America's Energy Advantage

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Q&A with Charles R. Morris

How will the shale revolution improve the American economy?

CRM: In multiple ways.  It’s already making a big dent in the American trade deficit, and in the not distant future we’ll see modest export surpluses in gas and oil. But the boost it will give to manufacturing may be even more important.

How does it help manufacturing?

It confers a big competitive advantage for high energy-using industries, like refining, chemicals, fertilizer, cement, and steel. For the foreseeable future, American natural gas can be profitably produced at somewhere between a quarter and a third of its energy equivalent in oil. The organic chemical industry, for example, uses hydrocarbons both for feedstock and power, and they can account for half or even more of their operating costs. So inexpensive American gas bring big savings right to the bottom line.

Will just high energy-using companies benefit?

It will be much more across-the-board than that. Coal-fed electrical utilities, for example, are rapidly switching to natural gas, which lowers costs throughout the economy, and has an environmental bonus besides. Natural gas is gaining ground as a transportation fuel, for freight railroads, long-distance truckers, and other fleet operations. As the infrastructure thickens, and NG-based fuels are more conveniently accessible, we should see major savings in transportation of all kinds. We’re at an especially critical time now in which every cost advantage is unusually important.

Why is that?

American manufacturing jobs were decimated in the 2000s, in a huge wave of off-shoring, especially to China. But US businesses invested heavily in cost-reduction technologies during the crash, while China has begun to flounder. On an all-in cost basis, the US and China are approaching cost parity in everything except lower-end manufacturing. A “reshoring” movement seems clearly to be taking shape. Every additional US cost advantage will help turn that stream into a self-sustaining flood.

It’s hard to overstate the importance of this. For the first time in forty years or so there is a major opportunity to create millions of blue-collar jobs with middle-class pay levels. Industrial manufacturing pays better than the retail or low-end service jobs that have absorbed many of the displaced industrial workers. And big-ticket manufacturing has higher employment multiplier effects than other industries, because they have long supply chains, and their products often have challenging distribution and servicing requirements.

A bonus is that the manufacturing recovery will force more investment in our very-dilapidated infrastructure. During the years of American industrial dominance, we created an elaborate system of inland waterways – canals, river ports, loading docks, warehouses,etc. – that have been decaying for almost a half century. It’s the kind of productivity-enhancing investment that pays for itself, and an area ripe for innovative public-private partnerships. A reasonable decade-long infrastructure recovery would add millions more jobs.

Can you name specific companies?

Sure. GE was arguably the pioneer of big-company offshoring, and they’re pulling their businesses back home. On one of the appliance lines, they saved 20% over Chinese costs, because their design and manufacturing teams began working together for the first time in years. Caterpillar, Ford, and Whirlpool are doing much the same thing. Toyota is planning to build minivans in the US to export back to Asia, and Rolls Royce is now building a second airplane parts manufacturing facility here to service its global customers. In chemicals and fertilizers, there are dozens and dozens of names. Royal Dutch Shell and Dow Chemical are making very large plant investments, for instance, as is LyondellBasell Industries and Formosa Plastics. Nucor was the first steel company to see the opportunity in natural gas, and is substantially reconfiguring its processing to take advantage. Austria’s Voestalpine, arguably Europe’s most advanced steel producer, is following Nucor’s lead and opening a major new plant in Texas, with plans to export half its product back to Europe.

What can jeopardize our nat-gas fueled manufacturing future?

I most worry about the current all-out drive for unlimited gas exports. (Gas has to liquefied into “LNG” by freezing it down to about the same volume/energy density as crude to make shipping economic.) There is a thirst for natural gas energy especially in east Asia, and especially now with the shutdown of the Japanese nuclear industry, and problems surfacing in the Korean industry as well. Deliveries in Asia, net of the processing and transportation, command prices up to four times higher than in the US. If we began substantial exporting to Asia, American prices will inevitably rise to the Asian level. Two-tier pricing systems are almost impossible to maintain.

The rhetorical argument for unlimited exports is that the free market is the always the best allocator. I agree, but world energy prices are not set in a free market; they’re maintained at a level determined by the OPEC cartel. If the cartel collapsed, and crude prices were set by free competition, oil might even be less expensive than American gas. Natural gas prices outside of the US are so high because it’s set to roughly match the energy-unit price of cartel oil.

“Oil-linked” US gas prices would be wonderful for the oil majors that will dominate the export business, but it would severely damage the hopes of a deep American manufacturing revival. In the worst case, the US could gradually sink into the position of an extractive commodity supplier to an Asian manufacturing juggernaut, which was more or less the future Great Britain planned for us before the Revolution.

Are there any precedents for that scenario?

Right now in Australia, it seems.  They will bring substantial LNG exporting capacity on line starting next year, and local gas prices have already tripled, although there is ample supply, and there has been little change in production costs. Suppliers are apparently hoarding gas to export at oil-linked prices next year. One major Australian fertilizer and ammonia producer that had been planning a new billion-dollar plant at home, has cancelled it in order to relocate in Louisiana. According to the Australian press, the CEO is confident that the US will carefully limit exports. I hope he’s right, and I wish I could share his confidence.