Address by Stuart R. McGill
senior vice president, Exxon Mobil Corporation
at the Oxford Energy Seminar, Oxford University

September 7, 2006

Good evening.

I am delighted to have the opportunity to speak with you this evening. I recognise that I am standing between you and your dinner, and all that that means.

But I know of no better opportunity for leaders from the energy sector, national governments and international agencies to come together to share information on the essential role that energy plays in modern life than the Oxford Energy Seminar.

An Interdependent World
Tonight, I want to begin by reminding us of the fundamental concepts and values that are central to the functioning of our international economic system – concepts that are as important to the financial services, automotive and information technology industries as they are to the energy industry.

Most of the world’s citizens – and I include those of us in this room – underestimate the degree to which we are interconnected in the global economy. We live in a world in which capital is mobile across international borders. It is a world in which information technology brings us news and information from anywhere in the world literally as it happens. And it is a world in which the goods and services we consume every day may have their origins in places far removed from our own lifestyles and experiences.

An average American, for example, may drive a vehicle made in Korea, insured by a European financial entity, consuming gasoline that may have started life as a crude oil molecule in the seabed under the Gulf of Guinea in West Africa.

Every single day, consumers, governments and businesses around the world are in some way participating in and benefiting from a globally interdependent economy. It is at the heart of our standard of living today and key to improving living standards in the future.

Maximising the Benefits of Interdependence through Trade
We maximise the benefits of this interdependence when policy settings encourage international trade and allow markets to work. One simply has to look back over the past few decades to see that the path to economic growth and higher living standards lies in liberalisation of markets, and in the pursuit of economic freedom. It is a truism that has been proven again and again.

Indeed, an assessment of the global economy in recent years shows that the strongest growth rates have come from those nations that are liberalising and encouraging foreign investment. For example, over the last five years China’s annual economic growth has averaged almost 9.5 per cent. This period incorporates China’s ascension into the World Trade Organisation in December 2001, and the ensuing significant liberalisation of the Chinese economy.

The Chinese story is only a part of the broader global picture in which domestic economic liberalisation and integration into the global economy has contributed to increasing prosperity in many regions around the world.

The benefits of interdependence are not confined to economics. An open trading environment also encourages greater communication and dialogue on other issues. Through trade, nations can develop strong relationships in fields such as education, culture, technology and more.

In other words, trade transcends the transfer of goods … it facilitates the sharing of knowledge and aspirations that make progress possible. And it creates an environment that bolsters technological advancement through a “competition of ideas” that ultimately leads to innovation for the benefit of all.

Energy Facilitates Interdependence
So where does the energy sector fit into this picture?

Today’s energy industry is both essential to, and a product of, global interdependence. Access to affordable and reliable energy is the key to economic progress and the pursuit of improved living standards.

Consider this … the World Bank predicts that by 2030, there will be around two billion more people on this planet than at the beginning of this century. And over the same period, the size of the global economy will double, with the Asia Pacific economy approaching the size of Europe’s.

According to the International Energy Agency, this growth is going to drive energy demand close to 50 per cent higher over the next 25 years, with the developing world accounting for about three-quarters of that growth.

Those statistics provide us with a glimpse of the challenge that lies ahead, especially given that people and governments the world over desire – and have a right to pursue – increasing standards of living.

Most observers expect oil and natural gas to maintain about a 60 per cent share of total energy over the period to 2030. Conventional energy as we know it will continue to underwrite global trade and the pursuit of prosperity around the world.

A wide variety of other energy sources will have roles to play. Renewable sources such as wind and solar will increase rapidly, albeit from a low base, largely through government subsidies and mandates – in other words, through intervention in the market process. This is a prerogative of governments but it is important to acknowledge that well-intentioned measures may carry unintended consequences.

An example is the very important public policy debate around renewables and the issues of greenhouse gas emissions and climate science. Rigorous, transparent assessment of both climate science and potential policy options is important for two reasons: firstly, because the risks posed by climate change are significant, and secondly, because the economic and social impacts of policies to address these risks could also be quite significant.

