The Resurgence of American Exports: Manufacturing and Natural Gas

The Boston Consulting Group (BCG) has just released a report, “Behind the American Export Surge,” which explores the recent resurgence in US manufacturing.  While BCG goes into some detail in explaining the reversal in the decline of domestic manufacturing, it has been driven by two basic causes, a more attractive investment climate and the widespread availability of low cost energy as a result of booming domestic shale gas production and natural gas development.  But perhaps the single most important conclusion drawn from the study is this: there is enough domestic shale gas to fuel an American manufacturing resurgence and to export abroad.

High-volume hydraulic fracturing natural gas development has made increased production of shale gas and oil economically attractive.  With increased production of natural gas, the price according to BCG has declined 51% since 2005.  And, technology is projected to result in further lowering production costs.  This is a big advantage over our competitors that have natural gas prices that are 2.6 to 3.8 times greater than our domestic prices in America.

Lower natural gas prices mean that industries such as chemicals and plastics are able to increase profit margins as natural gas is a major cost in the manufacture of synthetic textiles, paper, and primary metals.  Gas fired power plants are becoming an important source of electricity and this will, according to BCG help to keep power costs lower in the US.

The positive manufacturing and trade picture painted by the Boston Consulting Group is a bright light in an otherwise dismal economic outlook. However, making that projection a reality requires that we avoid economic rent-seeking by certain industries.  That is especially true in energy where there already is a movement by such rent-seekers, like Dow Chemical, to restrict the export of liquefied natural gas (LNG).  These companies are lobbying for restrictions so that they can use the low price caused by over supply to increase their own profits.

Such a policy perspective is not only short-sighted but is the equivalent of an economic circular firing squad.  It would deny the benefits made clear by numerous studies from Brookings, Deloitte, and even the Department of Energy-commissioned NERA Economic Consulting study which found increasing exports could add nearly $75 billion to annual economic growth.  And, it would invite some form of retaliation by our trading partners.

Moreover, such a policy perspective denies the reality of shale gas reserves.  As the BCG study notes, proven shale gas reserves are estimated to be 350 trillion cubic feet, and production is expected to grow to double by 2035 to 12 trillion cubic feet of gas.  There’s enough gas there to power manufacturing and to export to American allies abroad.

In the 1960s and 70s, inter-state natural gas was subjected to price controls but intra-state gas wasn’t.  As a result, inter-state gas had to be rationed as supplies diminished.  Just the opposite happened in gas producing states.  Today, the current boom in natural gas production has produced an excess in supply which has significantly depressed it price.  Not surprising, as prices have dropped so has drilling activity.  According to the Energy Information Administration, natural gas drilling activity has dropped from over 1400 active rigs in 2007 and 2008 to the 400 range in the last couple of years.

The notion of natural gas prices set by bureaucrats and not market forces brings back memories of the price and allocation controls in the 1970s.  They didn’t work then and won’t work now.

Free and open trade benefits all, not a few.  The advocacy of those in the camp of Dow chemical against expanding LNG exports is more about promoting crony capitalism than the “emerging renaissance in American manufacturing.”  Companies should compete in the market place as it exists, not as they would have government make it.

As Boston Consulting Group makes clear, we can have both a domestic renaissance in manufacturing and continue to boost domestic natural gas development through LNG exports.  As a policy, we should avoid the rent-seeking advocacy opposed to LNG exports.  Instead, we should embrace both expanded natural gas development through exports and domestic manufacturing.  There’s more than enough gas to fuel both.