The boom in U.S. oil and gas production has sparked talk of a manufacturing renaissance. I mentioned that somewhat skeptically last week in the context of a much broader piece on the excitement surrounding surging U.S. oil and gas output. I want to drill down on five important issues here. Some of this thinking is preliminary, so as always, feedback is most welcome.
Energy is of marginal importance to most manufacturing.
Most U.S. manufacturing is not energy intensive. Joe Aldy and Billy Pizer reported in a 2009 paper that only one tenth of U.S. manufacturing involved energy costs exceeding five percent of the total value of shipments. These industries – the most prominent of which are iron and steel, primary aluminum, bulk cement, chemicals, paper, and glass – are what we are talking about when we discuss the potential for an energy-driven manufacturing boom. The size of these sectors would need to grow enormously to have revolutionary consequences for the fate of the U.S. manufacturing sector. Avoiding substantial decline, though, could be more feasible.
Manufacturing growth tied to cheap natural gas is mostly a chemicals story.
Take a look at the sweep of major energy-intensive industries, and you’ll find that most are still quite insensitive to energy prices. IHS-CERA, which is not shy about extolling the benefits of the “shale gale” (a term it coined), surveyed these areas in an ANGA-funded study on shale jobs late last year and came to some striking conclusions.
- Aluminum: “Lower U.S. natural gas prices could potentially slow or even halt the slow decay in the aluminum industry. However, it is unlikely that they would change the economics of primary aluminum production enough, even in the long-term, to redirect investment here.”
- Steel: “Cheaper electricity [due to low gas prices] will have only a small positive effect on this industry in terms of profitability and competitiveness.”
- Cement: “The electricity fraction of costs for cement production is too small to generate a significant impact on competitiveness, and the cost savings are not expected to cause production expansion and capacity investment.”
There were, however, two industries that stood out. The (much) smaller one was “iron ore processed from taconite in the Great Lakes region”. Indeed several new projects, each of which would ultimately employ a couple hundred people, appear to be underway. The greatest potential, however, appears to lie in petrochemicals. The basic story is simple: natural gas is partly ethane and propane, feedstocks that makes up the bulk of ethylene and propylene producers’ costs. Greater natural gas production boosts ethane and propane supplies. So do lower natural gas prices, which can make it more profitable to strip out these liquids (not a cheap endeavor) rather than keep it in the gas to boost sales. (Ethane and propane increase the Btu content of natural gas, and thus the amount one can make by selling it.) On the flip side, the main competition for ethane and propane as feedstocks is naphtha, a product of petroleum refining. High oil prices make ethane in particular a much better bet than naptha so long as oil and gas prices continue to diverge. (High oil prices tend to pull propane prices up, making propane unattractive as an ethylene feedstock.)
This explains why we are hearing so much talk of resurgent investment in petrochemicals. A sense of scale, though, is essential. U.S. ethylene production capacity was about 29 million tons annually as of 2009. At a price of $1,300 a ton, that was worth about 40 billion dollars. Even if the United States were to double its ethylene production – an outcome, I hasten to mention, that no one is even remotely talking about – the revenues (not profits) would be another 40 billion.* That’s far from trivial, but it isn’t earth-shattering either.
If you want to find manufacturing jobs related to energy, look at the supply chain.
All the talk of oil and gas fueled manufacturing has muddled something essential: it’s production, not consumption, that’s mostly driving gains so far. This, not cheaper energy, is the main reason that you’re seeing steel plants stay open or expand – they are supplying drillers. Indeed proximity is particularly important in an emerging industry where interaction between customers (in this case drillers) and manufacturers is important to innovation.
Some further numbers from IHS-CERA drive this home. The consultancy claims, quite plausibly, that as of 2010, shale gas production was supporting 39,000 direct manufacturing jobs and another 32,000 along the supply chain. It has projected (again not unreasonably) that these numbers could rise to 67,000 and 57,000, respectively, by 2020. This is far greater than the number of people that all the chemicals plants currently being discussed will employ.
Oil and gas isn’t the only manufacturing-intensive energy business.
If you think there’s a lot of steel in a gas well, wait until you take a look at a wind turbine. According to the American Wind Energy Association (to be certain, hardly a disinterested source), the U.S. wind industry employs 30,000 people in the manufacturing sector. The Solar Foundation (again, not disinterested) claims another 24,000 in the solar sector (including the supply chain). This is all on the back of an industry that remains much smaller than oil and gas.
Let me make sure I don’t confuse people: no one should decide between fossil fuels and renewable energy based on the number of manufacturing jobs they each entail. That said, for policymakers thinking about how different developments might affect manufacturing, the numbers are instructive.
There’s an important link between today’s discussions and climate policy.
Remember when policymakers and advocates hotly debated the possible impact of carbon pricing on U.S. manufacturing? In those distant days (two years ago to be precise), claims that cap-and-trade would destroy U.S. manufacturing by raising energy prices were all the rage. Study after study challenged those claims, and legislation was crafted with provisions to safeguard trade exposed, energy intensive firms. Yet concerns remained.
The present discussion about cheap gas and U.S. competitiveness is the precise mirror of that debate. The same sentiment that foresees a massive manufacturing surge on the back of low fuel prices is one that leads to alarm about the risks of carbon pricing. The same arguments that oppose creating new sources of gas demand (whether by promoting CNG cars or allowing LNG exports) based on worries about manufacturing competitiveness will come back to be used against carbon policy down the road. That’s worth keeping in mind as we think this issue through.
* The American Chemistry Council has claimed that a big increase in ethylene production should spark a similar rise in industries that use ethylene as a feedstock. There should be some movement along those lines, but I’m skeptical of the bigger claim: not long ago, lots of U.S. companies expected to import ethylene, which suggests that many ethylene users would have existed anyhow.