Wednesday, 9 April 2014

Image of the Day: Shale impacts on prices; price impacts on manufacturing

What impact has US shale gas production had on natural gas prices? It's been pretty dramatic:

Until 2010 the gas prices in Europe and the USA were pretty similar, tracking each other up and down. Post 2010, the difference is startling!

Why does this matter? Well, we use gas for a lot of things, not just electricity generation. For example, natural gas is required as feedstock for many industrial processes, especially the manufacture of the petrochemicals and plastics that modern life, and even anti-fracking campaigners, require.

The cost of this feedstock is a major driver in the final cost of these products, and hence the viability of the industries that make and use them. The figure below shows the proportion of the total product cost that is dependent on feedstock and energy for a range of common plastics and petrochemicals:

So how has the USA shale gas boom affected manufacturing there? The figure below compares the cost of manufacturing ethylene in various world regions in 2005 and in 2012.

In 2005 it was very cheap to manufacture petrochemicals in the middle east, while everywhere else the price was moderate, but pretty similar whether you were in China, Europe or the USA. 

In 2012, the USA was as cheap as the middle east, while China and Western Europe have become substantially more expensive. Hence the moves towards "re-shoring" of manufacturing in the USA, while the same companies look to get out of Western Europe.

This is another reason why renewables and shale gas development are not enemies. Forget electricity generation, we need natural gas as a raw material for manufacturing. 

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