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.
The reality is that energy, although very important for some industries, is a marginal driver for industrial activity overall. In 2012, Dow Chemical reported that “expenditures for hydrocarbon feedstocks and energy accounted for 37 percent of the Company’s production costs and operating expenses.” No wonder Dow is the name most often associated with calls to restrict U.S. exports of liquefied natural gas (LNG) from the United States -- energy is a big cost for the company.
But there is more to the U.S. economy than chemicals, which accounted for 2.3 percent of GDP and 0.6 percent of full-time equivalent employment in 2012. The Bureau of Economic Analysis (BEA) estimates that, overall, U.S. businesses spent $790 billion on energy in 2012. Energy represented about 3.7 percent of total costs, similar to the 3.6 percent that companies have spent on average since 1997. (The low was 2.6 percent in 1998 and the high was 4.6 percent in 2008.)
Despite low natural gas prices, in other words, spending on energy is hardly out of the historical norm. In part, the reason is that natural gas made up only about 15 percent of energy spending by industry in 2011, with the rest going to coal, oil, and electricity, some of which generated from gas. Cheap gas has provided only a limited stimulus, on the order of $32.5 billion in savings for American industry -- a paltry sum compared to the $6 trillion in total spending by industry on intermediate inputs and wages.