The rising cost of energy derived from oil and coal has had a monumental impact on U.S. manufacturing for some time now, and the future doesn’t look promising:
According to the US Energy Information Administration (USEIA),
the price of oil and coal are expected to rise
by another 50% over the next 25 years.
At the same time, the USEIA also predicts that natural gas and electricity prices will remain essentially flat for the next 25 years thanks to:
- New and expanded drilling techniques such as fracking that enable the extraction of natural gas from previously unproductive, but extensive tight shale formations.
- The ability to compress natural gas into a liquid (LNG) and, thus, facilitate shipping to and from remote locations.
- New sources of natural gas as the result developments in coal-bed methane, landfill gas and deepwater drilling.
These cost predictions and potential opportunities are causing manufacturing executives to rethink their operational strategies from the ground up. Rather than passing on the high cost of traditional energy sources, they are looking at the larger picture, considering the long-term impact of their choices and determining the most effective response for profitability – which means taking a deeper look at natural gas.
The Case for Natural Gas
In the past, many process industries involving high thermal demand moved offshore to reduce energy costs. At that time, uncertainties about natural gas influenced that decision. Today, though, much more is known about the efficacy of natural gas for the long run and there are multiple emerging macro forces that could further increase the demand for natural gas in the near future:
- Economics: As decreasing costs and increasing efficiency becomes critical, replacing extremely inefficient processes becomes critical as well. The use of natural gas in the generation of steam is a good example.
- Electricity: The price and availability of electricity greatly influences demand for natural gas. This is especially true for manufacturers with a large thermal demand. Should deregulation occur, manufacturers may choose to generate their own electricity on-site, powered by natural gas, rather than falling prey to the risks associated with outside electricity suppliers.
- Environment: California and New York have already begun to impose stringent regulation on the emissions of certain industrial processes. This is a trend we can expect to continue. Because natural gas represents a cleaner alternative to oil and coal, we can expect demand for natural gas to increase.
- Access: As we have already explored, new technologies that make it easier to access natural gas are already playing a role in demand. Additionally, 85% of the natural gas consumed in the U.S. is produced in the U.S, and we have a 100+ year supply of natural gas that’s accessible via existing mining methods.
- • Opportunity: Natural gas currently comprises only 2% of transportation fuel consumed. This opens the door to a possible reduction in transportation costs and, therefore, in the cost of manufacturing overall.
What Does the Future Hold?
How U.S. manufacturing responds to the cost of traditional energy sources and the promise of natural gas will have an effect on the success of many industries on which our commerce depends. If trends continue, the possible outcomes are quite interesting:
- Coal-fired plants may struggle to maintain a competitive position: There is an intense and growing interest in converting from coal-fired to gas-fired facilities. In fact, the power generation industry has been consistently abandoning plans to construct new coal-fired plants.
- Manufacturing may relocate closer to the market: Certain industries may consider returning to North America as the price of petroleum products rise, making overseas shipping increasingly unattractive. At this point it is unknown whether or not other countries will be able to compete as suppliers of natural gas. Increases in the cost of labor overseas, as well as other factors, will also influence location decisions.
- Pipeline construction industries may experience a boom: Natural gas consumption is limited only by the number of pipes in the ground. As demand for natural gas increases, there could be much more pipeline construction activity.
- Symbiotic, cost-reducing partnerships may form between manufacturing plants: Manufacturers with high steam consumption can now take the gas used to make steam and produce electricity. Surplus electricity can then be sold to other manufacturers, and this may also have the effect of decreasing market share for electricity companies.
As a manufacturer, how are you responding to the cost of energy?
What are your concerns about natural gas as an alternative to oil and coal?
What potential outcomes do you predict as a result of current trends?
