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Thu March 28, 2013
Cheap Natural Gas Pumping New Life Into U.S. Factories
Originally published on Tue April 23, 2013 3:13 pm
The millions of Americans who lost factory jobs over the past decade may find this hard to believe, but U.S. manufacturing is coming back to life.
The chest compressions are applied by the pumping of cheap, domestic natural gas.
"We are entering a new era," says economist Jerry Jasinowski, a former president of the National Association of Manufacturers, a trade group. He and other optimists are cheered by the increase in industrial production, which has grown at a 5 percent annualized rate since the Great Recession ended. That's more than twice as fast as the economy as a whole.
Some economists are skeptical about just how big, or long-lasting, the impact of cheap gas will be. They say U.S. factories have been perking up primarily because of the usual pent-up demand that follows a deep recession, as well as the global competitive advantage provided by a weaker dollar.
Economic historians eventually will look back and decide which assessment proved true, but for now, the "manufacturing renaissance" theory has broad support, both from business leaders and from most economists. They say manufacturing's future is getting brighter because of "fracking" — an increasingly popular drilling technique used to recover natural gas from shale formations. Fracking is helping guarantee factory owners access to cheap, reliable and abundant energy sources.
People landing fracking-related jobs have gotten a lot of media attention in recent years. But many more workers are quietly finding paychecks in factories as manufacturers start to take advantage of lower natural gas prices.
Consider: The price for United Kingdom natural gas futures has been hovering around $10 per million British thermal units (a measure of natural gas) while the U.S. equivalent is priced below $4.
That difference "is a game changer," said Craig Alexander, chief economist from TD Bank Financial Group. "There's no question we are seeing a renaissance in manufacturing because ... the cost advantage has shifted to the United States."
In the chemical-manufacturing sector alone, companies are building plants worth an estimated $95 billion, according to IHS Global Insight, a forecasting firm.
In Freeport, Texas, for example, Dow Chemical Co. is employing armies of construction workers to help with a multibillion-dollar expansion of its facilities there. The new operations will add about 600 new jobs, and spin off many more jobs for truckers, suppliers and others.
The sprawling facility will break down natural gas byproducts into their chemical building blocks, to be used to make everything from food packaging to pharmaceuticals.
"We have low-cost, affordable feed stocks again in North America," Earl Shipp, who runs Dow's Texas operations, told NPR. "It's the start of what some of us in the industry call a renewal of our industry in the United States."
And in the Houston suburb of Baytown, Chevron Phillips Chemical Co. is investing in a $5 billion expansion of its Cedar Bayou Chemical Complex and other nearby facilities. "For most of the last 20 years, the best places for growth capital have been in the Middle East," CEO Peter Cella said.
Now, Texas is becoming a magnet for investment. "For every one direct chemical job in one of our plants, there are six additional indirect or induced jobs to serve that job," Cella said.
And it's not just new plants that are improving employment prospects. In East Millinocket, Maine, for example, the new owner of one of the state's oldest paper mills is looking for ways to drive down costs to keep open the Great Northern Paper Co. plant — and save hundreds of jobs. A big part of the plant rescue involves cheap natural gas.
Company president Ned Dwyer says the old method of using oil to operate the paper-drying equipment during Maine winters was not cost competitive in the global marketplace. Now, with a switch to natural gas, the factory can survive and even grow, he says.
Inexpensive energy "allows us to run a second paper machine in the wintertime that nominally produces around 300 tons of paper a day," Dwyer said. "It produces another 40 jobs."
It's all starting to add up. Since 2010, about a half-million manufacturing jobs have been created, bringing the total back to nearly 12 million. That's down sharply from the roughly 15 million manufacturing jobs that existed a decade ago, but the trend has been positive since the end of 2009.
Hiring may pick up even more as ships, trains and trucks start converting to natural gas. That widely expected conversion will give domestic manufacturers yet another competitive edge as transportation costs fall.
Not everyone is cheering the surge in natural gas production. Environmentalists raise serious concerns about fracking, saying the potential environmental harm may outweigh any short-term economic gains.
And some economists say talk of an energy-related "renaissance" is overblown. A new Goldman Sachs Global Economics analysis provides skeptics with new ammunition.
"It is true that the U.S. has seen much faster manufacturing output growth than other advanced nations since 2009," it said. And indeed, a big reason for that is: "U.S. energy costs are much lower, especially in the case of natural gas."
However, "U.S. export performance — arguably a more reliable indicator of competitiveness — remains middling at best," the report concluded. Manufacturing will perk up some in coming years, but only because of a "broad economic improvement that benefits all sectors ... not a structural U.S. manufacturing renaissance."
Perry Cessna, a 28-year-old who is helping with the expansion of the Chevron Phillips complex in Baytown, doesn't buy the skeptics' arguments — not when he sees Texas employers pouring billions into new operations. "When a company's investing back in itself, it makes you feel that you can grow," he said.