Can Natural Gas Bring Back U.S. Factory Jobs?

Obama touted the energy boom in his State of the Union as fuel for economic revival.

When industrialist John Correnti announced last year he was opening a $1 billion steel mill in the struggling delta town of Osceola, Arkansas, officials feted him at the marbled state capitol. Correnti addressed the public and press alongside the governor, members of the Arkansas Economic Development Commission, and a very overwhelmed mayor.

"The site," Correnti said, "is steel-mill heaven."

He went on to describe a 550 kV power transmission line passing through the property, with the shipping lane of the Mississippi River on one side and a railroad on the other. An interstate is a few miles away. Correnti also hailed the "can-do attitude of the governmental agencies, plus the Arkansas farm boys and farm girls."

The fact that all of it is sitting atop the natural-gas-rich Fayetteville shale never came up. But industry insiders are citing Big River Steel and similar projects as the result of abundant new fuel supplies. The American Chemistry Council (ACC) predicts 13,000 jobs will be created in Arkansas, 500 of those at Big River Steel. It's touted as a key dividend of hydraulic fracturing, or fracking, and the unlocking of massive reserves in shale formations across the country. (See related "Interactive: Breaking Fuel From Rock" and "The Great Shale Gas Rush.")

President Barack Obama picked up the theme in his State of the Union address. "One of the biggest factors in bringing more jobs back is our commitment to American energy," he said. "Businesses plan to invest almost $100 billion in new factories that use natural gas," he added, pledging to cut red tape to help get the facilities built.

Suddenly, natural gas is the stuff dreams are made of. Well, if not dreams, then pool liners, food packaging, shoes, diapers, coatings, films, and sealants. Jobs, basically. Manufacturing jobs. Industry predictions—always heady—have ranged as high as 5 million new U.S. factory jobs in the coming decade due to cheap new natural gas supplies. (See related quiz, "What You Don't Know About Natural Gas.")

But can abundant natural gas really turn back the clock on more than three decades of economic change? Some 7.5 million U.S. manufacturing jobs have been lost since the 1970s, for reasons that are complex, but include cheap labor, lax environmental regulation, and subsidy and tax policies overseas. The cost of energy is certainly one factor in siting new factories, but is it a big enough bait to lure back the blue-collar jobs lost during the rise of globalization? (See related, "Natural Gas Nation: EIA Sees U.S. Future Shaped by Fracking.")

The numbers show that manufacturing in the United States is indeed making a comeback. But there remains plenty of disagreement about why, how far it will go, and how big of a role the new supply of natural gas is playing. (See related, "No Freeze on Winter Energy Prices, Despite Natural Gas Boom.")

Revival or Recovery?

"Increased oil and gas supplies will bring an economic renaissance to the United States," petroleum economist Philip Verleger declared recently. "Energy independence, once thought unrealistic, will be achieved."

The American Chemistry Council (ACC), the industry's leading trade group, is keeping a running tally on publicly announced corporate investments in the United States that it argues are the result of the natural gas boom. As of early January, those investments had climbed to $91 billion worth. The figure includes Correnti's project, Big River Steel.

Research firm IHS predicts that as many as 3.8 million new jobs will be created in the United States, either directly or indirectly related to the natural gas industry, by 2025. There is a catch, of course. The U.S. government needs to give the industry what it wants, such as more access to federal land for drilling and no new regulation. (See related, "Natural Gas Reality Check: U.S. Methane Emissions May Exceed Estimates By 50 Percent" and "Fracking Waste Wells Linked to Ohio Earthquakes.")

Anecdotes abound of factory jobs returning stateside. But since mid-2009, manufacturing employment has increased only about 2.6 percent. And that uptick came on the heels of a 19 percent loss in the sector from 2001 to mid 2007. In other words, a renaissance is still a long ways off. But what accounts for the bump? Goldman Sachs' economist Jan Hatzius has dismissed it largely as cyclical, and cast doubt on the idea that natural gas is doing much for manufacturers.

In fact, U.S. economic recovery efforts likely had more impact than energy prices. Of the 307,000 net new manufacturing jobs that the U.S. Bureau of Labor Statistics says have been added since the recession officially ended in June 2009, 65 percent were in the auto and auto parts manufacturing industries. They're not extremely  energy-intensive, but they did benefit from a $78 billion government bailout, since repaid.

In its annual World Energy Outlook in November, the International Energy Agency weighed in with an analysis: "Reindustrialization of the U.S. economy: Myth or reality?" IEA noted that General Electric, Dow, BASF, Voestalpine, Caterpillar, and other manufacturers had all announced plans to invest large sums in new U.S. plants. But aside from the shale gas industry itself, and perhaps petrochemical manufacturing, IEA said "there is so far little evidence of a resurgence in investment or production." (See related, "IEA World Outlook: Six Key Trends Shaping the Energy Future.")

Still, IEA said "the logic of a manufacturing renaissance remains compelling," and it cited other studies predicting creation of from 1 million to 5 million new U.S. jobs in the sector in the next decade. The price of natural gas in the European Union, where domestic supplies of the fuel are falling, is now triple the price in the United States. Japan, entirely dependent on natural gas imports, pays nearly five times as much.

IEA said that over the next decade the United States will enjoy an export cost advantage of 5 to 25 percent over Germany, Italy, France, the United Kingdom, and Japan in a range of industries, including plastics, rubber, machinery, electrical equipment, computers, and electronics—as long as U.S. natural gas prices stay low.

