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GAME CHANGER

BUsiness Horizon Quarterly

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merica has a competitive advantage in

fertilizer manufacturing. Many of these industries

energy compared to the rest of the world.

require energy in the form of heat to transform a raw

We have some of the most advantageous

material, such as iron ore, into a finished product, such

natural gas prices, resulting from the growth of shale gas

as steel. For others, such as fertilizer, chemical, and oil

production. This wasn’t always the case. In the

refining manufacturers, the energy products supply both

mid-2000s, energy intensive industries reduced

raw materials and heat to create their products.

production and closed facilities. Manufacturing companies looked for opportunities to move facilities to regions of the world with more favorable energy costs. Today, shale oil and gas has changed the outlook for “Made in America.” Fifty new major industrial projects have been announced, including petrochemical, steel,

In energy intensive industries, energy is a critical component of the variable production costs. The more products made, the greater the energy and raw materials used in the process. A competitive advantage in energy cost is a game changer for these industries.

and fertilizer manufacturing. The American Chemistry Council estimates that growth in manufacturing will entail $72 billion in capital investment and construction activity and a 7.3% manufacturing expansion. This growth will contribute 662 thousand direct and indirect jobs and contribute $342 billion to the economy. Several studies look at the direct economic benefit of energy production. The economic benefit of abundant energy goes far beyond the immediate benefit of production and beyond the political rhetoric of energy independence. Energy abundance offers real opportunity to renew America’s manufacturing base. Even for less energy-intensive manufacturers, energy

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can have an important impact on the bottom line. The recent shale gas discoveries have lowered prices both

Manufacturers use energy in a variety of ways.

for natural gas and for electricity, since natural gas is

Energy intensive manufacturers use energy products

a growing fuel for power generation. As energy is a

as feedstock or have significant heating or cooling

fixed cost for small manufacturers, any reduction in the

applications critical to the manufacturing process.

cost directly increases the bottom line. If their energy

Less energy intensive manufacturers use energy for

expense is 5% of operations, then a 40% decrease in

machinery, transportation, and operating facilities.

energy expense reduces total costs by 2%, which is a very real addition to profitability. Increasing company

Energy intensive industries include petroleum

performance directly facilitates business growth.

refining, chemicals, steel, aluminum, paper, glass, and

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GAME CHANGER

BUsiness Horizon Quarterly !"#$%&'()$%*+',-'./$'0&%#12-'#"%*$-.',)1$3$)1$).' ±anŒŒtO‰œ8ŒÊȼ|—½±anŒa±a´Œ¼|a-Œ¼aX+¼8¼a´¡ Œam28†a±®´±anŒa±a´V,|±aa*Ça±´*anŒa±ÊŒ,aÉ8´V È8´´†8¼aXm±œ´´F†a´8†aŒÀÎÎfFaO8Á´a¼È8´Œ†Ê ‰8±tŒ8††Êœ±n¼8F†a¡+|8†a†8ŒXŒ8¼Á±8†t8´|8Ça O|8ŒtaX¼|aœ±´œaO¼´m±¼|a±anŒa±Ê8ŒX¼|aœaœ†a Ȑ±…Œt¼|a±a¡ ±ÁXa†m±‰¼|a 8t†a±X´|8†a m±‰8¼ŒV8†Œtȼ|†Èa±Œ8¼Á±8†t8´œ±Oa´V|8´´8ÇaX ^¸¸oVÎÎÎ8X8Ê8ŒX±8´aXœ±n¼´FÊrÎÎ ¡ ŒOa8 ‰8±tŒ8†8´´a¼V,|±aa*Ça±´*anŒa±Ê´ŒÈ8Ç8†Á8F†a m8O†¼Ê¡±28†a±V†Èa±Œ8¼Á±8†t8´œ±Oa´|8Ça´8ÇaX ¼|aO‰œ8ŒÊ‰±a¼|8Œ^—F††Œ8ŒŒÁ8††Ê´ŒOaÀÎÎf¡

Petroleum refining is an energy intensive process

is in Rotterdam, where gas prices are about $11.00 per

and manufacturing gasoline, diesel, and other products

MCF, then the cost of natural gas required per barrel is

provides an example of the impact of competitive

$5.50 to $8.80. In Asian countries relying on Liquefied

energy supply and prices. The input is a raw material—

Natural Gas (LNG) imports, a natural gas cost of

crude oil—and the output is gasoline, diesel, specialty

$16.00 results in the cost per barrel of $8.00 to $12.80.

