobs. Thousands of small businesses have closed their doors. Many companies – large and small – have cut back on their investments in the future. And some of America’s largest corporations have had to contend with bankruptcy and seek government aid. In addition, our state, federal, and local governments have experienced tremendous fiscal pressures as tax revenues have fallen and deficits continue to soar.

Recently, financial markets appear to have stabilized. Energy prices are down from recent highs, and worldwide energy demand has also eased. And the pace of job loss seems to have slowed. Yet, despite these positive developments, companies, workers, and consumers remain uncertain about the future.

To recover from the recession, business and government must work cooperatively to restore confidence.
We will need investments and innovation from industry. And we will need sound and stable government policies that lay the groundwork for sustained growth in all sectors.

Contributions of the Energy Sector
For more than 150 years, the oil and natural gas industry has played an important role in America’s economic growth. And it continues to help drive the U.S. economy by providing reliable energy, well-paying jobs, tax revenues, technological innovation, and shareholder value.

According to a recent study by PricewaterhouseCoopers, the oil and natural gas industry contributes more than $1 trillion a year to the U.S. economy. This enormous contribution comes in the form of jobs, labor income, and the value added within our industry as well as in other industries that provide goods and services to support our activities. Or to put our contributions another way, the oil and gas sector is responsible for 7.5 percent of the country’s total economic output.

America’s energy industry does not just provide financial strength. The energy sector is also a major U.S. employer. The oil and natural gas industry supports more than 9 million jobs in the United States – or about 5 percent of total U.S. employment. These jobs put more than $550 billion of income into the economy in 2007 alone.

Of course, this contribution to American productivity and employment also strengthens our state, federal, and local governments. According to the U.S. Energy Information Agency, America’s major energy-producing companies paid or incurred more than $242 billion of income tax expense from 2005 to 2007. Last year, ExxonMobil alone paid more than $14 billion in state and federal taxes.

Unfortunately, the oil and gas industry’s enormous economic contributions are generally overlooked. Despite the billions of dollars in value and investments that are created and the millions of jobs that are supported, discussions about the energy industry focus almost solely on energy prices or quarterly earnings announcements. This misplaced focus often drives public policy in the wrong direction – hurting consumers and carrying adverse consequences for the entire economy.

In recent years, this misplaced focus has led to higher taxes. Congress has enacted tax laws that are expected to cost the industry around $10 billion in additional taxes from what the industry would otherwise be expected to already pay. In addition, in the 2010 budget, the current administration has proposed new taxes and fees for the oil and natural gas industry – taxes and fees that could potentially total more than $400 billion over the next 10 years.

Now, this probably sounds to some like a businessman engaging in a typical complaint about taxes. My script says, “It is not.” I am not going to read that part of the script because I am going to complain a little bit. But in fact, by the end of this speech, I’ll be proposing a new tax.

Instead, what I am pointing out is that care should be taken in adopting tax policies that arbitrarily punish investors and workers in any one industry. Such policies are often counter-productive. They violate the principle of fair and equal treatment that is one of the great strengths of the rule of law and free markets. They place an undue burden on economic growth, and they undermine job creation.

Punitive taxes levied on the energy industry will ultimately raise energy costs for consumers – putting the highest burden on those who are least able to do with those costs, like the poor and the elderly. Finally, such punitive taxes would undercut America’s future by hindering the ability of the U.S. energy industry to invest in new energy supplies and to conduct the research and development necessary to develop new technologies, ceding that ground to foreign companies.

Like few other industries, oil and natural gas production depends on consistent, disciplined, and substantial investments over a prolonged period of time. It takes years of planning and billions of dollars to complete a modern energy project, and projects can last for 75 years or longer. To give you an example, from 1983 through 2007, ExxonMobil made more than $355 billion in investments worldwide. Those investments exceeded our total cumulative earnings across the same period.

Raising taxes and fees on the energy industry does not just endanger the investments in new energy projects. It also makes it harder for the energy industry to return value to our shareholders, who can then reinvest that value in other segments of the economy. Nearly 55 million households have a mutual fund account. And 45 million households have IRAs or some form of personal retirement account. Millions of these households depend on the financial strength and performance of America’s energy companies to protect their investments.

What all these numbers show is that America’s energy industry is a critical part of America’s financial strength and its fiscal health. But even these data do not do justice to the important role that affordable, reliable energy plays in our economic growth.
The fact is, affordable and reliable energy has a vast multiplier effect that helps every company and every consumer in the American economy.

