Employee-owned Voss Industries is growing in new international markets
Voss Industries, an employee-owned Ohio City company that supplies parts for nearly every commercial and military aircraft.
(Thomas Ondrey / The Plain Dealer)
Bernard L. Weinstein is associate director of the Maguire Energy Institute
Until a few years ago, the 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. Between 2000 and 2010, the number of manufacturing jobs in the United States dropped by a third, a decline of more than 5.8 million.
But since 2010, manufacturing companies have added more than one 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 percent of our gross domestic product (GDP).
There are several explanations for this rebound in U.S. manufacturing activity. 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.
But 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 percent.
Consequently, the average cost to manufacture goods in the United States is now only about five percent higher than in China and 10 to 20 percent lower than in major European economies. According the Boston Consulting Group, by 2018 production costs in America will be three percent 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 to 50 percent lower than their foreign counterparts.
For example, combined with lower crude oil prices, cheap electricity is helping America's refineries earn record profits. The Houston ship channel, which houses the largest concentration of refineries and petrochemical plants in the world, is currently undergoing $35 billion of new investments.
Abundant energy supplies are helping the United States in other ways, such as reducing our trade deficit and attracting foreign investment, especially in heavy manufacturing. Increased use of clean natural gas for power generation is largely responsible for reducing America's greenhouse gas emissions to their lowest level in 20 years.
The shale boom has also helped revive a number of industrial areas in the Northeast and Midwest that had recorded job losses for decades. For example, Pittsburgh has become the logistical and administrative center for the Marcellus Shale, which is now the largest natural gas play in the country. 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 percent of the manufacturing jobs it lost during the Great Recession while Detroit has added more than 89,000 industrial jobs since 2009, an increase of 31 percent. San Antonio has added a new dimension to its economy by becoming the service center for the Eagle Ford play in South Texas, currently the No. 2 oil-producing field in the country.
Without question, the dramatic drop in oil prices over the past year, due to a global oversupply of about two million barrels per day, is posing tremendous challenges to America's energy industry. The drilling-rig count has dropped by more than 50 percent, while companies large and small have announced layoffs in the thousands. Capital outlays by U.S. shale firms are projected to decline 40 percent this year and may fall even further next year.
But prices won't remain depressed forever. The oil and gas industry has always been highly cyclical and it will rebound when global supply and demand come into balance. In the meantime, cheap and abundant energy is giving U.S. manufacturers a "leg-up" in the global economy while creating much-needed high-wage jobs for America's workers.
Bernard L. Weinstein is associate director of the Maguire Energy Institute and an adjunct professor of business economics in the Cox School of Business at Southern Methodist University in Dallas.