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
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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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 $3.20 of natural
results in running their manufacturing facilities at
gas for a refinery in the United States. If the refinery
greater capacity, which increases domestic fuel supplies.
!"#$#B U S I N E S S H O R I Z O N Q U A R T E R L Y // I S S U E 7
!"!#$% The excess production can be exported, increasing economic output for the country. In 2011, the United States became a net exporter of refined products, reversing decades of being a refinedproduct importer.
!"#$%&'(")'*("+,(-.+$/"%' 0+.+$# 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 donâ€™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 $6.00 per MCF,
Commerce Foundation and is the president and
almost two times the current gas price. This incremental cost will limit the amount of LNG exports and continue the U.S. comparative natural gas price advantage for
managing director of Global Energy Strategies LLC, focusing on energy project development and technology commercialization, primarily with oil and gas environmental applications. He
the foreseeable future. The more energy we produce,
serves on the Advisory Boards of Hart Energy Publishing, the Canada
the better our competitive advantage. Polices that
Institute of the Woodrow Wilson International Centre for Scholars, and
discourage supply or restrict demand potentially reduce energy investment.
the University of Southern Californiaâ€™s Center for Geothermal Studies. Slutz is also a Distinguished Associate of FACTS Global Energy. Prior to founding Global Energy Strategies, Slutz served in roles as the Assistant Secretary of Energy at the U.S. Department of Energy as well as the Indiana Oil and Gas Director.
// N O W M A D E I N A M E R I C A : E N E R G I Z I N G M A N U F A C T U R I N G !"#$