The Importance of Energy to the Economy
To understand the best policy course for harnessing not hindering the strength of the energy industry, it is important to understand the realities governing the industry – and the energy future we must face together.

First and foremost to grasp is the fundamental fact that global energy demand is set to grow – and it is going to grow significantly.

As the International Energy Agency – along with almost any think tank or government forecast – predicts, the world’s total energy demand will be significantly higher, about 35 percent higher, in 2030 than it was in 2005. And that’s despite the current global economic downturn.

Such energy demand growth is actually good news. In developed nations, it promises greater access to the technologies and services that sustain our prosperity. Advanced computing, improved transportation, expanded communications, cutting-edge medical research, and other modern advances rely on ready access to affordable and reliable energy sources.

For developing nations, energy offers something even more fundamental. It represents hope and opportunity. Energy means expanded industry, increased trade and improved transportation – all of which create jobs that help people escape poverty. For rising nations, affordable, reliable energy is also vital to building new homes, schools, hospitals, and sanitation systems that can improve and save lives.

We wish such progress for all people.

This brighter future presents a challenge, however.
To meet this enormous and growing demand for energy, the energy industry must operate at a size and a scale and over a long time horizon that for most people is simply too difficult to grasp.

The world currently uses the equivalent of more than 230 million barrels of oil per day to fuel transportation, generate electricity, run farms and factories, heat and cool homes and more. ExxonMobil is the world’s largest publicly traded energy company – and yet we account for a mere two percent of the world’s total energy. It is an enormous global energy industry.

Not only is this an enormous challenge in terms of scale, it demands long-term planning horizons. Time in the oil and gas industry is not measured in business cycles, and it’s certainly not measured in election cycles, but in generations. The energy we use today is the product of investment decisions and technical work, that were made years, even decades ago. In addition, for most nations, the energy that powers their economies requires a vast, complex infrastructure. New supplies of energy can come from hundreds, even thousands of miles away – often originating thousands of feet below sea level or drawn from layers of rock once thought impenetrable.

To conquer such challenges requires long-term planning and effective risk management – especially as the world’s energy resources are increasingly found in difficult or hard-to-reach places.

And it requires an unprecedented level of new investment on the part of the world’s energy sector. The International Energy Agency estimates that the energy industry will need to invest more than $25 trillion in the world’s energy supply infrastructure by the year 2030 to meet growing energy demand.

Aspects of the Energy Debate
These fundamental energy realities are important. For decades, they have shaped how our industry manages risk, plans for the future, and invests in new technologies.

As energy demand grows around the world, these realities will become increasingly important. We will need to use them as the starting point, as we work together to build sound and stable policy. In the decades to come, they will affect our economic growth, the environment, and our energy security. In short, our policy response will shape our future.

The fact of enormous and growing demand for energy around the world means that the United States must pursue policies that allow us to develop energy from all available and commercially viable resources.

We will need to increase the use of alternative energy sources such as wind and solar. We will also need nuclear, hydroelectric, and geothermal power. In fact, all of these sources will help our economy as they become more efficient and more competitive with time.

Developing all our energy resources will also require us to find and produce more oil and natural gas. Fossil fuels currently provide the vast majority of the world’s energy – and due to their availability, their affordability and their versatility, they will continue to do so. Oil and natural gas alone are projected to supply nearly 60 percent of the world’s energy needs through the year 2030.

With this increased energy demand, we also foresee a second part to the energy challenge: reducing greenhouse gas emissions associated with energy use. Globally, we expect energy-related carbon-dioxide emissions to rise by an average of one percent per year through the year 2030. Much of this emissions growth will come from rapidly developing nations such as China and India. Meeting the challenge of reversing this trend in greenhouse gas emissions will require every nation, industry, and consumer to help.

Achieving Change in the Energy System
Our best hope for bringing change to the world’s massive energy system is to harness the power of new technologies and free markets.

By allowing nations and peoples to work together, we can invest in integrated solutions. These solutions leverage technology to expand energy supplies, increase efficiency, and reduce emissions. Time and time again, our industry has proven that innovation and cooperation unleash human ingenuity and bring far-reaching technological advances that can transform the economy, protect the environment, and increase energy security.

Let me provide just a couple of examples of how investing in integrated solutions can help society achieve our shared goals, starting with recent advances in natural gas.

For years we have known that the United States holds vast quantities of so-called tight gas or shale gas – natural gas locked in formations denser than concrete. But we did not have the technology to extract this so-called tight gas in a cost-effective way. Until now.

