GSU Economic Forecasting Center Conference 14 November...
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The Oil & Gas Boom and What it Means for the Manufacturing Outlook GSU Economic Forecasting Center Conference 14 November 2012 Dr. T.K. Swift Chief Economist & Managing Director
Transcript of GSU Economic Forecasting Center Conference 14 November...
The Oil & Gas Boom and
What it Means for the
Manufacturing Outlook
GSU Economic Forecasting Center Conference
14 November 2012
Dr. T.K. Swift
Chief Economist & Managing Director
ISM Manufacturing PMI (USA) & JP Morgan Global Manufacturing PMI
30
35
40
45
50
55
60
65
00 01 02 03 04 05 06 07 08 09 10 11 12
Global Manufacturing US Manufacturing
Source: Institute for Supply Management, JP Morgan
Diffusion (Net % Increase)
% change on previous year (unless otherwise noted)
2008
2009
2010 2011 2012 2013 2014 2015 2016 2017
GDP -0.3 -3.1 2.4 1.8 2.2 2.1 3.0 3.1 2.9 2.8
Housing Starts (000) 904 554 587 609 747 911 1,351 1,496 1,603 1,607
Light Vehicle Sales (mm) 13.2 10.4 11.6 12.7 14.2 14.6 15.1 15.7 15.9 15.8
Motor Vehicles & Parts -31.6 -14.3 32.5 11.8 16.7 5.6 5.8 4.7 3.5 3.6
Aerospace -2.5 -1.6 -2.3 8.9 8.6 12.5 11.3 9.5 5.6 4.3
Computers & Electronics 0.4 -7.5 10.9 7.9 0.5 4.9 7.3 8.5 7.9 7.4
Construction -17.5 -15.3 3.9 5.5 5.6 7.1 12.3 10.3 5.8 3.8
Food & Beverages -2.8 -0.7 -0.1 1.7 2.3 1.4 1.6 1.7 1.7 1.4
Textile Products -17.1 -15.9 4.0 0.1 -0.4 -1.0 -1.1 -0.9 -2.2 -3.0
Total IP -8.2 -7.0 5.4 4.1 4.1 2.3 3.2 3.5 3.0 2.7
US Economic & Industrial Environment (Consensus)
Is Economic Uncertainty Holding Back US Business Investment?
% Change Y/Y (3 MMA) in Manufacturers’ New Orders of Non-Defense Capital
Goods excluding Aircraft
Source: Bureau of the Census
-40
-30
-20
-10
0
10
20
30
40
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
0
40
Our View on the Economic Outlook
The US economy is slowly recovering from the Great Recession. Exports and business investment are slowing but housing and light vehicles (and consumers in general) taking over, with bright spots in oil and gas. Unfortunately, there are still many dark clouds lingering over the economy. Uncertainties linger and global leaders are worried about several problems, including the:
• European debt crisis and recession
• Slowdown in China and other emerging market economies
• Looming US debt and deficit problems
At best a slow economy into 2013, with a gradual improvement but risks of US recession are high (~35%) and if Europe and China worsen further a US recession is likely
With a maturing population, slowing innovation, lackluster capital formation and uncertainty, the US economy is on a slow-growth track this decade; one more susceptible to shocks!
Background on Shale Gas
• Shale and other non-conventional gas always present, just not
economically feasible to extract
• Fixed natural gas supply and rising demand from electric utilities
in 1990s combine with supply constraints
• Prices rise from average of $1.92 per thousand cubic feet in the
1990s to $5.46 in 2004 and with the hurricanes an average of
$7.33 in 2005
• Natural gas production in the USA was supposed to decline
• Early-2000s were difficult period for industrial gas customers
– Loss of over 40% of ammonia capacity and decimation of US
methanol production
– Concerns in early 2000s over long-term viability of US
petrochemicals
Shale Gas Resources and the Enabling Technologies
• New way of gathering natural gas from tight-rock deposits of organic shale
• Horizontal Drilling – Drill horizontal wells 1 ½ miles
beneath the surface
– And lateral lengths of 10,000 feet
• Hydraulic Fracturing – Fracture the rock by using water
pressure aided by chemistry (polymers, gelling agents, foaming agents, etc.)