chemicals, and other products. The process to convert

To understand the extent of the advantage, it is useful

crude oil to usable products requires energy to distill the

to note that the margin per barrel of refined product

various products and hydrogen to change the chemistry

has historically been around $3.00 a barrel. Current

of some hydrocarbons into other useable products. The

natural gas prices have greatly improved the global

energy and the hydrogen come primarily from natural

competiveness of U.S. refineries compared to those in

gas. To make each barrel of refined product requires

Europe and Asia.

500 to 800 cubic feet of natural gas per barrel of crude oil, depending on the quality of the oil. U.S. refining businesses have a significant

While the above analysis is a simple review of one component of a complex business involving many more variables, it illustrates the impact of energy abundance

competitive advantage over foreign refiners because

on one industry. It is not just about making oil

of natural gas prices. If we assume a natural gas price

refineries—an industry with historically thin margins—

of $4.00 per thousand cubic feet (MCF), then each

more profitable. The refiner’s competitive advantage

barrel of crude oil requires $2.00 to $3.20 of natural

results in running their manufacturing facilities at

gas for a refinery in the United States. If the refinery

greater capacity, which increases domestic fuel supplies.

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!"!#$% The excess production can be exported, increasing economic output for the country. In 2011, the United States became a net exporter of refined products, reversing decades of being a refinedproduct importer.

!"#$%&'(")'*("+,(-.+$/"%' 0+.+$# Current North American energy abundance is the result of innovation and private sector investment. Government policies that restrict development or prevent the market from working effectively may reduce the benefits this energy competitive advantage offers to Americans and to our manufacturing industries. The best way to ensure the highest value for our economy is to allow the market to work in the manufacturing and energy sectors.

For manufacturers, the best energy policy encourages long-term productive energy development. At present, abundant energy supplies mean exceptional opportunities for energy intensive industries. If the United States can maintain its energy advantage over the coming years, the projected $72 billion in manufacturing investment and construction referenced earlier will be only the beginning of a long-term trend resulting in greater job growth. While we don’t know what the future holds, relying on markets, while sometimes resulting in higher prices, will provide the price signals

For energy, markets will effectively allocate energy production, particularly natural gas and oil, to uses that generate the highest return for their owners. Oil is a global commodity, so any restrictions on trade will not provide long-term price benefits to consumers. Restrictions can have an adverse effect if the result is decreased investment and production. Furthermore, North America has a structural competitive advantage in natural gas because of the high cost to liquefy and

necessary to usher in entire new resource opportunities. The shale oil and gas resources are an example of markets and innovation working together. These new resources offer energy supplies for the next 50 to 100 years. Innovation will change our energy future, although when and how is unknown. With history as a guide, we can maximize the value of these resources now, and trust markets and innovation to find our next energy breakthrough. Q

ship natural gas. The cost of liquefying and shipping

James Slutz is a fellow at the U.S. Chamber of

natural gas to Asia is approximately $6.00 per MCF,

Commerce Foundation and is the president and

almost two times the current gas price. This incremental cost will limit the amount of LNG exports and continue the U.S. comparative natural gas price advantage for

managing director of Global Energy Strategies LLC, focusing on energy project development and technology commercialization, primarily with oil and gas environmental applications. He

the foreseeable future. The more energy we produce,

serves on the Advisory Boards of Hart Energy Publishing, the Canada

the better our competitive advantage. Polices that

Institute of the Woodrow Wilson International Centre for Scholars, and

discourage supply or restrict demand potentially reduce energy investment.

the University of Southern California’s Center for Geothermal Studies. Slutz is also a Distinguished Associate of FACTS Global Energy. Prior to founding Global Energy Strategies, Slutz served in roles as the Assistant Secretary of Energy at the U.S. Department of Energy as well as the Indiana Oil and Gas Director.

// N O W M A D E I N A M E R I C A : E N E R G I Z I N G M A N U F A C T U R I N G !"#$

Now Made in America: Energizing Manufacturing  

Energy abundance offers real opportunity to renew America’s manufacturing base.

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