After more than a decade of steady investment in research and development, ExxonMobil and others have achieved a breakthrough with the invention of Multi-Zone Stimulation Technology. Now, this technology allows us to stimulate – bust the concrete – and improve recovery from natural gas reservoirs previously thought to be economically out of reach. Here in the United States, in just one part of Colorado, it will allow my company to increase production by 300 percent, providing enough energy to heat 50 million U.S. homes for 10 years.

At the same time, this technology helps reduce environmental impacts as we can now drill up to nine wells from a single point, allowing us to reduce our footprint, so we don’t impact the surface acreage as much. Also, by making greater supplies of cleaner burning natural gas available to Americans, this technology helps reduce greenhouse gas emissions in a substantial and meaningful way.

Our long-term approach has led us to invest in technologies that have the promise to be truly transformative for the economy and the environment, even though they may be decades away.

In July, you may have seen the announcement that we forged an alliance with leading biotechnology firm Synthetic Genomics Incorporated to research and develop next-generation biofuels from photosynthetic algae. Certain species of algae can produce oils through photosynthesis that could one day be blended through our existing refining and supply network, converted diesel, gasoline, and other products.

If this R&D effort is successful, algae could play a role in expanding our transportation fuel supplies, and because algae lives by absorbing carbon dioxide, this revolutionary technology could also help us reduce greenhouse gas emissions.

In addition, unlike first-generation biofuels, like those made from corn or sugar cane, algae production does not rely on fresh water and arable land, so this next-generation biofuel should have no adverse impact on food supplies.

If the research-and-development milestones are met, we expect to spend more than $600 million on this project – and that’s just to prove the technology. If the technology is proven, it would also require billions more of investments to begin production on a commercial scale.

These are just two of our technological innovations. Over the last five years, we have invested more than $3.7 billion in research and development projects, because making steady and disciplined investment in innovation can help us and our customers increase efficiency and reduce emissions.

In our industry, we understand that that when it comes to achieving change at scale in the energy system, it requires long-term investments of time and money. This is why our nation needs energy policies that maximize the use of markets, minimize complexity, and give businesses the predictability needed to invest with confidence to develop the new technologies that are our best hope for a brighter future.

Principles of Policymaking
Climate change policy is one example where such an approach is needed.

As Congress debates important legislation for addressing the risks of climate change, we must remember the fundamental realities governing the energy system, the need for and pace of technological change, and the role of stable policies to help encourage innovation, investment, and collaboration.

When it comes to managing the risks of climate change, in my view, the most effective policy approaches must be guided by several key principles.

First, a successful carbon-reduction policy needs to establish a uniform and predictable cost for emissions for use in all economic decisions. This will ensure government is not put in the position of arbitrarily picking winners and losers.

Second, the best way to ensure that carbon costs are minimized is to allow for markets to select the best methods to reduce emissions through new investments and technology.

Third, we should seek to minimize administrative complexity. Our shared goal is to reduce emissions at the lowest cost to society.

To do that we must keep administrative costs low so that market participants can invest in technologies that actually reduce emissions – not become bogged down in bureaucratic demands or incur the costs of financially burdensome regulatory systems.

Fourth, we should seek to maximize cost transparency. By providing this transparency, companies and consumers can assess costs for themselves within the context of different public policy options, as well as assess those costs in light of their own needs and resources, allowing them to make the best decisions possible.

Fifth, our national policy approach should encourage global participation. Energy is critical to progress and economic opportunity in both developed and developing countries. Thus, for long-term emissions reductions to succeed, every nation must be involved. Developed nations cannot do it alone. Developing nations cannot be expected to forgo economic growth and advancement. Thus, any carbon-reduction policy must take these realities into account and encourage every nation to participate in the most appropriate way to meet our shared goals for reducing emissions globally.

And of course, there will need to be periodic reviews and assessments to ensure that we can adapt to any changes in climate science that might emerge or to respond to any adverse impact these policies might be having on economic performance.

Shortcomings of Cap and Trade
So how does the current proposal before Congress to reduce carbon emissions measure up against these principles for effective policymaking? Will a cap-and-trade system accomplish our society’s shared goals?

Unfortunately, experience indicates that a cap-and-trade system will result in volatile prices for emissions allowances – and this volatility will carry a heavy cost for both the economy and the environment. For businesses and industry, price volatility undermines the ability to invest in advanced technologies. Price volatility also creates economic inefficiencies and invites manipulation in the markets for allowances.

For businesses and entrepreneurs, the added complexity and lack of a predictable cost for emissions make it difficult to plan – especially over the long-term.

