Shale revolution sparking comeback of U.S. manufacturing

Eager to take advantage of America’s abundant supply of oil and natural gas found in shale formations scattered around the country, companies – both domestic and foreign – are rushing to set up production facilities in the United States.

While much of the country still struggles to recover from the recent recession, states endowed by geology with energy-rich shale – Pennsylvania, Ohio, West Virginia, North Dakota, Texas, and Arkansas – are experiencing a boom of unprecedented proportions. Only a few years ago, policymakers were debating the merits of importing liquefied natural gas (LNG), which would require the construction of terminals along the coast to receive the gas from overseas. Now, plans are underway to build facilities at coastal locations from which LNG can be exported to markets abroad.

Sempra Energy, Cheniere Energy Inc., and Energy Transfer Equity LP are planning to construct multi-billion LNG export facilities in Louisiana. These facilities will chill the natural gas so that it turns into a liquid that can be shipped on tankers to ports around the world. Such is the abundance of shale gas in the U.S. that the price of natural gas is so low (the lowest in the world) that some of it can be converted to LNG for export while the rest can serve electricity needs in this country.

The gas that does stay in the United States is helping to revitalize the domestic manufacturing base. Dow Chemical Co., for example, is building a multi-billion plant in Freeport, Texas which will convert natural gas into the building blocks of plastics. The plant, expected to be in operation by 2017, will employ 2,000 workers at the peak of construction. Dow had previously announced a $4 billion expansion of its facilities south of Houston. “The discovery of shale has really recreated the value proposition to build these facilities in what is the world’s largest market,” Andrew Liveris, Dow’s CEO, told the Wall Street Journal (April 19).

Glitter is returning to the Rust Belt. Royal Dutch Shell PLC is building a $2 billion chemical plant in western Pennsylvania near Pittsburgh, where it can take advantage of affordable electricity drawn from the Marcellus Shale. Manufacturers are rethinking the advisability of outsourcing their production to foreign locations. Labor costs are rising rapidly in China, and intellectual property rights are poorly protected in that country. Mexico is so beset with drug-related gang violence that it is increasingly being shunned by manufacturers.

Hydraulic fracturing (fracking) and its companion technology, horizontal drilling, are giving the United States a decisive competitive advantage in the field of manufacturing. More and more companies are realizing that it’s cheaper to produce here, where gas and oil are relatively abundant (and would be more so if restrictions on drilling offshore and on federal land were lifted) than it is in countries where the rule of law is underdeveloped and production and transport costs are rising.

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About the Author: Bonner Cohen, Ph. D.

Bonner Cohen, Ph. D.

Bonner R. Cohen, Ph. D., is a senior policy analyst with CFACT.