Shale Drives Manufacturing Back to the U.S.

The Washington Post recently highlighted a growing trend that holds great economic promise for the United States.  Specifically, the Post noted that European industry is moving to the United States to take advantage of lower energy costs, specifically clean-burning natural gas. Of course, this is just the latest in a series of economic good news attributable to the nation’s growth in oil and natural gas development from shale resources. Little wonder, then, why major U.S. investment banks are declaring that “energy is beginning to carry America.”

To exemplify the exodus by European manufacturers, the Post highlighted German chemical company BASF, which has invested more than $5.7 billion in North America over the last four years.  According to company representatives, the reason behind this significant investment is pretty straight-forward:

“It’s become clear, with the drop in gas and electricity prices in the United States, that we are, at the moment, at a significant disadvantage with our competitors,”

“It’s a very slow process, but it’s a continuous one,” said Harald Schwager, the head of BASF’s European operations, referring to the manufacturing outflow. “Once a customer of ours decides to build a new factory in the U.S., then this customer will request from us to be close by with our production. And so, over time, you see a self-accelerating process, which will move production into the U.S.”

The reason more companies are placing manufacturing facilities in the United States – after a decade’s worth of decline for the industry – is also fairly simple. Affordable natural gas supplies, made possible through the responsible development of shale. This not only translates into lower feedstock costs for manufacturers like BASF, but it’s also caused wholesale electricity prices in the United States to drop by more than 50 percent since 2008.

For these reasons, BASF’s investments are noteworthy — but they are by no means unique. In fact, Austrian steelmaker Voestalpine recently came to a similar decision when its senior leadership decided to locate a new steel plant in Texas, a decision the company reached after examining 17 sites in eight different countries.  In explaining his company’s decision, Dr. Wolfgang Eder noted:

 “In the USA, re-industrialization is being promoted very consistently, ambitiously and with great conviction,” Eder told Reuters. “Low energy prices gave us the final – and not insignificant – push.”

Of course, these are just a few examples of a much larger trend that’s being witnessed in communities across the United States. The French oil and gas pipeline company Vallourec has opened multiple steel plants in Youngstown, Ohio, providing over $700 million in economic activity for this once struggling Rust Belt city.  At the same time, in Louisiana, the South African based company Sasol is building the nation’s first commercial plant to convert natural gas to liquid fuels, thanks to the United States’ newfound abundance of affordable natural gas. This project, which has been billed as the largest manufacturing investment in Louisiana’s history, is expected to provide nearly $14 billion in economic activity and 7,000 well-paying construction jobs.

All of this activity, and more, has led outlets like NPR to run headlines like: “Cheap Natural Gas Pumping New Life into U.S. Factories.”  While it would be easy to dismiss such a headline as anecdotal, recent experience and statements by U.S. executives and federal officials show it is indeed true – and perhaps even an understatement.

Drew Greenbelt, owner of Baltimore based Marlin Steel Wire Products, recently noted his company’s orders are rising because his customers are receiving a widening discount in the price of natural gas and electricity. Specifically, he noted the savings are “making U.S. companies that used to be at a price disadvantage now uniquely positioned to win contracts they never won in the past — or haven’t for a while.” He added: “Everyone talks about what’s going on in North Dakota, but it’s filtering down now to conventional factories throughout America.”

Last year John Surma, chairman of U.S. Steel, observed the following: “It has become clear to me that the responsible development of our nation’s extensive recoverable oil and natural gas resources has the potential to be the once-in-a-lifetime economic engine that coal was nearly 200 years ago.”

The aggregate benefits of these investments to the overall U.S. economy were recognized last year by former Treasury Secretary Timothy Geithner, who told NBC News: “The economy now is actually looking quite resilient,” before adding that two of the biggest reasons for that development are gains in domestic oil and gas production and domestic manufacturing. “If you look at what’s happening in energy, enormous boom,” Geithner said. “In manufacturing, [the country is having] one of the strongest periods in manufacturing revival that we’ve seen in almost a generation.”

All of this supports a report issued more than a year ago by the global consulting firm PricewaterhouseCoopers. That study, titled “Shale Gas: a Renaissance in U.S. Manufacturing?” predicted that shale development would save U.S. manufacturers nearly 12 billion dollars per year in energy costs. When combined with increased demand for manufacturing products due to oil and gas development, the result of the U.S. energy boom would be an additional one million U.S. manufacturing jobs by 2025.  It’s worth noting this activity is all in addition to the $545 billion in economic activity supported by America’s oil and natural gas industry just last year.

As the discussion about U.S. energy policy and shale development continues, we should remember: Just four years after the onset of one of the deepest recessions in U.S. history, shale development is providing millions of jobs, billions of dollars in new investment, and is breathing new life into a vital sector of our economy. Oh, and did we mention it’s giving us cleaner air, too?

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