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Fracking Is Fueling American Industry's Leading Edge

6 June 2014 in Trading Ideas

Occasionally lost in the energy-independence talk surrounding the US shale oil boom is that, in the here and now, rising oil and gas supplies are paying more immediate dividends for this country’s multinational companies – often at the expense of countries with more expensive energy costs.

A Reuters story earlier this week drew an even clearer distinction: A profound shift is underway between the US and manufacturing rival Germany, where, due to that country’s decision to phase out nuclear power and push into green energy, companies there now pay some of the highest prices in the world for power.1

On average, German industrial companies with large power appetites paid about 0.15 euros (21 cents) per kilowatt hour (kWh) of electricity last year, according to Eurostat, the European Union’s statistics agency, Reuters said.


Compare those prices in Germany with costs in the US. Industrial electrical prices in Louisiana, as an example, is 5.5 cents per kWh, according to US Energy Information Administration data cited by Reuters.

Electricity prices are falling in the US thanks to natural gas derived from fracking – the hydraulic fracturing of rock. The process first became popular in the US six years ago and has produced a glut of natural gas in the country, pushing down domestic prices for the fuel by about 61% in that time frame. That’s made it more appealing to use in electricity generation. Now roughly one-third of US power plants employ it, according to Reuters.

Natural gas is also a key ingredient used to make chemicals, akin to flour in a bakery. Automobile tires, for instance, include styrene, a chemical which is derived from natural gas.

Cheap, plentiful natural gas has helped boost manufacturing’s contribution to U.S. Gross Domestic Product by 15 percent since 2008, when fracking started to become popular. Natural gas made a $2.08 trillion contribution to the U.S. manufacturing sector last year alone, Reuters said.

It also hasn’t been too shabby for companies involved in the exploration and production of shale oil and gas – as well as their shareholders.

The Shale Oil motif, for example, has gained 38.3% in the past 12 months. The S&P 500 is up 22.3% during that same time period.

In the past month, the motif has risen 4%; the S&P has increased 2.3%.

Peter Huntsman, chief executive of his chemical manufacturing firm Huntsman Corp., told Reuters that the US is the new global standard for low-cost manufacturing. Huntsman is spending hundreds of millions of dollars to expand in the US, and rapidly closing plants in Europe. The company estimates that a large, modern petrochemical plant in the here is $125 million cheaper to run per year than in Europe. That sum includes cheaper power, waste disposal and myriad other factors, and Huntsman said the contrast is similar for Asian plants.

Power isn’t the only reason the US is becoming so attractive to manufacturers again. Average labor costs in China have more than doubled since 2007 to around $2 per hour, while they’ve risen less than that in the US, with far higher productivity in the US, Reuters said.

That ultimately could mean a continuing and increasingly beneficial relationship for the investors of both shale oil companies and their US-based customers.

1Christoph Steitz and Ernest Scheyder, “Special Report: How fracking helps America beat German industry,” reuters.com, June 2, 2014, http://www.reuters.com/article/2014/06/02/us-usa-germany-power-specialreport-idUSKBN0ED0CS20140602.

Tags: shale oil