Energy boom & revival of manufacturing in our future?

David Ignatius brings up what could be heralds of good economic prospects ahead.  (Or is it just a pipe dream?)

First, the case that America is entering a new era of energy security: My expert here is Robin West, a friend who is chairman of PFC Energy, a Washington-based advisory group. He argues in a series of recent reports to clients that, because of the rapid expansion of oil and gas production from shale, America is likely to become by 2020 the world’s No. 1 producer of oil, gas and biofuels — eclipsing even the energy superpowers, Russia and Saudi Arabia.

West explains that the natural-gas boom will mean a dramatic change in energy imports and, thus, the security of U.S. energy supplies. He forecasts that combined imports of oil and natural gas will fall from about 52 percent of total demand in 2010 to 22 percent by 2020. The totals are even more impressive if supplies from Canada are included.

“This is the energy equivalent of the Berlin Wall coming down,” contends West. “Just as the trauma of the Cold War ended in Berlin, so the trauma of the 1973 oil embargo is ending now.” The geopolitical implications of this change are striking: “We will no longer rely on the Middle East, or compete with such nations as China or India for resources.”

Energy security would be one building block of a new prosperity. The other would be the revival of U.S. manufacturing and other industries. This would be driven in part by the low cost of electricity in the United States, which West forecasts will be relatively flat through the rest of this decade, and one-half to one-third that of economic competitors such as Spain, France or Germany.

The coming manufacturing recovery is the subject of several studies by the Boston Consulting Group. I’ll focus here on the most recent one, “U.S. Manufacturing Nears the Tipping Point,” which appeared in March.

What’s happening, according to BCG, is a “reshoring” back to America of manufacturing that previously migrated offshore, especially to China. The analysts estimate that by 2015, China’s cost advantage will have shrunk to the point that many manufacturers will prefer to open plants in the United States. In the vast manufacturing region surrounding Shanghai, total compensation packages will be about 25 percent of those for comparable workers in low-cost U.S. manufacturing states. But given higher American productivity, effective labor costs will be about 60 percent of those in America — not low enough to compensate U.S. manufacturers for the risks and volatility of operating in China.

In about five years, argue the BCG economists, the cost-risk balance will reach an inflection point in seven key industries where manufacturers had been moving to China: computers and electronics, appliances and electrical equipment, machinery, furniture, fabricated metals, plastics and rubber, and transportation goods. The industries together amounted to a nearly $2 trillion market in the United States in 2010, with China producing about $200 billion of that total.

As manufacturers in these “tipping point” industries move back to America, BCG estimates, the U.S. economy will add $80 billion to $120 billion in annual output, and 2 million to 3 million new jobs, in direct manufacturing and spin-off employment. To complete this rosy picture, the analysts forecast that in about five years, U.S. exports will increase by at least $65 billion annually.

via An economic boom ahead? – The Washington Post.

If, that is, the government doesn’t do what many environmentalists are calling for, banning fracking as well as other new technologies, blocking new pipelines, and preventing drilling where new reserves have been discovered.  And if the government does not stand in the way of  building of new plants and factories

About Gene Veith

Professor of Literature at Patrick Henry College, the Director of the Cranach Institute at Concordia Theological Seminary, a columnist for World Magazine and TableTalk, and the author of 18 books on different facets of Christianity & Culture.

  • SKPeterson

    First off, let me say that, in general, I would distrust someone from a “Washington-based advisory group” as this may be nothing more than a lobbyist’s propaganda piece for natural gas exploration and development masquerading as a news/opinion piece. While I’m for such exploration and development and severely restricting the reach of the EPA, I’m also leery of standard corporate welfare schemes offered up by “advisors”; anyone “Washington-based” generally has some sort of angle on getting favors from government – low-cost leases on federal lands, deferred excise taxes, etc. And, if you object to these “common sense” handouts, you’re against the modernization of the American economy, and employment opportunities for millions, etc, etc.

  • SKPeterson

    First off, let me say that, in general, I would distrust someone from a “Washington-based advisory group” as this may be nothing more than a lobbyist’s propaganda piece for natural gas exploration and development masquerading as a news/opinion piece. While I’m for such exploration and development and severely restricting the reach of the EPA, I’m also leery of standard corporate welfare schemes offered up by “advisors”; anyone “Washington-based” generally has some sort of angle on getting favors from government – low-cost leases on federal lands, deferred excise taxes, etc. And, if you object to these “common sense” handouts, you’re against the modernization of the American economy, and employment opportunities for millions, etc, etc.

