The Missing Shale Miracle

Why Cheap Energy Won't Spark a U.S. Manufacturing Renaissance

Pump jacks in the Midway Sunset oilfield in California, April 29, 2013. (Lucy Nicholson / Courtesy Reuters)

The boom in shale gas production in the United States has sparked talk about a U.S. manufacturing renaissance powered by cheap gas. The National Association of Manufacturers notes on its website that “abundant domestic natural gas resources can fuel a renaissance in U.S. manufacturing”; similarly, a 2011 report from PricewaterhouseCoopers found that “shale gas has the potential to spark a US manufacturing renaissance over the next few years, boosting revenue and driving job creation.” 

Meanwhile, in Europe and Asia, where energy prices are still high, leaders worry about a coming deficit in competitiveness that will threaten their already fragile economies. Daniel Yergin, the Pulitzer-prize winning author of The Prize, reported that in Davos this year competitiveness was “was calibrated along only one axis -- energy.” Cheaper energy in the United States, he wrote, “puts European industrial production at a heavy cost disadvantage against the United States. The result is a migration of industrial investment from Europe to the United States.” Yet talk of manufacturing renaissances or dark ages is overblown. Natural gas matters far less than either the optimists or the pessimists claim.

Energy competitiveness, the idea that cheap energy can be a source of industrial strength and competitive advantage, is at once intuitively appealing and intuitively suspect. It is appealing because we have been conditioned to believe that energy is terribly important, so big shifts in global energy must cause big shifts in the economy. It has to be a huge deal for the United States -- with profound implications for geopolitics and economics -- if natural gas prices there are a third or a fifth or a tenth of what they are in Europe and Asia.

At the same time, the idea of energy competitiveness is suspect. One rarely associates access to cheap energy with industrial potency (think Saudi Arabia, Russia, and Venezuela). By an accident of geography, the countries with advanced industrial sectors -- Germany, Japan, Korea, Taiwan -- happen to depend on imported and usually expensive energy. If those countries managed to nurture world-class industrial sectors without indigenous sources of cheap energy, there must be more to manufacturing than energy.

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