Editor’s Notebook: Cheap Energy Brings Jobs Where There Were None

September 2015, Vol. 242, No. 9

Jeff Share, editor

OK, I’m a sucker for natural gas. Maybe I’ve learned something these past 25 years that George Mitchell tried to explain: natural gas is the fuel of the future and can revitalize America. After I read this story off the Reuters news wire, can you blame me?

“There’s some good news for workers in Ohio: for the first time ever, Ford will shift medium-duty truck production to the Buckeye State, out of Mexico. Ford Motor Co (F.N) will start building its medium-duty F-650 and F-750 commercial trucks at a Cleveland-area plant, moving production out of Mexico for the first time. The shift to the 41-year-old plant in Avon Lake means that about 1,000 workers represented by the United Auto Workers union will keep their jobs, Jimmy Settles, UAW vice president, said in a statement issued by Ford.

Now I’m not saying the shale boom was the reason for this decision, but read on and you’ll see that it certainly wasn’t a negative factor.

Ohio and Pennsylvania, along with all of their Rust Belt neighbors, have long suffered from a never-ending loss of manufacturing jobs, zero population growth, diminishing tax base and steady economic decline. And there was little reason for hope. If you were young and wanted to earn a real living, you left, as many young people did, never to look back.

West Virginia was always an economic disaster due to its terrain that inhibits any type of development except mining. But with growing environmental resistance to coal and a desire for a life outside of the mines, West Virginia is now well-positioned in the enormously productive Marcellus and Utica shale plays, as are Ohio and Pennsylvania.

Western Pennsylvania is undergoing an economic renaissance that some optimists expect to outmatch the steel industry. Companies assured of cheap, long-term fuel costs are moving in, expanding or staying put. The few problems that do emerge tend to be resolved quickly. An op-ed piece by Bud Weinstein, associate director of SMU’s Maguire Energy Institute, was published in the Cleveland Plain Dealer on Aug. 12. It sums up rather nicely what the fracking boom has done for America.

“Until a few years ago, prevailing conventional wisdom viewed America’s manufacturing sector in secular decline, unable to compete with lower-cost production platforms in Mexico and China. The data seemed to bear this out. From 2000-10, the number of manufacturing jobs in the U.S. dropped by a third, a decline of over 5.8 million.

“But since 2010, manufacturing companies have added over 1 million workers. Similarly, the value of production from America’s factories has jumped from $1.7 trillion in 2010 to $2.1 trillion last year and now accounts for 12% of our gross domestic product (GDP). There are several explanations for this rebound. Labor costs have been rising rapidly in Mexico and China, as well as other export-oriented Asian economies, while American companies have boosted productivity faster than their competitors abroad.

“The most important factor in America’s industrial renaissance has been cheap and abundant energy, a result of the “fracking boom” that started about six years ago and has boosted America’s oil and natural gas output by 70%. Consequently, the average cost to manufacture goods in the U.S. is now only about 5% higher than in China and 10-20% lower than in major European economies. The Boston Consulting Group says by 2018 production costs in America will be 3% cheaper than in China.

“Natural gas, diesel and gasoline prices have dropped dramatically in recent years, significantly lowering energy costs for households and businesses. But most beneficial to manufacturers has been the falling cost of electricity, much of it now generated by natural gas turbines. Energy-intensive industries like steel, aluminum, paper, and petrochemicals are now enjoying power costs 30-50% lower than their foreign counterparts.

“The shale boom has also helped revive a number of industrial areas in the Northeast and Midwest that had recorded job losses for decades. Pittsburgh has become the logistical and administrative center for the Marcellus Shale. Steel mills in places like Wheeling, West Virginia and Youngstown have sprung back to life making pipe and other products for use in the Marcellus and Utica plays.

“Cheap energy is helping the auto industry rebound with the result that Michigan has recovered 40% of the manufacturing jobs it lost during the Great Recession while Detroit has added over 89,000 industrial jobs since 2009, an increase of 31%.”

You know the Chinese are well-aware of this. Just like the Saudis.

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