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Oct. 1, 2015

Securing Growth through Sound Energy Policy

Rex W Tillerson

Rex W. Tillerson Chairman and Chief Executive Officer

National Association of Manufacturers
Washington, D.C.

I appreciate the opportunity to address the National Association of Manufacturers’ Board of Directors Meeting.

NAM is one of the most important trade associations in Washington. 

Under Jay’s leadership [Jay Timmons, president and CEO], NAM gives a voice to America’s manufacturers – the millions of men and women across this country that help power our economy and make this country strong. 

Just a few years ago, the manufacturing sector was one of the hardest hit industries during the financial crisis and the Great Recession that followed. 

In the intervening years, however, American ingenuity and innovation have led to what has rightly been called a “manufacturing renaissance.” 

But that American resurgence is now under severe pressure, and we must act to put in place sound policies to secure the nation’s full economic and manufacturing potential. 

In this critical effort, I am confident that NAM will be an invaluable resource for engaging the public and policymakers and for educating them on the obstacles and headwinds that are undermining growth, investment, and opportunity in America.  

State of the Economy and Industry

Our nation’s newspaper headlines, Internet feeds, and economic indicators have made clear why this is an important moment for our nation.  

Although we have made some progress in our recovery, we are reminded daily that our economy and, most importantly, millions of citizens continue to struggle.  

It is true that employers have expanded payrolls and the unemployment rate has fallen in recent months.

But reports in leading papers – from The Wall Street Journal to The New York Times – indicate that there is increasing concern among academics and researchers that the official unemployment rate is understating the economic pain across the country. 

Our low labor-force participation rate suggests that millions of people have dropped out of the workforce because of frustration and discouragement.  

In addition, wage growth has been stagnant and the economy’s expansion has been sluggish and uneven. 

The U.S. economy is now operating somewhere near two percent annualized GDP growth.  This is extremely weak by historic standards – especially coming out of a severe recession.  

Coupled with, and as a result of, slow economic growth in Europe, Japan, and China, global energy demand growth has moderated as well. 

Which brings us to new challenges in the energy sector created by the resetting of the balance between global supply and demand.  Since the recession began, one of the few bright spots for the U.S. economy has come from a resurgent American energy industry. 

As this audience knows, new technologies and techniques pioneered by our industry have made it possible to unlock vast new supplies of oil and natural gas. The result has been a new “Era of Abundance” in North American energy. 

The impact and implications of these technologies have become clear to world energy markets.  We have, in turn, seen markets and oil prices adjusting to fundamental changes in the supply and demand of energy.  

The result of greater supplies and lower demand growth has naturally led to a downcycle that is challenging every company in the energy sector, putting pressure on balance sheets and cost structures. 

While the abundant supplies of affordable energy provided an economic tailwind for consumers and some sectors of the economy, the current conditions present economic headwinds to our industry and all of those manufacturers and serve providers who support the energy industry.  And additional obstacles are being introduced by new and costly regulations.  This is why this gathering is so important.  

We are now standing at a moment when we need smarter, wiser policies – policies that will contribute to economic growth, spur increased investment, and that can help us leverage the energy bounty flowing from our industry’s innovations.  

If we choose the path of embracing America’s resource abundance, we can bolster our economy, empower our manufacturing future, and contribute to global trade and growth. 

But if our nation continues on the current path of hindering business and investment, we will stifle innovation, entrepreneurship, and job creation in America. 

Today, I will briefly discuss the role of the energy industry’s innovations in creating this new Era of Abundance, how our innovations have contributed to U.S. manufacturing and overall economic growth, and why we will need sound policies to ensure innovation continues to advance.

Our best hope for meeting the challenges of today and tomorrow will not be found in new, onerous, however well-intended, regulations.  

It will be found in the ingenuity and daring of America’s scientists, engineers, and entrepreneurs – the people forging the technologies that enable us to meet our shared goals for expanding economic opportunity, while increasing efficiency, reducing emissions, and protecting the environment.

Industry Innovation and the New Era of Abundance

Contrary to some claims, this Era of Energy Abundance was not the result of a single technology, or one source of energy, or even a lucky break.  It is the painstaking result of decades of sustained investment in technologies across the energy sector.

