Report: Affordable Natural Gas — Made Possible by Fracking — Has Bolstered U.S. Manufacturing
A new report by researchers from environmental think tank Resources for the Future (RFF) found that the decline in natural gas prices brought on by shale development helped grow U.S. manufacturing employment by up to 1.8 percent between 2007 and 2012. This report also analyzed the impact of natural exports on manufacturing employment, finding such exports have a “small effect.”
Overall, these findings demonstrate how shale development has benefited the U.S. economy – and U.S. manufacturing specifically. However, some questions remain about the magnitude such benefits cited by report.
There is little question that the increase in natural gas production from shale development and subsequent lower natural gas prices benefited U.S. manufacturing and the economy as a whole. As the authors state:
“Few experts dispute that the US economy is benefiting from higher natural gas production and lower prices. GDP growth, employment expansion in the natural gas production sector, lower electricity and natural gas prices, improvements in the trade balance, and increases in tax revenues are all among the commonly articulated gains.”
For manufacturing specifically, the impact of shale development is two-fold: increasing input supply and lower electricity costs. With fracking opening new reserves of natural gas, manufacturing industries that use natural gas as a main input, such as chemical manufacturing, now have access to greater supply at lower cost. Additionally, lower natural gas prices translate to lower cost electricity generated from natural gas, which also benefits manufacturers. As the report notes:
“Based on standard microeconomic theory, a decline in the price of an input, such as natural gas, reduces marginal production costs, increases output, and reduces output prices. The output increase raises employment, and the decrease in natural gas prices relative to wages can increase or decrease employment depending on whether natural gas and employment are complements or substitutes in production.”
Greater domestic natural gas supply spurring U.S. manufacturing growth can be seen across the country. For example, the latest data from the American Chemistry Council (ACC) estimates that in chemical manufacturing alone, roughly $185 billion in capital investment has been announced for 317 projects or expansions that make use of the wealth of domestic shale gas.
More difficult to observe directly is expansion related to the cheap electricity costs from natural gas generation. According to the report, between 2007 and 2012, natural gas prices declined by about 50 percent, while natural gas production grew by over 23 percent during this same period. To determine the impact such a substantial price decline had on U.S. manufacturers, the authors analyzed the effect of low natural gas prices on county level employment. Doing so, the authors claim, gave them a more accurate picture of the effect when compared to using natural level data, as other studies have.
Overall, the authors concluded shale development increased manufacturing employment nationally:
“We find that the drop in natural gas prices raised overall manufacturing employment by 0.6 percent.”
The report continues:
“Although natural gas prices had modest effects on aggregate manufacturing employment, they did have substantial effects on employment in gas-intensive industries. The decline in natural gas prices between 2007 and 2012 increased employment by 1.8 percent in the relatively gas-intensive industries (i.e., those in the top quartile of the gas intensity distribution), which is three times greater than the estimate for the entire manufacturing sector, reflecting the importance of natural gas as an input for the gas-intensive industries.”
Smaller Impact than Previous Studies
While these findings fit the general trend of other similar reports – that shale development increased U.S. manufacturing employment – RFF’s conclusions are notable because find a relatively smaller impact than some notable reports. The authors concede:
“The overall finding of this research is that the 50 percent US natural gas price declines of the past decade have indeed had a favorable impact on domestic manufacturing employment, albeit not as favorable as previous studies have estimated.”
Such “previous studies” mentioned in the report include a 2016 study from the London School of Economics which examined the same time frame and concluded that shale development helped generate over 350,000 manufacturing jobs.
“Using the average sector level employment together with average energy intensity, we can arrive at an overall estimate of the employment gains: total manufacturing sector employment increased by around 356,000 jobs up to 2012. A comparison with previous research (Feyrer et al, 2015) suggests that, for every two jobs created in direct relation to fracking, this indirect effect adds more than one additional job elsewhere in the economy.”
Moreover, other studies which the RFF authors mention in their literature review found significantly increases in U.S. manufacturing employment than the RFF study. For example, a 2015 study by Hausman and Kellogg for the National Bureau of Economic Research concluded that if gas prices didn’t decline following 2007, the industry would see a similar pattern of growth as the rest of the economy – about 3.4 percent. By factoring in the price decline of natural gas, Hausman and Kellogg found employment increases of 9.1 percent for gas-intensive industries, up to 14 percent for the most gas-intensive industry, fertilizer manufacturing. In total, Hausman and Kellogg found that the shale revolution led to a benefit of $48 billion per year for natural gas consumers and producers between 2007 and 2013.
Additionally, the U.S. Energy Information Agency (EIA) reported in 2013 that the increased supply of natural gas was indeed a major benefit to manufacturers.
“Natural gas has been an important exception to the trend of rising prices for energy sources used by manufacturers. Production of natural gas in the United States increased rapidly beginning in 2007 as a result of resources found in shale formations. That increase in supply has in turn lowered the price of natural gas to manufacturers as well as other consumers.”
In short, because natural gas is so vital to American manufacturing as both a feedstock and for electricity generation, it’s difficult to imagine a 50 percent decline in natural gas only increasing employment by 0.6 percent nationally and 1.8 percent in the most gas-intensive industries – a criticism bolstered by countless other studies.
“Small Effect” On Manufacturing Employment from LNG Exports
In addition to examining the impact on a county level, the RFF study took into account other factors that potentially could impact manufacturing employment. Notably, the authors focused on the influence expanded liquefied natural gas (LNG) exports could have on domestic manufacturing employment.
Relying on data from a 2014 EIA report, the RFF report finds that greater LNG exports would reduce the gain in national employment by 0.1 to 0.3 percent, with the effects on more natural gas-intensive industries estimated to be between 0.2 and 0.5 percent. The authors conclude:
“Increases in natural gas exports are expected to have relatively small impacts on natural gas prices, raising them somewhere between 3 and 9 percent (EIA 2014). Consequently, simulation of our model suggest that higher exports would have relatively small impacts on overall manufacturing employment, reducing employment by 0.1 to 0.3 percent across all industries, depending on the magnitude of the export-induced price change. For the gas-intensive industries, the employment reduction would be 0.2 to 0.5 percent.”
While the overall impact found is minimal, the authors’ reliance on data from the 2014 EIA report calls into question whether this impact is even smaller than their findings suggest. According to the 2014 EIA report, increased LNG exports were forecast to raise domestic natural gas prices by three to nine percent between 2015 and 2025, depending on the level of long-term LNG export growth. However, since EIA published the report, natural gas prices have continued to decline as exports have increased.
In fact, the EIA reference case estimated prices to reach over $4.00 per million British thermal units (MMBtu) by 2020, with export levels topping 5.7 billion cubic feet per day (Bcf/d). Currently, U.S. natural gas prices are just $2.81 per MMBtu, while the existing 2.8 Bcf/d of natural gas exports are expected to increase to 9.6 Bcf/d by 2020. In other words, while export levels have outpaced EIA forecasts, domestic natural gas prices still remain low. And, considering RFF based their conclusion that LNG exports would reduce employment by raising natural gas prices, since natural gas prices have dropped, these employment reductions would be non-existent.
While some questions remain, the key takeaway from this report is that it’s the latest confirmation of shale development’s substantial contribution to a manufacturing renaissance in the United States. As the below EID graphic illustrates: as goes shale gas development, so too does manufacturing. Hopefully then, as shale development continues to boost domestic natural gas production, we’ll see more and more “Made in America” labels soon.