Volume 11, Number 3 - October 2014
Welcome to the latest edition of EntreWorks Insights, a quarterly newsletter that reports on business trends, policy developments, and other issues affecting the business of economic and workforce development. You’re receiving this note because you’ve asked to subscribe or because you have some previous interest in the work of EntreWorks Consulting. If you wish to subscribe or be removed from this list, please send an email to info (at) entreworks.net. If you’re interested in the newsletter, please read on. Please feel free to share with friends, family, colleagues, and other loved ones. Comments and constructive criticism (and praise) are also welcome. You are also encouraged to visit and comment on the EntreWorks blog at http://entreworks.net/blog. Thanks for your interest.
Game changer is getting to be an overused word nowadays. In sports, RGIII, the zone-read offense, and moneyball were all going to be game changers. In politics, I can remember when Sarah Palin was one of the first so-called game changers. My point is that “real” game changers are pretty rare. After all, the game doesn’t change every day.
In economic policy discussions, the emergence of shale gas is a top contender for “game changer” status. This designation makes some sense. The discovery of new shale gas and oil resources here in the U.S. is having a massive impact. Globally, our reduced dependence on foreign oil is helping our balance of payments and changing trade patterns. At home, new jobs are flowing into new energy boom towns in North Dakota’s Bakken shale region and elsewhere. The potential for even more extensive economic transformations—thanks to cheap and abundant domestic energy---are regular topics in reports by think tanks and consulting groups.
These trends are quite exciting, but do they represent “a game change?” This topic has been foremost in my mind as I’ve been wrapping up a U.S. Small Business Administration-backed supply chain mapping project (along with my colleagues at the Center for Regional Economic Competitiveness, the Northwest Pennsylvania Commission, and the Northwest PA Partnership for Regional Economic Performance). Our study examined regional supply chains in an eight county region of Northwest Pennsylvania. Our work assessed two sectors—rail and transportation equipment manufacturing and manufacturing sectors related to shale energy. This essay only discusses our findings related to shale energy. Will shale energy be a game changer in Northwest Pennsylvania and elsewhere? The short answer is “maybe.”
Northwest Pennsylvania was a good candidate for this study. The region is located in the heart of both the Marcellus and Utica shale gas plays, but has not yet seen large scale energy development. To date, most of this activity has occurred elsewhere in Pennsylvania. Moreover, the region has a large manufacturing base that could benefit from the region’s proximity to shale energy resources. It is also home to a strong base of economic development organizations who actively collaborate on regional projects.
While our project focused on NW Pennsylvania, its findings are relevant for many regions. Our research suggests that we can’t really speak about one single shale energy supply chain. Instead, it is composed of at least four different supply chains and sets of activities:
To date, most public attention has focused on the first two of these supply chain opportunities, i.e. those activities associated with the processes of exploration, drilling, fracking, and extraction of shale oil and gas. These activities have helped to create boomtowns across the U.S., but the jury is still out on whether these activities are sustainable or subject to the traditional boom and bust cycles of new energy developments. (I recently blogged about this issue here.)
In terms of economic development, the real action is likely to occur in midstream and downstream activities. Midstream activities are about the transportation, storage, and distribution of oil and gas products. If you can’t get these new energy resources to market, they can’t be game changers. As a result, there’s a big boom in the midstream as new opportunities emerge in the storage and distribution of new energy resources. For example, in Virginia, a coalition of utilities has just unveiled plans for a massive $5 billion Atlantic Coast Pipeline project to move shale gas from West Virginia and down into Virginia and North Carolina.
Similar projects are underway across the U.S. and we can expect the midstream investment boom to continue for some time. Deloitte researchers project that new shale energy related infrastructure investments could reach more than $200 billion by 2035. These numbers will climb even higher if the U.S. begins exporting liquid natural gas.
The potential for downstream economic benefits may be even more compelling. Downstream refers to the myriad activities that can benefit from cheaper and more readily available energy inputs. In this case, we are typically referring to manufacturing sectors and especially to heavy or energy-intensive manufacturing sectors. Examples include the chemical, plastics, glass, and mineral industries. Increased shale energy investments are also expected to increase employment in the cutting and machine tool, steel, and oil and gas machinery manufacturing sectors.
These energy intensive manufacturing sectors are already undergoing a major transformation. In February 2014, the American Chemistry Council pegged new chemical industry investments triggered by the shale gas revolution at over $100 billion, with more than 637,000 potential new jobs tied to these investments. These investments are already having big impacts in states like Texas and Louisiana. According to Southern Business and Development, between 2011 and 2014, these two states were home to 28 different petrochemical related projects where new investments will exceed $1 billion per project.
These types of projects are now starting to crop up elsewhere as well. Both West Virginia and Pennsylvania are now being considered as sites for new ethane cracker facilities. These facilities, which require billions of dollars in new capital investment, have been projected to have massive economic impacts on the region, creating thousands of construction jobs while also stimulating a wide range of downstream industries. (A West Virginia study on these potential impacts can be accessed here.) Polyethylene, a prime product of this process, is used in a diverse array of industries, including plastics, textiles, packaging, automobile components, industrial machinery, and many more.
Based on these studies and other data, the case for a shale energy revolution is pretty strong for the petrochemical sector and some other related industries. But what about changing the game for other manufacturers? Here the evidence is murkier. A recent Peterson Institute study, Fueling Up, takes a deep dive into how new shale energy investments will affect American manufacturing. The researchers find large scale impacts in some key sectors, such as fertilizer and chemical manufacturing. Overall, nine manufacturing sectors will likely see double digit gains in employment and output thanks to new shale energy developments. However, these sectors collectively account for only 2.5 percent of total U.S. manufacturing employment.
These results suggest that shale energy can be a game changer, but only for a few industries and for a few states and regions. The beneficiaries are no surprise—they include states and regions that are home to shale energy resources or that are already host large industry clusters focused on petrochemicals or other energy-intensive sectors. And, in these sectors, lots of new opportunities for new business and for supplier contracts are going to emerge. For the rest of us, the benefits are going to be important but perhaps not directly visible. They’ll come in the form of cheaper energy for home owners and large energy users. Cheaper oil prices are especially important for cold weather states and regions that use greater amounts of oil to heat homes. Ensuring that your community can tap into cheaper sources of energy—like shale gas—will become an important mission for economic developers.
So, the bottom line—assuming we can manage the environmental issues related to shale energy development—is pretty good. America’s shale energy revolution may not be a tangible “game changer” for all Americans, but it should contribute to a more competitive and productive economy for many individuals, companies, and communities.
We added one new document—our report on regional supply chains in Pennsylvania--to the EntreWorks library page.
Erik Pages of EntreWorks continues to hit the road with recent visits to Rutland, VT, Richmond, VA, Reading, PA, Queenstown, MD, and Fort Worth, TX on the itinerary. We continue to provide more regular news and updates at the EntreWorks blog at http://entreworks.net/blog. Recent posts have looked at America’s wealth gaps, the reshoring of manufacturing jobs, and our changing labor markets. You can also access blog updates at our Facebook and LinkedIn pages and on Google Plus.