Will cheap shale gas revive U.S. manufacturing? Not so fast.

at 11:44 AM ET, 05/21/2012

It’s hard to think of an extravagant prediction that hasn’t been made about America’s recent natural-gas boom. Let’s see: Cheap natural gas will wipe out coal. It will make the U.S. energy independent. And, oh yes, it will create one million manufacturing jobs and revitalize the Midwest.


Someone has to make these pipes. (Keith Srakocic - AP)
That last claim comes via a recent report from PricewaterhouseCoopers. But over at the Council on Foreign Relations, Michael Levi casts a more skeptical eye on arguments that the age of cheap natural gas from shale will really lead to a dramatic revival of U.S. manufacturing.

There are reasons to think the overall impact will be fairly muted. Energy costs are still a small factor for many manufacturers. Levi points to a 2009 paper (pdf) by Joseph Aldy and William Pizer finding that “only one tenth of U.S. manufacturing involved energy costs exceeding five percent of the total value of shipments.” Aldy and Pizer estimated that a carbon tax, which raises energy prices, would affect manufacturing employment slightly — less than 3 percent — in the most energy-intensive industries like aluminum, cement, glass, and steel. The flipside is that lower energy costs, thanks to cheap natural gas, would have a similarly marginal impact.

That said, there are two smaller areas were cheap shale gas could matter quite a bit. The first is chemicals. As the PwC report notes, many petrochemical plants — particularly makers of ethylene, a feedstock for chemicals — have been reopening in places like Louisiana and Texas. The use of cheap natural gas as an ingredient can give these plants an advantage over foreign competitors who have to rely on more expensive oil. Levi estimates that U.S. ethylene production is a $40 billion industry, which is significant, though not enough on its own to lead a massive jobs renaissance.

The other place that a drilling boom can matter is in the direct supply chain. Someone, after all, has to make the hydraulic fracturing equipment used to extract natural gas from shale rock. Someone has to manufacture all those pipelines. Levi cites estimates that there are about 71,000 manufacturing jobs here — and that this could reasonably rise to 124,000 by 2020. “This,” Levi notes, “is far greater than the number of people that all the chemicals plants currently being discussed will employ.”

Interestingly, these last two areas — chemicals and the drilling supply chain — could, potentially, find themselves in conflict. A debate has been flaring over whether the United States should start shipping its newly plentiful natural gas to other countries. A number of export terminals in places such as Louisiana are in the works, and they require approval from the Department of Energy.

Why would this matter? On the one hand, more exports would likely lead to more natural-gas production, which means more jobs for the drilling supply chain. On the other hand, the petrochemical industry might reasonably argue that too many exports would raise natural gas prices and hurt the boom in ethylene production. (The politics here are complicated: While Dow Chemical’s CEO has suggested a cap on exports, the American Chemistry Council is opposed.)

So even if the shale gas boom won’t necessarily have an outsized effect on U.S. manufacturing, the various impacts could shape the politics of natural gas. The caveat here, meanwhile, is that manufacturing isn’t the only consideration when it comes to energy policy. And shale gas also isn’t the only energy source that could boost manufacturing. Wind and solar power, for instance, support about 30,000 and 24,000 manufacturing jobs respectively — even though both are significantly smaller than the natural-gas industry.

Related: Should the U.S. export its cheap natural gas? A debate flares

 
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