Natural Gas, the Real Economic Stimulus

Two articles this week call attention to one of the few bright spots in our current economy, the natural gas boom. Not only is the US creating direct jobs in the natural gas industry, but the promise of long-term cheap natural gas is even driving chemical and manufacturing companies back into the United States:

Three decades after being devastated by the closing of steel mills, this gritty river valley is hoping its revival will come from cheap natural gas.

The hope doesn’t rest on drilling rigs, but on a multibillion-dollar chemical plant that Royal Dutch ShellPLC is considering building here because of a flood of domestically produced natural gas. Community leaders are touting the plant as the first step toward reviving a manufacturing industry many thought was gone for good.

“I never would have expected that as a region we’d have a second chance to be a real leader in American manufacturing,” Bill Flanagan of the Allegheny Conference on Community Development, a regional business group, told a crowd of locals who came to hear about the chemical plant. “Suddenly we’re back in the game.”

It isn’t just Beaver County reaping the benefits of cheap gas. Plunging prices have turned the U.S. into one of the most profitable places in the world to make chemicals and fertilizer, industries that use gas as both a feedstock and an energy source. And they have slashed costs for makers of energy-intensive products such as aluminum, steel and glass.

Because the price of natural gas has dropped from $12/million-BTU to around $4/million-BTU in recent years, companies that previously were unable to operate in the United States are now returning. This is an exciting, hopeful development for parts of the United States that have been hit hard by the recession:

Uncertainty about the long-term direction of natural-gas prices remains one of the biggest obstacles to a gas-driven industrial renaissance. “Look how much the price has changed in the last few years,” says Mike Mullis, whose Memphis-based company, J.M. Mullis Inc., helps manufacturers choose sites for new factories. “It’s just a wild card right now.”

The chemical industry, which like the fertilizer industry saw production shift overseas in the 1990s and early 2000s, is now rushing back to the U.S. Companies such as Dow Chemical Co. and Chevron Phillips Chemical Company LLC have announced plans to build multibillion-dollar chemical plants in Texas, Louisiana and other states.

“We convinced ourselves that this is not a temporary thing,” says Peter Cella, chief executive of Chevron Phillips. “This is a real, durable phenomenon, a potential competitive advantage for the United States.”

Such projects could have a bigger long-term economic impact than the drilling boom itself. Drilling activity ebbs and flows with prices, and the rigs themselves rarely stay in one community for long. But chemical plants, oil refineries and the factories that use their products can last for decades.

It also is one of the reasons why environmentalists efforts to ban hydraulic fracturing are incredibly harmful, because none of this would be possible without inexpensive natural gas due to fracking. And as the quote mentions above, uncertainty over the price of natural gas is damaging as well. Threats to ban fracking from overzealous politicians help to create this uncertainty.

Daniel Yergin, an energy historian and consultant, elaborates in the Wall Street Journal:

Shale gas alone is now 10% of the overall U.S. energy supply. And similar technologies to recover so-called tight oil trapped in rock formations are largely responsible for boosting U.S. oil production by 25% since 2008—the highest growth in oil output of any country in the world over that time period.

So far more than 1.7 million jobs are the result, according to a report titled “America’s New Energy Future,” released Tuesday by my research firm, IHS. These jobs include people working on rigs in Pennsylvania or North Dakota, manufacturing equipment in Ohio or Illinois, and providing information-technology services in California or legal services to royalty owners nationwide. The number of jobs could rise to three million by 2020. The energy revolution will add an estimated $62 billion to federal and state revenues this year.

But the energy revolution is having other effects that get less attention. The balance of payments is one. The increase in domestic oil production over the past five years will reduce our oil-import bill this year by about $75 billion. The growth of shale gas will save the U.S. from spending $100 billion a year on imported LNG, which was the likely prospect five years ago.

Natural resource production has done wonders for the economy in recent years, and has provided a much needed cost reduction for other industries. Let’s hope the future remains bright.


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