And as we discussed earlier, steady and disciplined investment is needed to develop and deploy new technologies.

We are not alone in this assessment. The Congressional Budget Office studied cap and trade and concluded, I quote: “Volatile allowance prices could have disruptive effects on markets for energy and energy-intensive goods and services and make investment planning difficult.”

Cap-and-trade schemes create another potential cost: opportunities for market manipulation. Yet, even with regulations aimed at minimizing the potential for market manipulation, the volatility inherent in a cap-and-trade system will add to consumer concerns about energy prices and the consumer’s ability to manage energy-related expenditures.

Benefits of a Carbon Tax
These costs and consequences inherent to cap-and-trade schemes have led many policy experts and economists to prefer another course of action to reduce greenhouse gas emissions. That other option is a revenue-neutral carbon tax. I know that’s hard for a politician to say, so we have given it a new name. We call it a “refundable greenhouse gas emissions fee.”

As a businessman, I have to take a deep breath every time I speak about this, because it’s hard for me to speak favorably about any new tax. I hope you see it shows how serious we are about this issue. A revenue-neutral carbon tax has the advantage of being well focused for achieving our society’s shared goal of reducing emissions over the long term. It can be predictable, transparent, and comparatively simple to understand and implement.

A carbon tax can create a clear and uniform cost for emissions in all economic decisions. This encourages every business, every industry, and every consumer to become more efficient and do their part to increase efficiency and reduce emissions through other choices they might make. Because a carbon tax is directly applied to the carbon content of fossil fuels or to other greenhouse gas emissions, there is no need for a government to pick winners and losers in industry through complex allowance allocation processes as we have witnessed on the Hill of late.

By eliminating price volatility, a carbon tax provides predictability. And predictability allows entrepreneurs and businesses to plan over the long term to research emerging technologies and develop the integrated solutions that have the most positive impact.

A carbon tax also avoids the costs and complexity of having to build a new market for emissions allowances or the necessity of adding a new layer of regulators and administrators to police this market. And a simple carbon tax can be more easily implemented. It could largely be built on the existing tax infrastructure. We pay a lot of taxes, excise taxes, federal taxes. We’ll just add this to the list.

There is another advantage: A revenue-neutral carbon tax can ensure that government policy is specifically focused on reducing emissions, not on becoming a revenue stream for other purposes. In other words, the size of government need not increase due to the imposition of a carbon tax to solve a threat to society.

By returning the tax revenue back to consumers through reductions in other taxes – payroll taxes or a simple dividend – we can reduce the burden on the economy and on our most vulnerable citizens. In this current economic downturn, American families and businesses can hardly afford to be paying a higher cost for energy, so a direct and transparent refund mechanism is a political imperative.

Finally, there is another potential advantage to the tax approach. A carbon tax may be a more viable framework for engaging participation by other nations. A tax framework is easier to implement and it does not cap economic growth.

In addition, it can be easily adapted to reflect the circumstances of each country. Given the global nature of the greenhouse gas challenge, and the fact that the economic growth in developing economies will account for a significant portion of future greenhouse-gas emissions, policy options must be flexible in order to encourage global engagement.

Now, some people have suggested that a revenue-neutral carbon tax has no chance of gaining sufficient support in Congress to become law. They say a carbon tax is too politically sensitive and that it is easier and more politically expedient to support a cap-and-trade approach, because the public will never figure out where it is hitting them. They will just know they hurt somewhere in their pocketbook.

I disagree with this assessment. I believe the American people want climate policy to be transparent, honest, and effective. Economists generally agree that achieving a given emissions target costs less under a tax or fee approach than under a cap-and-trade system. I firmly believe it is not too late for Congress to consider a carbon tax as the better policy approach for addressing the risks of climate change. Indeed, there has never been a more opportune time for Congress to pursue this course of action.

Call to Action
During this time of economic challenge, we must remember that our nation’s economic growth and success are built on the innovation, energy, and ingenuity of the American people. In the months ahead, our nation will make many important decisions about the direction of our energy policies.

The U.S. oil and gas industry, and I certainly can commit ExxonMobil, is committed to working with government leaders to help reenergize the economy, create new jobs, protect the environment, and strengthen America’s energy security. We’re going to continue to do our part to achieve all these shared goals by investing in and developing integrated, technology-based solutions to our nation’s economic and environmental challenges even in the face of an economic down cycle. And I’m confident, with sound and stable public policies in place, that these investments hold the promise for a brighter future for not just all Americans, but for the entire global community as well.

I thank you for your kind attention.

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