In Canada, for instance, industry innovations have made it possible to safely and responsibly develop that nation’s vast oil sands.  

In the Gulf of Mexico and around the world, advanced technologies have opened up unprecedented opportunities in offshore exploration and production.  In less than a generation, we have progressed from hand-drawn engineering concepts on drafting tables to sophisticated computer-designed rigs that can operate in ultra-deepwater depths of more than 10,000 feet – with wells that extend five miles below the ocean’s floor.  

In the United States, the most recent – and far-reaching – breakthrough: our industry’s advanced integration of hydraulic fracturing and horizontal drilling led to a resurgence in America’s role as a supplier of energy sufficient to not only meet our own needs, but sufficient to contribute to the world’s need for reliable, secure energy supplies.  

These technologies and techniques have enabled us to develop our nation’s vast shale gas and tight oil resources. 

In just a few years, we have rewritten the North American energy story – and with it the future of global trade and energy security.  

The United States is now the world’s No. 1 producer of total energy coming from oil and natural gas.  And even now, we continue to advance all these technologies, further expanding supplies.

The Broader Benefits

Our industry’s investments and innovations have positioned the United States for the next chapter in economic growth and competitiveness.

According to the American Petroleum Institute, in 2013, the U.S. oil and natural gas industry supported more than 9 million jobs nationwide and accounted for 8 percent of U.S. GDP.

As the energy sector grapples with the current downcycle, we must remember the tremendous “multiplier effect” of reliable and affordable energy for the economy.

For example, the shale boom created benefits in places like North Dakota, Pennsylvania, and Texas where production is taking place.  But, importantly, it is having an impact on manufacturers in non-shale states, which are building the products necessary to support the oil and gas industry.

IHS Economics recently published a supply-chain report focusing on high-pressure pump trucks or “frac truck.” These trucks are used to pump fluids down wells at high-pressure in hydraulic fracturing.

The study found that there are 17 U.S. states with manufacturing that directly supports the production of frac trucks. That number jumps to 28 if you also consider major distributors for frac-truck parts.

The frac truck represents just one such example of the broader impact of the oil and gas supply chain. It is clear the economic benefits of America’s unconventional revolution extend far and wide.

As this audience knows, the U.S. energy industry has been an economic engine for the nation’s entire manufacturing sector, helping to ignite a comeback. New supplies of affordable and reliable natural gas have brought jobs and investment back to American factories.

Lower energy costs have given U.S. manufacturers a strong competitive advantage in the global marketplace. The Boston Consulting Group reported this summer that the U.S. continues to maintain a large advantage over European exporters thanks to the availability of low-cost energy. As recently as 2007, the cost of natural gas in the U.S. was only 20 percent less than in Europe, while this year, the cost has been about 65 percent lower.

In fact, even as the energy industry has cut back in response to the new price environment, we have seen what one analyst has called “a spectacular increase in construction spending by the manufacturing sector.”

The chemical industry is building new plants – and retrofitting others – to take advantage of relatively low-cost natural gas. The data on nominal construction spending shows construction spending by the chemical industry increased nearly 140 percent in the year that ended on June 2015 – and the growth rate is over 150 percent in the first half of this year alone.  

Even in the midst of economic challenges, we could make even further gains in chemical manufacturing with reform of the Toxic Substances Control Act.  

The House has already passed a bipartisan TSCA bill, but we need the Senate to follow through so we can improve both safety and innovation.

In addition to contributing to economic growth and competitiveness, our industry’s technological advancements are also bringing increasing efficiency and environmental benefits.

While the current administration imposes extensive regulations to address our shared concern for the risks of climate change, the U.S. energy industry is already delivering results.

For example, because natural gas emits roughly half the carbon dioxide of coal when used for power generation, our abundant and reliable supplies have been instrumental in reducing our nation’s carbon dioxide emissions to levels not seen since the 1990s.  

Even more remarkably, these gains have come despite the fact that our economy is about 60 percent larger and there are 50 million more consumers of energy in our nation today than there were in the 1990s.

