Carpe Diem

Cheap, abundant shale gas fuels economic growth in America’s Rust Belt and sparks a manufacturing renaissance

From today’s WSJ article “Cheap Natural Gas Gives New Hope to the Rust Belt,” more coverage of the shale energy revolution in America, which represents a seismic shift in the energy landscape that is transforming the U.S. economy in powerful ways and sparking a manufacturing renaissance, thanks to cheap, abundant shale gas (see chart above of inflation-adjusted natural gas prices for industrial users, which are close to historical lows):   

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.

“The U.S. is now going to be the low-cost industrialized country for energy,” the energy economist Philip Verleger says. “This creates a base for stronger economic growth in the United States than the rest of the industrialized world.”

In mid-2008, U.S. natural-gas prices topped $12 per million BTUs (see chart above). The current price is just $3.54 per million BTUs. The U.S. government expects the average price to stay below $5 for another decade, after adjusting for inflation. German and French companies now are paying nearly three times as much for gas as U.S. companies, and Japanese companies even more than that.

Natural gas will help some industries immensely, but others less so. It accounts for about 70% of the cost of making fertilizer, and 25% of the cost of making many plastics.

Between 1998 and 2004, fertilizer producers—which use natural gas to make ammonia, the key component in nitrogen fertilizer—shut down more than two dozen U.S. plants, representing close to half of U.S. capacity. Some facilities were literally taken apart and shipped overseas, where gas was cheaper.

Now the trend is reversing. In September, Egyptian industrial giant Orascom Construction Industries announced plans for a $1.4 billion fertilizer plant in Iowa, which the company says would be the first large-scale fertilizer facility built in the U.S. in more than 20 years.

Deerfield, Ill.-based fertilizer maker CF Industries Inc. is planning to spend up to $2 billion boosting its U.S. production through 2016. “It’s been a complete 180-degree change in our thought process,” says CF Industries CEO Steve Wilson.

Watch related WSJ video “Cheap Natural Gas Fuels Growth in Rust Belt,” and see a related WSJ article “The Man Who Pioneered the Shale-Gas Revolution.”

7 thoughts on “Cheap, abundant shale gas fuels economic growth in America’s Rust Belt and sparks a manufacturing renaissance

  1. Cheap feedstocks are behind a manufacturing renaissance for several industries.

    Butane, propane, ethylene, methane, methylene, ethane etc. are all critical feedstocks and are all by-products of the shale/gas boom.

    America is getting TWO-BANGS for its buck–and Obama is openly hostile to and vigorously against everything.

  2. So rather than ingesting the platitudes of industry propaganda (ya know, follow the money), I head on over to the industrial production (IP) data and look up chemicals (NAICS code 325) and plastics and rubber products (NAICS code 326).

    Chemicals account for ~12% and rubber ~3% of IP.

    So 4+ years after the collapse of natural gas prices and the more recent collapse in NGL prices, chemicals output is 88% and rubber output is 92% of the 2007 business cycle peak. Overall IP is ~95% of peak.

    Conclusion: The chemicals and rubber sectors are trailing and certainly not pointing to any manuafacturing renaissance.

    • Note that Prof. Perry used the words “sparking a manufacturing renaissance” and this quote among others:

      “Deerfield, Ill.-based fertilizer maker CF Industries Inc. is planning to spend up to $2 billion boosting its U.S. production through 2016.”

      Get back to us on nat gas related plastic and chemical IP in a couple of years.

      • Get back to us on nat gas related plastic and chemical IP in a couple of years.

        Ya, by then it will be another recession.

        Professor Perry has been playing to this unsubstantiated narrative for years. Did you know that fertilizers are a component of NAICS 3253, pesticide, fertilizer, and other agricultural, which represents 0.50% of IP? I fell off my chair LMAO about that CF Industries manufacturing spark. Industry needs to invest in capex for both maintenance and growth purposes.

        • Sorry to read of inbalance resuting in a fall from your chair. Positive results across a broad spectrum of industrial production, a result of natrual gas sparked investments, will hopefully heal your negative bias.

          • result of natrual (sic) gas sparked investments,

            Ya sure, the only thing that needs to righted is your moronic talking points.

            Chemicals IP trails manufacturing IP from the 2007 peak. Chemicals were NEGATIVE in Q2 and Q3 2012 while real natural gas prices were the lowest in 10+ years. Dow Chemical is closing a plant in Midland, Michigan (of the 20 global plants to be closed, that’s the only one I’m aware of in the U.S.) and cutting capex by 20%. According to Perry, that renaissance spark should be a raging fire by now.

    • On top of what Citizen B. said, the recent weakness in chemicals and plastics is more due to weak international demand than anything to do with natural gas prices.

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