- December 8, 2013
- Posted by: matt
- Category: Archived Newsletters
Shale Energy Boom = Manufacturing Boom?
The emergence of new shale gas and oil resources has been one of the most important economic trends of the past several years. The shale energy boom has generated a new dynamic, reducing energy costs, creating new wealth, and opening up many new business opportunities. Long neglected regions, such as the Dakotas and Appalachia, are now dotted with boom towns, and the local economic development mission has shifted from managing decline to coping with massive growth.
While debates rage on the environmental impacts of fracking, economic debates are more muted. Nearly everyone seems to agree that shale energy development is helping nearby economies. With a short term focus, that appears to be the case as new jobs and new businesses. But, many of these regions have enjoyed short term booms before. After all, the original oil rush occurred in same region where the Marcelllus/Utica Shale boom is happening today and many shale gas regions have a legacy of coal mining as well. Unfortunately, the long term benefits of past resource extraction booms have been limited. Once the oil (or coal or gas) was depleted, the local economic engines also sputtered. Finding a way to turn the short term shale energy boom into a long-term driver of prosperity is the key challenge for shale energy communities today.
In their search for longer-term economic drivers, many shale energy-impacted communities are hoping to link local energy sources to new opportunities in manufacturing. This focus makes great sense. Manufacturing may offer one promising target area on this front. Numerous recent research studies suggest that cheap shale gas will help spur a manufacturing renaissance. For example, a recent PWC report projects that, thanks to cheaper energy sources, U.S. manufacturers will save up to $11 billion per year between now and 2025.
As communities and businesses look to capitalize on the shale energy boom, where can they find the best long-term market opportunities? The past few years of experience suggest that upstream industries that are directly related to drilling (e.g. construction related to drilling, drilling support operations) will not be big long term job creators. (For a critical assessment of shale gas job impact studies, click here.) But, exciting manufacturing-related opportunities do exist in various downstream industries that benefit from low-cost energy or in the midstream sectors that support the industry. This latter market includes transmission, storage facilities, and processing facilities. These market opportunities are not directly tied to shale gas exploration, yet they offer the greatest potential for long-term economic benefits in shale energy communities.
In manufacturing, the prospects for benefit from cheap energy inputs are enticing. Nationally, analysts are also pointing to very promising trends. The American Chemistry Council reports that, since June 2013, 134 new heavy industry projects or expansions have been announced. Collectively, these projects represent nearly $90 billion in new capital investment. The projects cover a broad range of industries. Some are directly related to the natural gas industry; these include new liquefied natural gas terminals in Louisiana and elsewhere. Other industries, such as tire manufacturing and steel production, are capitalizing on cheap energy. Finally, many projects are in the transportation sector where many fleet operators, such as FedEx or Waste Management, are investing to convert their fleets to compressed or liquefied natural gas.
Many of these major manufacturing projects are located in or near major energy facilities in Louisiana and Texas. In particular, Louisiana is greatly benefiting from the boom. Statewide GDP growth is fifty percent faster than the national average, and the state has attracted more than $50 billion in new capital investments since 2008. Some of the biggest projects in the country, such as Dow’s $1 billion polyolefins plants and Sasol’s new ethane cracker, are now breaking ground in Louisiana. Officials in the Northeast hope that similar facilities will be located near the Marcellus and Utica shale plays, and they have placed high hopes in Shell’s plans to locate an ethane cracker in Southwest Pennsylvania. While Shell has expressed some recent reservations about moving forward, the facility currently remains in its future plans.
Regions in the Northeast may gain further benefits by focusing on developing the midstream infrastructure of gathering lines, pipelines, storage facilities, and transportation infrastructure that is needed to bring gas and gas liquids to market. This infrastructure is in place on the Gulf Coast, but is just emerging in Pennsylvania, Ohio, and West Virginia. Midstream development is becoming a major issue that includes difficult environmental, regulatory and economic subcomponents. (For background on midstream development issues in Pennsylvania, click here.)
A number of analysts predict major growth in these midstream markets. According to the Deloitte Center for Energy Solutions, the boom in midstream markets has just begun as nearly $200 billion in new capital investment (up to 2035) will be needed to build out essential shale gas-related infrastructure. This growth will stimulate a host of industries, including rail and barge transportation, pipeline development, and gas gathering and processing systems. All of these sectors include tantalizing business opportunities for manufacturers and other local firms.
As the shale gas boom proceeds, community leaders need to embrace the art of the long view. The real long-term economic benefits of shale gas are not going to be related to shale gas drilling and expansion. Instead, they will result from downstream industries, especially manufacturers,that benefit from cheaper energy inputs or from the development of new midstream resources related to the processing and transmission of gas and related products.
If these predictions are correct, smart local policies will focus on how best to nurture and encourage local manufacturers via policies such as enhanced workforce training, supply chain development, specialized consulting services, innovation engineering, and other such tools. These approaches offer the best means to avoid the boom and bust cycles that have historically affected the business of resource extraction.
What’s New at EntreWorks Consulting?
We have added several documents to the EntreWorks library page. They include the following:
- A Local Officials Guide to Defense Industry Adjustment, Report Prepared for the U.S. Department of Defense, Office of Economic Adjustment, 2013.
- Ride to Prosperity 2013: An Economic Development Strategy for Greater Reading and Berks County (PA). June 2013.
- The Emerging U.S. Rail Industry: Opportunities to Support Manufacturing and Spur Regional Development. Report prepared for the National Institute of Standards and Technology’s Manufacturing Extension Partnership, October 2013.
Erik Pages of EntreWorks has taken on a few new leadership roles in the past months. He is now serving on the Board of Directors for the International Economic Development Council (IEDC) and has also joined a new Advisory Committee for Virginia’s Small Business Development Center Network.
We continue to provide more regular news and updates at the EntreWorks blog at http://entreworks.net/blog. Recent postings have taken a look at manufacturing support policies, the power of microbusiness, and the impact of the New Markets Tax Credit. You can also access blog updates at our Facebook page.