This is not an argument against taking action but it is to remind us that policy directed at one area will have impacts in others…they are interdependent.

Ultimately, the role that different energy types will play in supplying future demand will be determined by the extent to which they support continued economic growth and meet the needs of consumers.

The State of California’s unsuccessful efforts in the 1990s to mandate an expansion in the use of electric cars is one example demonstrating that consumer acceptance is critical to any policy that seeks to change market behaviour.

So, we must prepare for a world in which energy demand is increasing significantly – and a world in which, for the foreseeable future, conventional energy sources will continue to play the key role, not withstanding the important and large effort to develop options for the longer term.

Energy is a Product of Interdependence
Let me turn now, from why energy is central to global economic interdependence, to how it is in fact a product of that same interdependence.

It is not an overstatement to say that oil is the most fundamental ingredient in the global economy. Oil fuels both the physical operation of the global marketplace and is itself the most traded commodity on the planet.

Let us consider for a moment the sheer scale of the global oil trade. Oil is the single biggest component of the global energy mix, contributing more than 80 million barrels per day – more than one third - of total world energy demand.

Every single day, a vast network of oil production rigs, storage facilities, ocean tankers and pipelines is utilised to deliver oil from often remote locations to where it is required. The market is brought to life daily by the thousands of buyers and sellers whose interactions determine the price of this commodity. And the market is made possible by the billions of dollars invested by the industry in the global oil infrastructure network.

And all of us in this room will be aware that it is not a market in which one or two major companies dominate.  Even though ExxonMobil is the world’s largest non-government oil company, we produce only three per cent of global production.

The reality is we do work in an industry in which a wide variety of companies compete every day to supply the world’s needs.

Recent technological advances are turning natural gas into a global business as well. The combination of larger Liquefied Natural Gas trains together with new-generation LNG ships and terminal efficiencies have resulted in unit cost reductions of more than 25 per cent. Natural gas supplies, historically constrained to markets closer to gas fields, can now be delivered to consuming markets anywhere in the world.

Ladies and gentlemen, we have in the energy industry a classic example of the way in which international trade linkages have led to the creation of a truly global interdependent business. And it is a business that delivers the fundamental ingredient in the pursuit of prosperity and progress around the world.

Elements of the Energy Challenge – The “Three-Legged Stool”
So, while we can assess with some confidence future energy needs, we also need to understand what it will take to deliver on those needs. The roles of interdependence and international trade are again critical.

Through them lie the keys to addressing the three major elements that are required to expand energy supplies for the future: technology and know-how, access to resources, and investment.

Throughout the history of the oil and gas industry, new technology and new techniques have continuously enabled us to reach further, drill deeper and otherwise be more effective in finding, producing and delivering energy. The industry of today is much, much different from the industry of 1950, 1970 or even 1990.

Tomorrow’s energy will be more challenging to find, to produce and to get to market. It will require continued evolution in thinking, tools and technology from that we have today.

Business innovates best when it has the market incentives and the financial means to do so. An open and stable international market clearly plays an important role in achieving this outcome by stimulating competition for resources, sending accurate price signals and providing a climate that enables long-term research to be undertaken.

But technology cannot thrive without know-how. This is the human dimension of the equation.

It is incumbent upon the energy industry to continue to attract and retain talented people who will have the know-how and the commitment to deliver the world’s future energy supplies.

Again, interdependence is key. International oil companies have long contributed to developing people in their operations, and to facilitating the transfer of technology and know-how to host nations. As the industry expands and seeks new resources, this role as a developer of international talent will become an even more important element in how we work.

The second necessity is access to resources. Our world has abundant resources to meet energy needs for the foreseeable future. Based on today’s understanding, we have used only about one third of the earth’s conventional recoverable oil resources, and less than one quarter when taking into account unconventional and heavy oil.