Prakash Loungoni, the head of commodities research at the International Monetary Fund, the United Nations agency that promotes global monetary cooperation, says that U.S. natural gas prices indeed have stabilized at a low level as a result of the new domestic supply. And that's good for domestic manufacturers. But they also have been helped by the dropping currency exchange rate. Even more important have been falling labor costs. "You had so much slack in the labor market in the recession," Loungoni says. "Work wage demands are pretty moderate in the [United States.]"

If the surge in natural gas production is showing up in the data, it's showing up in targeted sectors, such as petrochemicals, which have clearly benefited. "But you don't get a strong association overall," Loungoni said.

The Gas Effect

The role of cheap, abundant natural gas in providing new jobs seems impressionistic at best, getting fuzzier the closer you look.

The ACC highlights Arkansas as one of ten states that is harvesting manufacturing jobs as a result of natural gas supplies. In addition to Big River Steel, ACC cites new jobs at Anchor Packaging, a plastic food container manufacturer that creates GladWare products, and Welspun Tubular, LLC, which makes pipe for the oil and gas industry. All three have recently added jobs or promised to create them.

But neither the Arkansas State Chamber of Commerce nor the Arkansas Development Commission would go so far as to say that any of those jobs were directly linked to natural gas supplies.

And there was one more thing that made Arkansas "steel mill heaven" for Big River Steel: generous state incentives in the form of $125 million in bonds to support construction of the mill. In return, Big River Steel promised to create about 525 jobs with an average annual salary of about $75,000. Pretty good scratch in a state where the median household income is about $40,000.

But plans for the mill have stumbled. Rival Nucor, the largest U.S. steelmaker with operations in the same county as the proposed Big River Steel plant, argued the market couldn't support another mill.  Nucor also has gotten in on the cheap energy game, last month opening a new natural-gas-fired iron processing plant in neighboring Louisiana. Nucor has hired 140 workers and has plans for expansion, but the company, like all U.S. steelmakers, has suffered due to competition from cheap steel imports from China.

Back in Arkansas, Nucor challenged Big River Steel's air quality permit, arguing that the upstart's pollution model did not meet federal standards. Construction was suspended through January 25, when a stay on the permit was lifted. The delay may have had the desired effect. A lawyer for Big River says the plant's investors are now skittish and the mill might miss deadlines for the bonds. All of which just goes to show that manufacturing jobs, even subsidized ones, are no sure thing—even in an age of cheap resources.

Pat Ferren, director of operations for Anchor, called any connection between its new jobs and natural gas "convoluted" at best. The plastics company is growing because of general demand for its products, and it makes sense that it would expand in Arkansas because it has been operating in the state for decades.

However, Ferren says his company chose Jonesboro as the site to launch a new warehouse and production facility partly because its electricity provider had invested in natural-gas-fired turbines. "We use quite a bit of electricity," Ferren says. "They have such attractive utility costs because they have a very diversified mix of sources, including several mini-turbines run on natural gas."

Ferren says that resins for his products can be made of oil or natural gas. The sudden supply of natural gas has eased volatility in the price of resin, which might have kept some jobs in the United States. "I think the addition of natural gas as a feedstock does tend to hold those prices in check," he said.

Welspun, which recently added 200 jobs and expanded its Little Rock facility, is still making pipe primarily for oil customers even though gas exploration began in the Fayetteville Shale in 2004. "We think the natural gas effect has not hit us yet," said Dave Delie, president. "But we are looking forward that it will have an impact." As natural gas prices stabilize, Delie expects that more heavy gas users will make more investments, and that more power plants will opt for natural gas over coal. He notes that the U.S. could also become a major exporter of natural gas, meaning more pipelines moving the gas to liquefaction plants on the coast. "With the consumption planned on picking up, I believe the trend is going to get better," he said.

Ironically, some big players in the U.S. chemical industry have fought efforts to build new facilities to export U.S. natural gas, for fear that sending the fuel to overseas markets will reduce supply here. That could cause domestic natural gas prices to rise—erasing the low-cost fuel and feedstock advantage for U.S. manufacturers. (See related, "Natural Gas Nation: EIA Sees U.S. Future Shaped by Fracking" and "With U.S. Natural Gas Booming, A Move to Ship it Overseas.")

Kathy Deck, the director of the Center for Business and Economic Research at the University of Arkansas, says it's hard to ascribe jobs to any single factor, but she doubts the cost of energy is the primary driver. "We've seen the labor costs around the world dwarf the energy costs in producing our goods and services." That explains why so many companies chase cheap labor from one country to the next, while regions rich in energy, such as the Middle East, never developed as major manufacturing hubs.

That suggests that states that have rich natural gas supplies won't necessarily be the ones that get manufacturing jobs, either. "You don't locate manufacturing just because a particular state is a natural gas producer," says Ed Ratchford, geologist focused on fossil fuel resources for the Arkansas Geological Survey. "It doesn't matter if you're in Arkansas or Illinois, the price is going to be the same."

That may explain why Arkansas has continued to cede manufacturing. The state lost 54,585 manufacturing jobs between 2002 and 2012. The losses are expected to continue through at least the first quarter of 2014.

Still, the production of gas out of the Fayetteville Shale formation has boosted the state's bottom line. According to Deck's research, the natural gas industry generated $18.5 billion in total economic activity between 2008 and 2011, the last years for which numbers are available. Employment peaked at 12,000 jobs in 2012. Now that the wells have been dug and the pipe installed, however, the benefits for Arkansas are plateauing. If managed properly, long-term investments and education can continue to pay dividends.

"What we've learned [from looking at other states] is that it's important to manage for the long term," Deck said, "because booms and busts happen remarkably quickly."

This story is part of a special series that explores energy issues. For more, visit The Great Energy Challenge.

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