The new energy bounty is opening up opportunities for manufacturers of all sizes.
Much of what we hear and read about America's energy revolution is focused on the impact of "longer and lower" energy prices, and, secondarily, opportunities within the domestic energy sector. Each of these is crucial for business people to understand. Yet the American energy revolution is about much more than this.
Companies of all sizes, whether they see it or not, are having new opportunities open up for their products and services as a result of America's new energy bounty.
A Midwest manufacturer of heat exchangers and pressure vessels was originally focusing on foreign markets for new growth opportunities. After digging into the market research data, they discovered that there were far better opportunities for them domestically than overseas. They decided to allocate their scarce sales and marketing resources to targeting the burgeoning agricultural chemical sector here in the U.S. The results were substantial. They have added several new employees in recent months, and have confirmed orders for the next several years.
I realize this may not be the kind of success story that will garner top headlines in the business press. Nevertheless, for this company, its employees, suppliers, customers, and the community where it resides, this is really big news. And such stories are happening all over America. Our clients' success was tied directly to the far broader trends shaping American energy.
Since the 1980s, America's growing energy insecurity was forcing U.S. firms across many industries to reconsider their future. For example, dozens of major fertilizer and pesticide plants in the U.S. were closing—and production was shifting to nations where natural gas supplies were abundant. This was not a trivial development. The U.S., which is the largest agricultural producer in the world, grows and exports more wheat, cotton, soybeans, corn, sugar, and citrus than any nation on Earth. Of course, this largesse also means that America is the biggest consumer of agricultural chemicals.
In addition to its role as the biggest agriculture chemical consumer for decades, the U.S. was also the world's largest producer and exporter. America's abundant natural gas kept prices relatively low. U.S. dominance seemed assured in that industry. However, as American natural gas supplies dwindled and became more expensive (natural gas liquids are vital for the production of these chemicals), the industry underwent a major shift: away from production in America to other parts of the world where those natural gas liquids were more abundant, and cheaper.
This was not dissimilar to the 1990s and early 2000s, where American workers were replaced by labor in much lower-wage markets such as Mexico and China. By the early years of the 2000s, the U.S. still remained the largest consumer of agricultural chemicals. To its detriment, the U.S. had also become the world's largest importer.
U.S., with nearly 12 million tons of new capacity and an estimated $85 billion of private investment. Further, almost two-dozen retired plants are also being re-commissioned and upgraded. In a remarkable turnaround, the U.S. is set to once again become the world's leading fertilizer and pesticide producer—and exporter—by 2018. Our client is successfully targeting this new opportunity.
Examples like this one are being replicated across many industrial sectors of the U.S. economy, particularly petrochemicals. In 2012, the U.S. was still the highest cost producer of petrochemicals in the world. As increasing domestic shale gas supply became available, the U.S. moved to being one of the lowest-cost producers. As a result, in just five short years, by 2017, more than $185 billion in new capital investment had flowed to the construction of new nonagricultural chemical plants and supporting infrastructure. More than half of that capital flow came from overseas investors. Even if the average American is unaware about what is happening at home—beyond their lower energy bills—more and more foreign investors are wide awake when it comes to the business opportunities opened up by America's energy revolution.
The point here is that a company's market research studies and growth strategy—regardless of what industry they are in—should include the impact of the America's energy revolution in the principal calculus. Failing to do so could result in missing out on some of the best business opportunities in a generation.
As little as 12 years ago, grave concerns were being raised that the U.S. would not be able to meet its natural gas needs. Imports of natural gas liquids (NGLs) spiked, and it appeared America was going to add natural gas to its list of foreign addictions. In response, many U.S. industries tied to petrochemicals headed out the door to produce overseas. Those who stayed behind significantly reduced their footprint.
Today, it's a completely different story. It starts with NGLs. During the exploration and production process, both oil and natural gas migrate to the surface.
Petroleum and gas are then separated. At processing plants, natural gas can be broken down into liquids, the principal ones being ethane, butane, propane, heptanes, hexane, and pentanes. Each of these serves as the critical foundations for so many indispensible aspects of our lives.
expand its film plants, bag plant, conversion center, and warehouse in Lexington.
Sales have increased by nearly one third, to over $400 million while hiring continues apace.
abundant supply of quality NGLs at their disposal.
The American Fuel & Petrochemical Manufacturers association estimates that feedstocks account for 60–70% of the total cost to produce petrochemicals. Even a small drop in the cost of these feedstocks is a major benefit to US manufacturers.
Since natural gas prices in the United States fell by 75% between 2005 and 2016, while remaining flat or rising in most of the rest of the world, U.S. manufacturers that use domestic NGLs have enjoyed a significant competitive advantage.
care products like toothpaste that were deemed poisonous, had U.S. firms reevaluating their original decision to go to China in the first place.
With America's shale energy revolution well underway, the U.S. is seeing many of the firms that once departed now returning, as high-quality domestic petrochemicals and NGLs have fallen in price. Reshoring, as it is known, is the relocation of manufacturing and operations back to the home market. It is not a surprise that one of the top reasons firms reshore, according to research from the Reshoring Initiative, is quality control.
Bison Gear & Engineering Corp. is a St. Charles, Illinois-based manufacturer that has provided motor, gear reducer, gear motor, and complete system solutions to customers around the world since 1960. In the 1990s, the company followed many in its industry and sought greener pastures in lower-cost China. After a few years, it became clear that reduced production costs in China came with a terrible price. Citing the resurgence of natural gas production in the USA and the ability to control the quality of its supply chain, Bison reshored its Chinese operations back to America in 2012. New jobs were added.
It seems a sustainable formula for a renaissance in American manufacturing is taking hold, driven by the shale energy revolution. Abundant domestic natural gas is making cheaper, high-quality domestic NGLs more and more available to U.S. petrochemical producers, manufacturers of finished goods, and consumers. Once again the world's single largest consumer market is poised for resurgence in its "Made in the USA" label.
In 2008, Brooks Bros. bought a plant in Haverhill, Mass., and has moved nearly all of its suit production there, mostly from offshore locations, says John Martynec, who heads domestic manufacturing for the venerable designer and retailer. Employment at the plant has increased to 475 from 300. High-quality NGLs are crucial to ensuring the integrity of Brooks Bros.' design and manufacturing processes. "Making it" in the USA guarantees product quality and also bolsters Brooks Bros.' fast-growing international business. "A U.S. product is perceived as a luxury item in other areas of the world," he says.
Andrew R. Thomas is an author of 23 books and an associate professor of marketing and international business at the University of Akron.
This piece is excerpted from Thomas' latest book, "American Shale Energy and the Global Economy: Business and Geopolitical Implications of the Fracking Revolution" (2018).