But the challenge remains in enabling access to these resources. Governments hold the key to providing access to national resources, and in welcoming the investment and capabilities that the private sector brings to the development of these resources.

Governments of consuming nations also have responsibilities. It is sometimes forgotten in daily debate and political commentary that producing nations take a risk in allowing their resources to be developed for global consumption – without any guarantees that the resources will be utilised.

One only has to look back just a few years to see significant over-capacity in international oil producing infrastructure. In an interdependent world, it is important to recognise that consuming nations’ responsibilities are just as important as those of producing nations.

The third element that is essential to meeting future demand is the enormous investment required to bring new energy developments to market.

The International Energy Agency predicts that the oil and gas industry will need to invest an average of around $200 billion annually to meet growing demand to 2030.

In a long-timeframe, cyclical industry, and particularly in times like now, it is important to remember the imperatives of a long-term approach to the policy settings that governments apply.

Stable and reasonable fiscal and regulatory regimes, together with a robust framework in which to resolve issues that may arise over time, are critical elements in creating an environment which supports the enormous investments needed in the energy sector.

When the market is open to new investments and there is reward for developing new ideas, technology flourishes and the entire industry – and the consumer- benefits.

Engaging in the Debate
Notwithstanding everything I have said, ladies and gentlemen, recognition of the crucial importance and benefits of interdependence is not where it needs to be today to facilitate the reliable, affordable supply of energy to the world.

Despite all of the benefits that international oil trade linkages have delivered, we are seeing in some countries a movement to promote ‘energy independence’ – a concept based on the assumption that energy needs can be best achieved by looking inwards.

But the reality is that it is neither possible nor desirable to pursue such a measure and at the same time maintain living standards and economic progress. Of the ten largest economies in the world today, only the United Kingdom and Canada are net oil exporters.

In Europe, the major economies of Germany, France and Italy are all very significant net importers. Looking outside Europe, the world’s fastest growing economy, China, is now an importer and will continue to be so.

What this demonstrates is that growth in the world’s largest economies has been underwritten by integrating with global markets and benefiting from trade and its associated gains. The world’s economic growth -- today and increasingly in the future -- is supported by fostering partnerships and commerce across national boundaries.

So, interdependence is a fact of modern life. What is at issue is how we respond to that fact. We can either pursue policies that unnecessarily –or even unintentionally - limit or restrict international trade flows, or we can encourage nations to develop closer economic partnerships, to deepen mutual understanding and to welcome new investments.

The international energy industry, which plays such an essential role in making our modern lives possible, must be at the forefront of this debate.

In Conclusion
Ladies and gentlemen,

There are few -- if any -- industries that are better examples of the benefits of international trade, investment and competition than the energy sector. International oil companies, in partnership with host governments around the world, have become vehicles for technology transfer, for training and developing citizens, and for delivering essential supplies of energy to improve and enhance standards of living.

None of this would have been possible without the ability and willingness of both governments and industry to embrace international partnerships, without the development of technologies to facilitate access to resources and transport them to where they are needed, and without the development of a well-functioning global marketplace for these commodities.

We should not lose sight of the achievements that have already been made in the international energy sector. Yet, the future poses new, and in some ways more complex, challenges to overcome than those we have met in the past.

All of us associated with the energy industry have a role to play in developing policy solutions that can overcome the challenges that lie ahead. Many of you in this room are at the forefront of meeting these challenges in your organisations.

We must assist those who influence the policy environment to better understand the nature of our industry. We must work to achieve a renewed recognition among governments that the path to energy security lies in energy interdependence and partnerships with other nations. And we must help create an environment that fosters access to resources, and which supports the investment required to deliver new supplies.

We may not always receive thanks or recognition for ensuring a continued flow of reliable and affordable supplies of energy. But this is our responsibility and our obligation.

I hope tonight that I have been able to shed some light on a key aspect of our industry. I thank you for listening.

I wish you an enjoyable and stimulating evening of discussion with your fellow guests.Thank you.