  • helen

    We’ll have lots of natural gas…..and need to import water.

  • helen

    We’ll have lots of natural gas…..and need to import water.

  • Jeremiah Johnson

    I can’t speak to the manufacturing side, but concerning energy, the picture is much more complex.
    Due mostly to the advancement of fracking, the US has increased gas production more than ten percent since about 2005, and the EIA projections for the future shows excellent prospects for shale gas fields more than making up for the older, declining fields. On the oil side, production from the Bakken formation wells has increased significantly over the last several years, and the USGS 2008 estimate puts the technically recoverable reserves at 24 billion barrels, so the prospects for the next few years look good.

    But before we indulge in irrational exuberance, we should keep a few things in mind.
    1. These are all non-renewable resources. Don’t get me wrong, I strongly support the development of US energy resources, but we still need to acknowledge the reality that the earth does not contain infinite resources. And if fossil fuels are not infinite, someday our production will peak and we will find ourselves increasingly pinched for solutions.
    2. We have to keep the cost of extraction in the equation. Fracking is expensive, so the oil that comes out of the Bakken formation necessarily costs more than, let’s say, Saudi oil. Do a Google search for “oil cost of extraction”. So even if we had a field with a trillion barrels in proven reserves, if that oil costs $200 a barrel to extract, you can bet that nobody’s going to go after that until one of two things happen: (1) oil hits $200 a barrel or (2) the cost of extraction comes down.
    3. Related to #2, oil and gas are sold in a GLOBAL market, which means that our own prices are tied to both global production and consumption. Yes, it will be good to have increased production in the US, because that will decrease our dependence on certain unstable regions of the world, but keep in mind that even if the US isn’t importing oil from unstable regions, other countries will, and the price they pay for oil directly affects our price too. So even if the US produced more than what it used, it would not necessarily decrease what we pay for oil. Remember, it’s GLOBAL demand and GLOBAL supply that sets prices. (Sorry, conspiracy theorists.) Oh, and by the way, the top two countries from whom we import the most oil? Canada and Mexico. (http://www.consumerenergyreport.com/wp-content/uploads/2012/04/Top-15-Oil-Imports-2011.png)

    Having said all this, the developments in US energy over the last few years have been very encouraging and I think we ought to continue to pursue them. But we need to be careful about the conclusions we draw from these developments. Don’t expect $1.50 gas anytime soon (if ever!).

  • Jeremiah Johnson

    I can’t speak to the manufacturing side, but concerning energy, the picture is much more complex.
    Due mostly to the advancement of fracking, the US has increased gas production more than ten percent since about 2005, and the EIA projections for the future shows excellent prospects for shale gas fields more than making up for the older, declining fields. On the oil side, production from the Bakken formation wells has increased significantly over the last several years, and the USGS 2008 estimate puts the technically recoverable reserves at 24 billion barrels, so the prospects for the next few years look good.

    But before we indulge in irrational exuberance, we should keep a few things in mind.
    1. These are all non-renewable resources. Don’t get me wrong, I strongly support the development of US energy resources, but we still need to acknowledge the reality that the earth does not contain infinite resources. And if fossil fuels are not infinite, someday our production will peak and we will find ourselves increasingly pinched for solutions.
    2. We have to keep the cost of extraction in the equation. Fracking is expensive, so the oil that comes out of the Bakken formation necessarily costs more than, let’s say, Saudi oil. Do a Google search for “oil cost of extraction”. So even if we had a field with a trillion barrels in proven reserves, if that oil costs $200 a barrel to extract, you can bet that nobody’s going to go after that until one of two things happen: (1) oil hits $200 a barrel or (2) the cost of extraction comes down.
    3. Related to #2, oil and gas are sold in a GLOBAL market, which means that our own prices are tied to both global production and consumption. Yes, it will be good to have increased production in the US, because that will decrease our dependence on certain unstable regions of the world, but keep in mind that even if the US isn’t importing oil from unstable regions, other countries will, and the price they pay for oil directly affects our price too. So even if the US produced more than what it used, it would not necessarily decrease what we pay for oil. Remember, it’s GLOBAL demand and GLOBAL supply that sets prices. (Sorry, conspiracy theorists.) Oh, and by the way, the top two countries from whom we import the most oil? Canada and Mexico. (http://www.consumerenergyreport.com/wp-content/uploads/2012/04/Top-15-Oil-Imports-2011.png)

    Having said all this, the developments in US energy over the last few years have been very encouraging and I think we ought to continue to pursue them. But we need to be careful about the conclusions we draw from these developments. Don’t expect $1.50 gas anytime soon (if ever!).

