At the moment a barrel of oil is under $50. It may soon be under $30, quite a collapse from the $112 per barrel we saw just last summer. The oil crash is prompting a question: will low energy costs result in a rise in US manufacturing? While headlines suggest a coming boom for manufacturing, the story is actually mixed.
When shale gas production exploded due to fracking a couple years ago, many analysts who track manufacturing expected boom times for factories and plants. It didn't happen. Now fracking is bringing about the same production boost with oil, and it's been followed by a predictable crash in oil prices. Again, headlines predict a happy days for plants. Let's not be too hasty, now..
Last year in the New York Times Sunday Review, Steve Rattner -- the Obama point guy for the auto turnaround -- commented that cheap gas wouldn't support reshoring: "While America's energy boom will provide an incentive for manufacturers to locate here, don't count on cheap natural gas to fuel an employment boom. According to a 2009 study, only one-tenth of American manufacturing involved significant energy costs." In the five years since that study, energy probably means even less to factories.
Efficiency has reduced the importance of energy costs
In the early 2000s, energy costs for plants started to soar. I remember talking with plant managers who said they didn't pay attention to energy costs until the turn of the century. The rising energy costs fueled a move to control energy use. Plant efficiency and optimization rose in importance. Factories were tweaked for efficiency gains. In their efforts to trim energy costs, plants got a lot of help from automation software.
New tools produced by automation vendors helped factories cut their energy costs dramatically. Automation systems were aided by equipment providers who responded to the need for low energy equipment with energy-saving motors, valves, everything. In the last decade, all of the equipment that goes into the plant has a low-energy stamp. Thus energy consumption at plants is a lesser concern again.
Reshoring may slow
The crash in energy prices will probably dampen the slow-but-steady reshoring movement. As labor prices in Asia rose, US workers became more efficient, thus reducing the positive differential in Asian labor costs. Plants became more efficient as well, so the cost of labor became even less of a factor in determining plant location. With rising energy costs in recent years, transportation became more of an issue, which supported reshoring. With transportation costs going down because of the oil and gas crash, transportation costs will become less of a driver for reshoring. The reshoring movement may slow considerably -- another damper on US manufacturing.
A slump in oil and gas equipment, a boom at Midwest factories
Another blow to US manufacturing will come from a slumping oil and gas industry. Fracking growth produced a significant uptick in the manufacturing of oil and gas equipment. While shale and traditional oil and gas operations will continue producing product, we're not likely to see the widespread investment in new equipment. Expect a slowdown in the manufacturing of hydraulic and pneumatic tools that support oil and gas.
On the sunnier side, the Wall Street Journal last month pointed to the type of manufacturing that will benefit considerably from the oil crash. For one, factories that use petroleum products in their goods as well as using oil and gas as energy sources -- tires and plastics, for instance. Another beneficiary is the portion of factories that use considerable energy (the 10% Rattner cited). These include the steel industry and much of the auto industry. Oil prices are expected to be down for an extended period. Some say two years, some say a decade or more. So we'll get a good look at those plants that benefit from lower cost fossil energy and those that don't .
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