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Natural Gas Drives Manufacturing Renaissance

February 6, 2013 5 minute Read by Nicholas Saliba

Thanks to technological advancement in the energy industry, products labeled “Made in China” may soon be instead labeled “Made in the USA.” With the use of horizontal drilling and hydraulic fracturing, U.S. production of natural gas from shale rock formations has surged since 2008. As supply has increased, the price of natural gas has fallen sharply, lowering electricity costs for homes and businesses. IHS Global Insight estimates that the shale boom has already resulted in a 10% reduction in electricity costs nationwide. As a result, disposable income per household is expected to average $926 more per year between 2012 and 2015.  Perhaps even more importantly, reduced costs for energy and raw materials have allowed the U.S. to gain a competitive advantage in manufacturing.

Affordable and abundant natural gas has given manufacturers a compelling incentive to locate factories in the U.S. rather than overseas. In December 2012, Adam Davidson wrote in the New York Times that the shift from coal to cheaper natural gas will save the United States Steel Corporation (U.S. Steel) hundreds of millions of dollars per year, helping to revitalize the steel industry in America. Similarly, the shale revolution is cutting costs for manufacturers of plastics, metals, chemicals, fertilizers, and other industrial materials. Over the next 20 years, the U.S. is projected to have some of the lowest natural gas prices of any industrialized nation. By contrast, in Europe and Asia the price of natural gas is three or four times more expensive than that it is in the U.S. PricewaterhouseCoopers estimates that lower feedstock and energy costs could save U.S. manufacturing companies as much as $11.6 billion annually. PWC also says that the manufacturing industry could add approximately one million more workers by the year 2025.

In particular, the petrochemical sector is enjoying the benefits of the shale boom, thanks to low-cost ethane. Ethane is a component of natural gas, separated from other components during the refining process. The first step in producing most plastic products and many consumer goods — such as toys, bottles, tires, and bags — is to convert ethane into ethylene (the most widely produced organic compound in the world) in a process known as “cracking.” It currently costs $300 to make a ton of ethylene in the U.S. versus around $450 in Saudi Arabia and over $1700 in Asia.

The American Chemistry Council projects that petrochemical companies, including Chevron Phillips Chemical, ExxonMobil Chemical, and Dow Chemical, will spend over $16 billion during the next five years to build new production facilities and to reopen factories that have previously been shut down. The ACC forecasts that this could create 17,000 jobs in the chemicals industry, and another 165,000 jobs elsewhere in the economy. Private investment by these companies also creates positive externalities, such as a significant boost in revenue for businesses that surround production facilities. Prior to the shale boom, the U.S. was on the verge of becoming a net importer of chemicals. Now, it is positioned to be a net exporter. This reversal will surely help reduce the nation’s staggering trade deficit.

The shift from outsourcing to insourcing has already begun. Royal Dutch Shell is currently planning to build an ethane cracker plant — of which none have been built in the U.S. since 2001 — in Beaver County, Pennsylvania (which lies above the rich gas deposits of the Marcellus Shale). Beaver County, along with many other counties near the Ohio River Valley, has struggled economically since the area’s steel mills closed 30 years ago. But this new plant will employ over 10,000 construction workers, technicians, and engineers from surrounding areas. This is just one example of how the shale gas boom has given the region a chance to once again be an epicenter of American manufacturing.

Clearly, the positive effects of the shale boom extend beyond just the oil and gas industry. The manufacturing renaissance America is now enjoying has the potential to significantly reduce unemployment and increase GDP. For this resurgence to be sustainable, the energy industry will need to continue to innovate and cultivate our country’s abundant reserves of natural resources. Texas and North Dakota are two excellent examples of states that have enjoyed faster growth because of the energy sector. If enough other states follow, a booming energy industry may well lead to a booming American economy.


Author

Nicholas Saliba
Nicholas Saliba

Nicholas Saliba is a consultant for the George W. Bush Institute and a Fellow with the Maguire Energy Institute in the Cox School of Business at Southern Methodist University in Dallas, Texas. He graduated Magna Cum Laude with Honors from Southern Methodist University in May 2014, receiving a B.B.A. in Finance, B.S. in Economics with Financial Applications, and B.A. in Public Policy. He also received minors in History and Political Science, along with a concentration in Energy Management.

Mr. Saliba has been a writer and researcher for the 4% Growth Project, the North America Scorecard Project, and the North America Working Groups of the George W. Bush Institute. He has co-authored numerous studies, and spoken on issues pertaining to finance, economics, and public policy in the energy sector. In 2013, Mr. Saliba was the co-author of the book "The Energy Logjam: Removing Regulatory Obstacles to Fuel the Economy," published by the George W. Bush Institute. Additionally, he has consulted on issues pertaining to energy, economics, and public policy for organizations including Consumer Energy Alliance, Texas Education Service Centers, D Magazine, Bracewell & Giuliani LLP, the Ohio Oil & Gas Association, and Energy Future Holdings.

Mr. Saliba is a member of Delta Sigma Pi Professional Business Fraternity, Omicron Delta Epsilon International Honor Society in Economics, and Phi Beta Kappa.

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