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Why "Cheap" Domestic Energy is Creating a New Dawn for America

by | published August 22nd, 2013

After 40 years of empty promises, the prospect of U.S. energy independence has finally become a real part of the national conversation.

In fact, if current production trends continue, the United States will overtake Saudi Arabia and Russia as the world’s largest oil producer in 2017, according to both the U.S. Energy Information Administration and the International Energy Agency.

But this stunning reversal of fortune is only half of the story.

The other side of the coin is that those same domestic energy supplies are going to have a major impact on global trade.

According to a study released this week by the Boston Consulting Group (BCG), “cheap” domestic energy could result in the U.S. taking between $70 and $115 billion in annual exports from other countries by the end of this decade.

This will provide significant economic advantages to America as this new era is ushered in.

And it will open up huge potential returns for average investors…

“Cheap” Energy is the Key to a Major Global Shakeup

Now I hasten to add upfront, the “cheap” energy referred to in the study is a relative matter. This is not the knee-jerk assumption of some that, if we have all of this shale gas and tight oil sitting around, that is bound to result in lower domestic energy costs.

We may well be able to cut imports, but the truth is the overall price you pay at the pump or when heating your home is subject to other factors.

Rather, it’s that the energy will be “cheap” relative to what it costs elsewhere in the world. And that is becoming the key in a major global shakeup.

By 2015, according to the BCG’s report entitled, “Behind the American Export Surge,” natural gas prices in the U.S. are projected to be 60% to 70% lower, while electricity may be 40% to 70% below what it will cost in Europe and Japan.

But the American advantage hardly ends there.

The study also notes a source not likely to be considered by most, at least initially. That is, until you factor in other elements contributing to this energy advantage.

BCG points out that lower labor costs will also be important sources of a competitive advantage for manufacturing in the U.S. Adjusted for productivity, America’s labor costs for many products are projected to be 15% to 35% lower than those of Western Europe and Japan within two years.

In addition, America will have a manufacturing cost advantage in machinery of roughly 7% over Japan, 14% over Germany and France, and 15% over Italy. But Labor costs will be the big differentiator, BCG said.

That is a major shift in a very short period of time.

As Gas Business Briefing has reported, only a decade ago average productivity-adjusted American factory labor costs were around 17% lower than in Europe, and only 3% lower than in Japan.

Here, the rise of domestic energy has been a major catalyst in a remarkable change.

Beginning in the 1960s, all manner of manufacturing moved from high-cost to low-cost countries. Then, the emergence of competitors to U.S. factory dominance resulted from this transition.

However, one senior author of the BCG report concludes that, “Now, as the economics of global manufacturing changes, the pendulum is finally starting to swing back. In the years ahead, it could be America’s turn to be on the receiving end of production shifts, as more companies use the U.S. as a low-cost export platform.”

Big Benefits for Seven U.S. Industries

A range of economic sectors are identified as likely to benefit from this change, making the U.S. particularly well positioned to increase exports.

In the report, BCG lists seven specific industries in which American exports will be rising at the expense of competing nations. They include: Chemicals, machinery, transportation equipment, oil and coal products, computer and electronic products, electrical equipment and appliances, and primary metals.

Of great interest is the BCG observation that these seven sectors account in the aggregate for about 75% of total global exports. In turn, employment gains would come directly through added factory work and indirectly through supporting services, such as construction, transportation, and retail, the report concludes.

But the industrial shakeup that is coming because of the energy advantage will be multifaceted.

Some companies will increasingly use the U.S. as a low-cost export base for the rest of the world, while others will use American production to replace imports. Throughout, both American and foreign companies will be relocating the manufacturing of products sold in the U.S. that otherwise would have been made offshore.

“It will take several more years for the full impact of improved U.S. competitiveness to translate into significantly more jobs and higher industrial output,” said Michael Zinser, a BCG partner who leads the firm’s manufacturing practice in the Americas and a report co-author.

Yet Zinser adds, “We already are seeing early evidence. Foreign companies such as Toyota, Airbus, Yamaha, Siemens, and Rolls-Royce are starting to move more production to the U.S. for export around the world.”

The Great American Rebound

Some of the findings from the study mirror themes discussed here in OEI over the past several years, providing tangible figures in support.

For example, by 2015, the U.S. is projected to take $7 to $12 billion in chemical exports from Western Europe and Japan. Fundamental to such a transition is the relative cost advantage of domestically-produced natural gas, a major feedstock for chemicals.

BCG points out that production costs in Germany, where the natural gas used in chemical manufacturing will be more than three and a half times more expensive, are projected to be 29% higher than in the U.S. by 2015. Meanwhile, gas costs are expected to be 16% higher in China and as much as 28% higher in France.

As the energy component’s comparative advantage kicks in, it will have positive results in wide export categories. As another example, BCG projects that by 2015, the U.S. will take $3 to $12 billion from Western Europe and Japan in exports of machinery, including everything from a construction and industrial machinery, to engines and air conditioners, the study says.

The energy component has never been more important to the U.S. economy than it is going to be in the next decade. An American economic expansion is going to result and the advantages will be substantial.

There is just one overarching concern…

We need the elected children inside The Beltway to play nice and come up with a national energy plan.

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  1. Dom Brunone
    August 22nd, 2013 at 10:13 | #1

    Good news, thanks. Regarding the elected children inside the Beltway, how about they just go home and keep their hands off? Everytime they touch something they screw it up.

  2. Tom S.
    August 22nd, 2013 at 10:21 | #2

    Sounds like we also need the cheerleads for exporting LNG to re-think their positions ?

  3. Tom Pendergast
    August 22nd, 2013 at 11:59 | #3

    I think DoE or another agency did a study on LNG exports using 15 scenarios and concluded it would be a net benefit to the US.

    I see no reason for the Feds to be involved in setting a national energy policy. Please forget about it!

  4. August 22nd, 2013 at 12:58 | #4

    Mark Z. Jacobson says producing all new energy with wind power, solar power, and hydropower by 2030 is feasible and existing energy supply arrangements could be replaced by 2050. Barriers to implementing the renewable energy plan are seen to be “primarily social and political, not technological or economic”. Jacobson says that energy costs with a wind, solar, water system should be similar to today’s energy costs.

  5. ronald g oconnor
    August 23rd, 2013 at 10:44 | #5

    Get Smart,
    I don’t see how we could build enough wind farms ( which have adverse health and environmental effects), enough low cost solar (too expensive w/o gov support),solar’s weak energy out put, and more dams? They are super expensive, they are being pulled down to restore previous environments. Building more to submerge beautiful landscapes will garner lots of resistance.

  6. August 24th, 2013 at 08:41 | #6

    The research is part of BCG’s ongoing “Made in America, Again” series on the changing global economics of manufacturing, produced by its Operations and Global Advantage practices. BCG has previously released research predicting that rising U.S. exports, combined with production “reshored” from China, could create up to 5 million new U.S. jobs in manufacturing and related services by the end of the decade, thanks largely to significant labor- and energy-cost advantages over Western Europe and Japan and rising costs in China.

  7. ralph
    August 26th, 2013 at 09:55 | #7

    @ronald g oconnor
    what? what are those adverse health and environmental effects of wind farms? where? especially compared to burning fossil fuels? are you (comparatively-) kidding or simply an advocate for fuels industries extant……do you realize how stupid that argument sounds?
    Solar and wind efforts can be realized @ past or current costs….they were always “slayed” by existing fuel monarchs that know they can’t control (read: contain, meter and bill accordingly.. ) those always present free power sources….it’s that simple-political protection of super profitable business buddies….

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