– Typical well requires 2 to 3 million gallons of water and 1.5 million pounds of sand
– About 99.5% of mixture is sand and water
• Computational modeling
Technologies Push out the Supply
Curve
Quantity (Billion Cubic Feet per Day)
Pri
ce (
$/T
ho
usa
nd
Cu
bic
Fee
t)
S1
Market Demand
2005
60.3
$7.33
S2
$2.79 2012
69.8
$0
$20
$40
$60
$80
$100
$120
Brent Oil ($bbl) WTI Oil ($bbl)
2005-12: Energy Prices Falling in Either Absolute or Relative Terms
$0
$1
$2
$3
$4
$5
$6
$7
$8
$9
Natural Gas - Henry Hub ($/000 CF)
WTI now at a discount to Brent
Source: EIA
Oil-to-Gas Ratio: A Proxy for US Energy Competitiveness
0
5
10
15
20
25
30
35
40
70 75 80 85 90 95 00 05 10 15
Divide Brent oil price ($ per barrel) by Henry Hub natural gas price ($ per 1,000 cubic feet).
When the ratio is above 7, US competitiveness vis-à-vis other major producing regions is
enhanced. The current ratio is very favorable for US competitiveness and exports of
petrochemicals, plastics and other derivatives.
Global Natural Gas Price Trends
$0.00
$2.00
$4.00
$6.00
$8.00
$10.00
$12.00
$14.00
$16.00
$18.00
02 03 04 05 06 07 08 09 10 11 12
United States Belgium Germany Japan Brazil China India
Source: EIA, Petrobas, IMF, World Bank, various national statistical agencies
$ per million BTUs
Shale Gas as a Manufacturing Game Changer
• Shale gas could also help revive American manufacturing and create hundreds of thousands of jobs, including some areas hardest hit by the recession, while strengthening national energy security.
• The new economics of shale gas create a competitive advantage for US manufacturers, which will lead to greater investment, job creation and industry (and economic) growth.
• Shale gas growth is helping to reduce natural gas and oil prices and create a more stable supply for fuel and power – this will allow US manufacturers to become more competitive than producers in the rest of the world.
• It is also reducing electricity costs.
• Should oil prices remain high, affordable natural gas will continue to provide US manufacturers with a competitive advantage over global competitors that use more expensive, oil-based feedstock and energy supplies.
• This oil and gas boom represents a positive shock to the US economy (much like the Internet), which should be able to capitalize on these developments. Long-term economic growth potential could be boosted by 0.3 to 0.8% per annum.
Global Ethylene Supply Curve (Petrochemical Production Costs by Country/Region)
$0.00
$0.20
$0.40
$0.60
$0.80
$1.00
$1.20
$1.40
0 85 141 210 247 311
Pro
ducti
on C
ost
s ($
/pound)
Global Supply (Cumulative in billions of pounds)
2005
2011 Middle East
Middle East
United
States
United
States
China
Western Europe
China
Western Europe
Other Northeast Asia
Other
Northeast
Asia
% change on previous year (unless otherwise noted)
2008
2009
2010 2011 2012 2013 2014 2015 2016 2017
Oilfield/Mining Machinery 9.5 -21.1 2.9 20.9 14.9 3.5 4.5 5.8 5.3 4.1
Iron & Steel 6.4 -35.6 30.0 9.1 7.8 2.2 4.5 4.8 4.0 2.4
Paper -8.9 -6.3 2.1 -1.4 -2.2 0.0 0.8 1.1 1.0 1.0
Chemicals -10.4 -12.1 10.3 1.5 2.3 2.3 2.3 2.6 2.3 2.0
Rubber/Plastics Products -15.6 -10.2 8.9 8.4 3.0 2.0 2.7 2.8 2.5 2.4
Glass -2.9 -14.5 2.8 -0.3 -3.8 2.9 3.5 4.1 2.8 1.9
Aluminum -7.4 -18.1 19.0 6.8 1.9 2.7 2.9 3.0 2.3 1.9