Such extraordinary results are a reminder that innovation is the key to achieving our shared aspirations for the economy and for the environment.

Building a Brighter Future

But all these gains – and the resulting American manufacturing renaissance – are at risk if we fail to recognize the role of investment in pressing forward the frontiers of science, engineering, and technology.  

We need sound policies – policies that leverage today’s technologies and lay the groundwork for tomorrow’s game-changing innovations.

Policies that open markets and new avenues for peaceful trade incentivize and stimulate new investments and innovation to maintain competitiveness.  

We must also recognize that regulations that ignore sound science carry severe consequences that undermine the development of new technologies.  

And, as we look to the future, we must work to put in place policies that improve the education and skills training needed to equip the next generation who will carry the torch of innovation.

I will say a few brief words on each of these topics.

Free Trade in Energy

Our vast new supplies of energy have contributed to the type of commodity downcycle we have seen before.  But sound policy reforms can help the U.S. energy sector – and the broader economy compete.  The best way to do that is by ending the artificial limitations on energy and allowing for free trade in oil and natural gas.

Whether we are talking about expediting and expanding the export of liquefied natural gas or ending the ban on crude oil exports, economists, and leaders from across the political spectrum agree that free trade in energy will lead to increased investment, stronger job creation, and, importantly, increased domestic energy production.

LNG exports will enable the United States to contribute to further reductions in greenhouse gases by helping more nations integrate cleaner burning natural gas into their economies.

NAM has been an ardent supporter of efforts to expedite LNG export approvals and to let the market determine which projects get built. That is because manufacturers recognize the importance of open markets to economic growth and job creation.

Thanks to the outreach of organizations like NAM and others, we have seen some bipartisan support for LNG exports in Congress and an uptick in approvals of proposed LNG export terminals from the administration.

Now, Congress and the White House are turning their attention to the decades-old ban on crude oil exports. Here, too, we are seeing important progress.

The ban on crude exports was enacted in the 1970s, a time much different than today. Back then, it was believed that America was running out of oil, while today we enjoy undreamt-of new supplies.

We are now facing a situation where our outdated trade policies could actually lead to reduced output.  They could compromise the ability of the industry to recover, and they could ultimately undermine many of the benefits of the shale boom.

As one union official in Ohio recently said: “It’s time for us to embrace our role as a global energy super power.”

It is time to end the ban.

Recognizing Regulatory Burdens

While the energy industry is hamstrung by energy policies that were enacted decades ago, we also face threats from a host of new, ill-conceived regulations.

At the top of the list is the administration’s new ozone standard.

As all of you know, this afternoon, the administration is expected to announce the National Ambient Air Quality Standards (NAAQS) for ozone.  This decision will no doubt impose major new costs on our nation’s energy and manufacturing sectors – with little in the way of benefits for the American public.  

NAM has been one of the most important voices in sounding this warning.  

NAM estimates that the administration’s NAAQS decision could be the most expensive regulation ever imposed on the American economy.  It is also unfortunate that this costly decision will provide negligible environmental or health benefits.

In fact, many areas of the country are still working in earnest to implement the previous standards, so it defies common sense that the EPA announced a rule that will push so many locales into non-attainment.

For the nation’s manufacturers, this new imposition will make it even more difficult to get the permits needed to operate, expand, and create jobs.

What’s more, it ignores the fact that U.S. air quality has improved dramatically over the past decade under the existing standard, as new technologies and efficiencies have been introduced by the private sector.

In addition to the new ozone standard, there are other costly and unnecessary rules on our industry, such as the new regulations on methane emissions from oil and gas operations.

For a decade now, the U.S. energy industry – in the absence of new regulations – has achieved significant environmental successes in the effort to reduce methane emissions.  

We recognize that reducing methane emissions is important because it is a particularly potent greenhouse gas.  Through sustained investment and technological efforts, the energy industry has proven its commitment to environmental stewardship.

According to the EPA’s own data, net methane emissions from natural gas production have fallen 38 percent since 2005, a time during which U.S. natural gas production has increased by 28 percent.