  • rlewer

    Changes in manufacturing mean that both the U.S. and China are producing more with fewer workers. On the other hand, demographics in both places mean that there will be fewer workers when many of the current workers retire, if they retire instead of continuing to work. Things are complicated.

    Windmills on my land should go on line by the end of the year. Thank you taxpayers for paying 40% of the cost to a German company using Chinese manufactured equipment to make this possible. Also not as simple as it seems.

  • rlewer

    Changes in manufacturing mean that both the U.S. and China are producing more with fewer workers. On the other hand, demographics in both places mean that there will be fewer workers when many of the current workers retire, if they retire instead of continuing to work. Things are complicated.

    Windmills on my land should go on line by the end of the year. Thank you taxpayers for paying 40% of the cost to a German company using Chinese manufactured equipment to make this possible. Also not as simple as it seems.

  • DonS

    Jeremiah’s point @ 3 is well taken. One of the reasons for the increasing supply is that the current relatively high price of energy makes more elaborate extraction techniques economical. So there is a price floor which will prevent $1.50 – 2.00 gasoline from ever returning, at least as a mainstay. For example, we are currently seeing 16 year lows in the price of natural gas because of a warm winter and record supplies, but prices are now rebounding as producers cut back on marginal-cost production. Additionally, our governments tax energy at much higher levels than used to be the case. $1.50 gasoline is implausible when the government is taking 60 or more cents per gallon, as is the case in many states. We also have a dedicated and politically powerful lobby which will oppose any and all energy production, of any type, including so-called “green” energy, such as wind and solar power. These obstructionists will continue to retard our economic growth and reduce middle class manufacturing jobs in this country through these energy-elimination efforts until the middle class finally rises up and demands a rational and economically balanced environmental policy.

  • DonS

    Jeremiah’s point @ 3 is well taken. One of the reasons for the increasing supply is that the current relatively high price of energy makes more elaborate extraction techniques economical. So there is a price floor which will prevent $1.50 – 2.00 gasoline from ever returning, at least as a mainstay. For example, we are currently seeing 16 year lows in the price of natural gas because of a warm winter and record supplies, but prices are now rebounding as producers cut back on marginal-cost production. Additionally, our governments tax energy at much higher levels than used to be the case. $1.50 gasoline is implausible when the government is taking 60 or more cents per gallon, as is the case in many states. We also have a dedicated and politically powerful lobby which will oppose any and all energy production, of any type, including so-called “green” energy, such as wind and solar power. These obstructionists will continue to retard our economic growth and reduce middle class manufacturing jobs in this country through these energy-elimination efforts until the middle class finally rises up and demands a rational and economically balanced environmental policy.

  • SKPeterson

    Well, we won’t see $1.50 gas anytime soon because we’ve pumped a few extra trillion dollars into our economy ex nihilo. That results in higher prices.

  • SKPeterson

    Well, we won’t see $1.50 gas anytime soon because we’ve pumped a few extra trillion dollars into our economy ex nihilo. That results in higher prices.

  • Klasie Kraalogies

    Jeremiah’s points about cost, as well as global pricing, are very important.

    The main advantage of further development in the Bakken is less reliance on Mid-Eastern oil, which reduces the need for political and military intrigue, taking into account that we (Canada) and Mexico are already major suppliers to the US market.

    As to natural gas: It is not just the warm winter – natural gas prices have been surpressed for a while now.

  • Klasie Kraalogies

    Jeremiah’s points about cost, as well as global pricing, are very important.

    The main advantage of further development in the Bakken is less reliance on Mid-Eastern oil, which reduces the need for political and military intrigue, taking into account that we (Canada) and Mexico are already major suppliers to the US market.

    As to natural gas: It is not just the warm winter – natural gas prices have been surpressed for a while now.


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