Foundries -14.4 -24.1 14.9 13.3 6.3 2.8 5.5 4.9 3.4 2.9
Fabricated Metal Products -12.0 -15.7 6.9 10.0 8.0 2.6 4.8 4.8 3.2 2.7
US Industrial Outlook for Natural Gas Sensitive Industries (Consensus)
% change on previous year (unless otherwise noted)
2008
2009
2010 2011 2012 2013 2014 2015 2016 2017
Oilfield/Mining Machinery 9.5 -21.1 2.9 20.9 14.9 3.5 4.5 5.8 5.3 4.1
Iron & Steel 6.4 -35.6 30.0 9.1 7.8 2.2 4.5 4.8 4.0 2.4
Paper -8.9 -6.3 2.1 -1.4 -2.2 0.0 0.8 1.1 1.0 1.0
Chemicals -10.4 -12.1 10.3 1.5 2.3 2.3 2.3 2.6 2.3 2.0
Rubber/Plastics Products -15.6 -10.2 8.9 8.4 3.0 2.0 2.7 2.8 2.5 2.4
Glass -2.9 -14.5 2.8 -0.3 -3.8 2.9 3.5 4.1 2.8 1.9
Aluminum -7.4 -18.1 19.0 6.8 1.9 2.7 2.9 3.0 2.3 1.9
Foundries -14.4 -24.1 14.9 13.3 6.3 2.8 5.5 4.9 3.4 2.9
Fabricated Metal Products -12.0 -15.7 6.9 10.0 8.0 2.6 4.8 4.8 3.2 2.7
US Industrial Outlook for Natural Gas Sensitive Industries (Consensus)
But economic models are demand-driven…what about the supply-side?
Incremental Supply-Side Gain in Shipments of Eight Gas-Intensive Manufacturing Industries
$0
$100
$200
$300
$400
$500
$600
Paper Chemicals (ex.
Pharma.)
Plastic & Rubber
Products
Glass Iron & Steel Aluminum Foundries Fabricated Metal
Products
Baseline Shipments Gain in Output from Lower Natural Gas Costs
In Billions of 2010 Dollars
Current Outlook for Chemicals (excluding Pharmaceuticals)
-25
-20
-15
-10
-5
0
5
10
15
0
10
20
30
40
50
60
70
80
90
100
110
120
03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
Production Volume (left) % Change in Volume (right)
Production Volume Index (Where 2007 = 100)
Sources: Federal Reserve Board, ACC analysis
Outlook for Chemicals (excluding Pharmaceuticals) with Shale Gas Advantages
-25
-20
-15
-10
-5
0
5
10
15
0
10
20
30
40
50
60
70
80
90
100
110
120
03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
Production Volume (left) % Change in Volume (right)
Production Volume Index (Where 2007 = 100)
Sources: Federal Reserve Board, ACC analysis
% change on previous year (unless otherwise noted)
2008
2009
2010 2011 2012 2013 2014 2015 2016 2017
Paper -8.9 -6.3 2.1 -1.4 -2.2 0.0 0.8 1.5 1.8 2.0
Chemicals -10.4 -12.1 10.3 1.5 2.3 3.5 5.5 6.0 5.8 4.8
Rubber/Plastics Products -15.6 -10.2 8.9 8.4 3.0 3.8 5.3 6.0 6.3 6.0
Glass -2.9 -14.5 2.8 -0.3 -3.8 2.9 3.6 4.3 4.0 3.3
Iron & Steel 6.4 -35.6 30.0 9.1 7.8 2.4 4.9 5.3 5.5 3.8
Aluminum -7.4 -18.1 19.0 6.8 1.9 2.7 3.9 4.8 4.6 4.2
Foundries -14.4 -24.1 14.9 13.3 6.3 2.8 5.6 5.3 4.6 3.3
Fabricated Metal Products -12.0 -15.7 6.9 10.0 8.0 2.6 4.9 5.2 4.0 3.1
US Outlook for Natural Gas Sensitive Industries with Shale Gas Advantages Scenario
Concluding Thoughts on Shale Gas and Manufacturing
• Forecasters’ approaches are demand-based; need to
recognize supply-side
• Shale gas has been a game changer in US natural gas
markets with US first mover advantages
• With oil developments (and lower electricity costs)
leading to a manufacturing renaissance
• Shale gas has improved the competitiveness of the
US manufacturing, especially chemicals • Boosting exports
• Over 50 major chemical industry projects have been announced
• Location of shale gas may foster new greenfield investment
• Generating new business, jobs, and tax revenues
• But challenges remain...
