Blog Post

Natural Gas Exports and the "Manufacturing Renaissance"

May 17, 2012 | Nathan Richardson

As Alan Krupnick and Joel Darmstader pointed out in a recent post, one of the loudest arguments against U.S. natural gas exports is the claim that doing so will "choke off a hoped-for manufacturing renaissance" by pushing up domestic gas prices.

Michael Levi punctures that argument, citing a 2009 study by Joe Aldy and Billy Pizer (then at RFF, now at Harvard and Duke, respectively). The study found that energy is a relatively small part of costs in most manufacturing sectors - so neither the fall in gas prices since 2009, nor a modest future rise due to exports would likely have much effect on manufacturing competitiveness or jobs. Cheap gas is a major boon for only one sector - chemicals - for which natural gas is a feedstock, not an energy source. As Levi puts it, "manufacturing growth tied to cheap natural gas is mostly a chemicals story."

It gets worse for protectionists: as Levi points out, gas exploration and drilling itself is a nontrivial source of domestic demand for manufactured products, most notably steel. Citing industry reports, Levi notes that:

[S]hale gas production was supporting 39,000 direct manufacturing jobs and another 32,000 along the supply chain. [Industry reports project that] these numbers could rise to 67,000 and 57,000, respectively, by 2020. This is far greater than the number of people that all the chemicals plants currently being discussed will employ.

If exports lead to greater domestic gas production, these manufacturing sectors supporting the gas industry will see further job growth.

Levi (correctly) adds that effects on manufacturing jobs should not drive choices between energy policies. But his analysis does undermine one of the core arguments against gas exports, strengthening Krupnick/Darmstader's position that the market should determine their level. Other arguments against exports remain - most notably environmental concerns from increased drilling, which Krupnick/Darmstader do not address. But hoarding gas as industrial policy appears to be a bad idea.