By Robert Schoenberger
CLEVELAND, Ohio — The shale gas boom hitting Ohio, Pennsylvania and several other states could provide a major advantage to manufacturers in the United States — cheap energy that could significantly cut the costs to produce goods here, a group of economists said Thursday.
“By 2025, the manufacturing sector alone could save $11.5 billion in energy costs,” Robert McCutcheon, an economist with consulting group PwC, said at a manufacturing summit hosted by the Federal Reserve Bank of Cleveland. McCutcheon’s company, formerly called PriceWaterhouseCoopers, released a study late last year predicting that as many as 1 million new U.S. manufacturing jobs could come from lower-cost energy.
“If we save $11.5 billion, that’s investment capital that could be redirected elsewhere,” McCutcheon added.
Cleveland Fed President and Chief Executive Sandra Pianalto said manufacturing businesses have been leading the economic recovery in the United States for the past two years, but she added that job growth hasn’t been as strong as profit and sales growth. To add jobs, the sector needs to attract new manufacturers and bring production back to the United States from other countries.
That’s where shale gas and cheap energy could come in.
Pianalto said one steel producer told her recently that energy costs in North America are one-third the cost of European steel plants [reporter’s note: an earlier version of this story said U.S. costs were one-tenth of Europe’s. Pianalto’s office said the Cleveland Fed chief went over her notes and found that one-third was the more accurate figure]. Those costs, coupled with weak demand, has ArcelorMittal expanding in Ohio while it cuts production in Europe. Several other steel plants in the region have also increased production to sell pipeline tubes and other parts to oil and gas companies.
Marianne Kah, chief economist for energy company ConocoPhillips, called the ongoing shale boom the “most significant change in the energy industry since the 1940s.”
Kah said over the past five years, energy companies have learned that most of their early predictions on shale gas were wrong. The companies knew that there were huge reserves of oil and gas trapped within hard rocks that needed to be hydraulically fractured to release that energy, but they vastly overestimated the costs of doing that.
Production in Texas and Pennsylvania has produced far more gas, far more cheaply than the industry expected, and gas prices are now near historic lows. Low gas costs have drawn huge interest from chemical companies that convert natural gas into plastics and other materials. In March, Shell Oil said it would build a multi-billion petrochemical refinery near Pittsburgh. Several other chemical plants have announced shale-related expansions.
“And these are the very early days. We’re likely to learn a lot more about how to optimize this process” and lower production costs in the future, she added.
From a competitive standpoint, she said shale is already making the United States a more attractive place to do business. Natural gas prices are lower here than in China, Germany of Great Britain.
William Strauss, senior economist for the Federal Reserve Bank of Chicago, said the boom has meant U.S. electricity prices are the lowest of any industrial nation in the world. Those low energy prices could help the country lure back work sent to Asia over the years where low-cost labor has been the draw. Strauss said labor is still cheaper overseas, but the total production costs can be higher after figuring in energy and the cost to ship goods across the Pacific Ocean.
Still, several economists at the summit expressed concerns on how easy it would be to take advantage of low-cost energy derived from shale gas. Some businesses may delay investments in gas-using processes out of fear of a boom-bust cycle in gas pricing.
Extremely high gas prices about five years ago led to the shale gas and fracking boom, and that boom has created a glut of unsold gas, pushing prices extremely low. Those low gas prices are attracting interest in chemical processing plants and gas-fired power plants. So in a few years, demand for gas could spike as those projects come on line, potentially pushing prices up much higher.
Pianalto noted that the big spikes in supply and demand are creating confusion in the market. In addition, as gas prices have fallen, much of the drilling activity in eastern Ohio and western Pennsylvania has slowed.
“There’s always a double-edged sword,” Pianalto said. “The lower energy prices are good for manufacturers, [but] those lower energy costs make it more challenging to get an investment return for energy companies.”
She added, though, that those are short-term concerns. Over the next several years, “markets tend to work these things out.”
Pianalto and Case Western Reserve University economics professor Susan Helper both said that energy costs and other factors are making the United States a more attractive place for manufacturers, but they warned that the numbers of jobs coming back to this country from Mexico and Asia have been small.
“It’s gone from a few anecdotal stories to something that’s measurable now,” Helper said. But she added that there hasn’t been a massive change yet.
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