New energy drives manufacturing

In economics, energy is king. Access to it drives all economic development, and if you can get it cheaper than your competitors, you have a major advantage.

In 2009 (the last year for which data was available), the U.S. oil and gas industry alone—not including coal, nuclear and renewables—supported 9.2 million full-time and part-time jobs and its total economic “value-added” was $1.1 trillion, or 7.7 percent of U.S. gross domestic product, according to PricewaterhouseCoopers.

Major developments are remaking the energy market and, with it, manufacturing. For the metalworking industry, new markets have opened up, including supplying parts for the booming U.S. fracking industry, which is extracting new sources of oil and natural gas. However, other markets, like building and maintaining coal-fired power plants, have fallen on hard times.

The economic benefits of new sources of domestic oil and natural gas are staggering—close to $1 billion a day, according to Bank of America Merrill Lynch. The biggest benefit is lower utility costs because of cheap natural gas, which saved U.S. companies and consumers about $566 million a day in 2012.

That’s good news for U.S. manufacturers. Some U.S. companies that used to be at a price disadvantage when manufacturing parts and products compared to foreign firms may now be more competitive. The energy cost savings for businesses, factories and consumers will last for decades, according to some analysts. And construction of new plants, such as ethane “crackers” to refine natural gas, means investment is flowing into areas around the U.S., fueling the growth of construction companies, engineering firms, materials and equipment suppliers, and financiers.

Add to this the growth of renewables, primarily wind and some solar, and the U.S. energy market is headed for major change.

Also, if the U.S. flips from being a net importer to a net exporter of energy (coal, oil and gas) over the next 10 years, which is considered probable, energy will go from being a trade-deficit producer to a surplus creator—a vital factor when dealing with energy-hungry China.

The biggest impact of the oil and gas boom has been on coal usage. U.S. consumption fell by about 114 million tons, or 11 percent, in 2012, largely because of a decline in the use of coal to generate electricity, according to the U.S. Energy Information Administration. But U.S. coal production fell just 7 percent. The U.S., with the world’s largest coal reserves, continued to ship 1 billion short tons in 2012.

Where is that coal going? Overseas. The U.S. Energy Information Administration said U.S. coal exports hit a record 126 million short tons in 2012, a 17 percent increase compared to the previous year.

The oil and gas boom may also negatively impact the nuclear industry, which generates 19 percent of total U.S. electrical output, according to the World Nuclear Association. Following a 30-year period in which few new reactors were built, four to six new units may come online by 2020. However, lower natural gas prices have put the economic viability of additional nuclear projects in doubt, according to the WNA. Add to these economic issues the health and safety concerns about nuclear power after the disaster at the Fukushima nuclear reactor in Japan in March 2011, and the future of nuclear power in the U.S. is cloudy at best.

The news for oil and gas developers is not all good. Factors that could slow development of new oil and gas fields include concerns about the impact of hydraulic fracturing on water supplies. These concerns have delayed drilling of the Marcellus shale field in New York, where in March the state assembly extended a moratorium on fracking for another 2 years. Also, the California state legislature is considering bills to regulate expanded production in the Monterey shale field, thought to be one of the largest deposits in the U.S.

But where big money is involved—as it always is in the energy business—count on oil and gas continuing to flow, and with it a largely positive impact on manufacturing and metalworking. CTE