Friday, March 28, 2014

Nikos Tsafos | Why Cheap Energy Won't Spark a U.S. Manufacturing Renaissance

Via Foreign Affairs:



The
boom in shale gas production in the United States has sparked talk
about a U.S. manufacturing renaissance powered by cheap gas. The
National Association of Manufacturers notes on its website that
“abundant domestic natural gas resources can fuel a renaissance in U.S.
manufacturing”; similarly, a 2011 report from PricewaterhouseCoopers
found that “shale gas has the potential to spark a US manufacturing
renaissance over the next few years, boosting revenue and driving job
creation.”
Meanwhile,
in Europe and Asia, where energy prices are still high, leaders worry
about a coming deficit in competitiveness that will threaten their
already fragile economies. Daniel Yergin, the Pulitzer-prize winning
author of The Prize, reported that in Davos this year
competitiveness was “was calibrated along only one axis -- energy.”
Cheaper energy in the United States, he wrote, “puts European industrial
production at a heavy cost disadvantage against the United States. The
result is a migration of industrial investment from Europe to the United
States.” Yet talk of manufacturing renaissances or dark ages is
overblown. Natural gas matters far less than either the optimists or the
pessimists claim.
Energy
competitiveness, the idea that cheap energy can be a source of
industrial strength and competitive advantage, is at once intuitively
appealing and intuitively suspect. It is appealing because we have been
conditioned to believe that energy is terribly important, so big shifts
in global energy must cause big shifts in the economy. It has to be a
huge deal for the United States -- with profound implications for
geopolitics and economics -- if natural gas prices there are a third or a
fifth or a tenth of what they are in Europe and Asia.
At
the same time, the idea of energy competitiveness is suspect. One
rarely associates access to cheap energy with industrial potency (think
Saudi Arabia, Russia, and Venezuela). By an accident of geography, the
countries with advanced industrial sectors -- Germany, Japan, Korea,
Taiwan -- happen to depend on imported and usually expensive energy. If
those countries managed to nurture world-class industrial sectors
without indigenous sources of cheap energy, there must be more to
manufacturing than energy.
Despite low natural gas prices, in other words, spending on energy is hardly out of the historical norm.
The
reality is that energy, although very important for some industries, is
a marginal driver for industrial activity overall. In 2012, Dow
Chemical reported that “expenditures for hydrocarbon feedstocks and
energy accounted for 37 percent of the Company’s production costs and
operating expenses.” No wonder Dow is the name most often associated
with calls to restrict U.S. exports of liquefied natural gas (LNG) from
the United States -- energy is a big cost for the company.
But
there is more to the U.S. economy than chemicals, which accounted for
2.3 percent of GDP and 0.6 percent of full-time equivalent employment in
2012. The Bureau of Economic Analysis (BEA) estimates that, overall,
U.S. businesses spent $790 billion on energy in 2012. Energy represented
about 3.7 percent of total costs, similar to the 3.6 percent that
companies have spent on average since 1997. (The low was 2.6 percent in
1998 and the high was 4.6 percent in 2008.)
Despite
low natural gas prices, in other words, spending on energy is hardly
out of the historical norm. In part, the reason is that natural gas made
up only about 15 percent of energy spending by industry in 2011, with
the rest going to coal, oil, and electricity, some of which generated
from gas. Cheap gas has provided only a limited stimulus, on the order
of $32.5 billion in savings for American industry -- a paltry sum
compared to the $6 trillion in total spending by industry on
intermediate inputs and wages.
What
about those industries in which energy is a major cost? Among the 69
individual industries for which the BEA reports data, only eight spent
more than ten percent of overall costs (energy, materials and services,
and compensation of employees). These industries, mostly in the
transportation and logistics sectors, made up less than five percent of
U.S. GDP in 2012. Adding in industries that use fossil fuels for
feedstock would get that total to around ten percent of GDP, of which a
significant portion relates to transportation and logistics.
That
is why it is hard to argue that investment driven by cheap gas will
drive a manufacturing renaissance. In a February 2013 paper that Charles
River Associates prepared for Dow Chemical on U.S. manufacturing and
LNG exports, it identified over 95 projects in the gas-intensive
manufacturing sector that had been announced by various companies since
2010. Together, they comprised some $90 billion in total investment. At
the same time, companies spend around $2 trillion a year in other,
non-residential investments. Given that not all these gas-intensive
projects will materialize and that this investment will be spread over
many years, it is hardly transformative.
Of
course, shale gas brings other benefits. The Boston Consulting Group,
for example, estimates that “the average U.S. household is already
saving anywhere from $425 to $725 a year because of lower energy costs
that can be attributed to domestically recovered shale gas.” Together
with shale oil, shale gas is creating good jobs and yielding tax
revenue, and helping shrink the U.S. trade deficit -- all worthwhile
goals. But shale gas will not trigger a widespread manufacturing
renaissance in the United States, nor will it undermine economies in
Europe and Asia by providing the United States with an energy cost
advantage. Its effects will be narrower and limited to a few industries.
It is time to let go of “energy competitiveness” as a real thing.

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