Yet, despite these achievements and the evidence from sound science, the current administration has imposed new, unnecessary regulations on methane – regulations that will prove costly.

Another area of recent interest to all of us here is the administration’s new “Clean Power Plan.”  It is an unfortunate example of EPA exceeding its authority, and the plan will likely raise electricity rates for American consumers due to its prescriptive nature.

When the playing field is level, free markets and innovation bring about positive change more quickly, more efficiently, and more cost effectively than policy mandates, government subsidies, or bureaucratic impositions.

Robust Cost-Benefit Analysis

Such regulations are multiplying because policymakers often underestimate the costs of implementation and overestimate the potential benefits of a new rule.  

As the Business Roundtable recently communicated to the EPA, there is a troubling lack of transparency used in many regulatory assessments and the methodologies leave far too much potential for over counting – or even double counting – the intended benefits.

It is imperative that we encourage a renewed appreciation for the importance of an open and democratic discussion of the full costs and benefits of regulations.

Unfortunately, in Washington’s current climate of partisanship the idea of meaningful cost-benefit analysis for regulations has become controversial.  

It should not be.

In fact, comprehensive and science-based cost-benefit analysis should be the foundation for a new bipartisanship characterized by respectful, informed dialogue.

To build sound policies that promote growth and safeguard the environment, we must support efforts to enhance transparency and public access to data, strengthen oversight, and improve accountability in the development of regulations.

This will lead to smarter regulations – regulations grounded in evidence-based science, that adequately consider costs and benefits to society, and that are the product of transparent and robust analytical methodologies.

In addition, regulatory programs – especially major ones – should undergo periodic review, with review efforts focused on identifying areas of duplicative, obsolete, or overlapping regulation.

Canada and Australia have both proven that this approach can work.  Earlier this year, Canada adopted a law that requires the government to remove one regulation on the books for every new regulation it seeks to add. This forces lawmakers to carefully consider the value and the consequences of regulatory actions.  And Australia holds regular “repeal days” each year as part of their policymakers’ efforts to address overregulation.

Sustaining Innovation Together

In the effort to spur innovation, government, industry, and society all have a role.

It is the responsibility of industry to uphold the highest standards of operational integrity and maintain a commitment to responsible environmental stewardship.

And with today’s market realities, we must work more effectively and efficiently than ever before. Even in a downcycle, we must continue to invest and innovate as we seek to meet the world’s energy and environmental challenges.

Government also has a responsibility – to promote the rule of law, maintain an open and level playing field for competitors, and enable the investment environment that leads to innovation.

With free trade in energy and common-sense regulatory reforms, the U.S. energy industry can continue to strengthen U.S. energy security, reduce emissions, and continue to fuel the American manufacturing renaissance.

But even with government and industry both playing their respective roles, innovation ultimately depends on people.  

This means in our policy debates we must recognize the role of education and job-skills training – especially in science, technology, engineering, and math.  

NAM has been one of the most important voices in working to improve educational opportunity and outcomes for students and 21st century workers.

Education is the gateway for individual opportunity. For our nation as a whole, it lays the foundation for international competitiveness and global leadership.  

Education is also critical for a free people because it provides citizens with literacy, numeracy, and critical thinking – skills necessary for science-oriented public discourse and informed policymaking.

Education also equips scientists, engineers, and entrepreneurs with the knowledge and skills to create the visionary technologies that bring new efficiencies and help us meet our shared aspirations for economic and environmental progress.

Sadly, there is mounting evidence that our nation has fallen behind.

That is why ExxonMobil is proud to work with NAM to ensure we have policies that promote innovation today.  We are proud to work together to raise academic standards, support research-proven programs, and improve job training.

The world faces many challenges – from how to expand energy supplies so every nation can advance to how we can work together most effectively to address the risks of climate change.

With government, industry, and society united in recognition of the invaluable role of innovation, we can meet these challenges and many more to come.  

With smarter regulations that unleash, instead of hinder free markets, the private sector will continue to invest in tomorrow’s visionaries, scientists, and engineers.

And by developing and deploying both evolutionary and revolutionary technologies, we can build a brighter future for all.

Thank you for your kind attention.