Shale Gas, Competitiveness and New U.S. Investment: A Case Study of Eight Manufacturing Industries

Economics & Statistics Department American Chemistry Council May 2012

Contents Executive Summary ....................................................................................................................................................1

Introduction ................................................................................................................................................................2

The Development of Shale Gas ..................................................................................................................................3

Methodology and Assumptions .................................................................................................................................7

Paper........................................................................................................................................................................ 11

Chemicals ................................................................................................................................................................. 12

Plastic & Rubber Products ....................................................................................................................................... 15

Glass......................................................................................................................................................................... 16

Iron & Steel .............................................................................................................................................................. 17

Aluminum ................................................................................................................................................................ 17

Foundries ................................................................................................................................................................. 18

Fabricated Metal Products ...................................................................................................................................... 19

Added Output and Job Creation .............................................................................................................................. 20

Tax Revenues ........................................................................................................................................................... 21

Conclusion ............................................................................................................................................................... 22

ACC Economics & Statistics ..................................................................................................................................... 23

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Executive Summary Access to vast, new supplies of natural gas from previously untapped shale deposits is one of the most exciting

domestic energy developments of the past 50 years. After years of high, volatile natural gas prices, the new economics of shale gas are a “game changer,” creating a competitive advantage for US manufacturers, leading to greater investment and industry growth.

American manufacturers use natural gas to fuel and power a wide variety of processes to produce a wide

variety of manufactured goods. Growth in domestic shale gas production is helping to reduce US natural gas prices and create a more stable supply of natural gas for fuel and power. It is also leading to more affordable supplies of ethane, a natural gas liquid and key raw material used in the chemical industry. As economic theory teaches and history shows, a reduction in the cost of a factor input such as natural gas leads to enhanced competitiveness and a positive supply response. This, in turn, leads to new private sector investment in the United States, which fosters job creation.

This report is the second in a series of analyses examining the potential economic and employment benefits of

natural gas development from shale. In March 2011, the American Chemistry Council (ACC) analyzed the potential economic effects of increased petrochemicals production to the US economy. That analysis -- Shale Gas and New Petrochemicals Investment: Benefits for the Economy, Jobs, and US Manufacturing – analyzed the impact of a 25 percent increase in ethane supply on growth in US petrochemicals. It found that the increase would generate new capital investment and production in the chemical industry; job growth in the chemical industry and its supplier sectors; expanded economic output; and increased federal, state and local tax revenue. This new report extends the analysis to consider the impact of lower natural gas prices on a wider segment of the US manufacturing base.

In this new report, Shale Gas, Competitiveness and New Investment: Benefits for the Economy, Jobs, and US

Manufacturing, ACC analyzed the effects of renewed competitiveness and the supply response among eight key manufacturing industries: paper, chemicals, plastic & rubber products, glass, iron & steel, aluminum, foundries, and fabricated metal products industries. ACC found a tremendous opportunity for shale gas to strengthen US manufacturing, boost economic output and create jobs. The analysis found that the increased output would:

• Directly generate 200,000 new, high-paying jobs in these eight manufacturing industries

• Generate an additional 979,000 jobs in the supply chain and elsewhere in the economy through the indirect and payroll-induced economic effects of expanded production from these eight manufacturing industries, leading to a total 1.2 million jobs generated from the effects of expanded production

• Generate 1.1 million jobs in construction, capital goods manufacturing, in their supply chains and elsewhere in the economy over the course of the investment phase

• Generate $26.2 billion in annual federal, state, and local tax revenue from the growth in output

• Directly generate a $121.0 billion increase in the output of the paper, chemicals, plastic & rubber products, glass, iron & steel, aluminum, foundries, and fabricated metal products industries

• Directly generate $72.0 billion in capital investment and construction activity by the eight industries to build and/or expand capacity, leading to a $207.6 billion one-time boost of economic activity

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The scenario outlined in this new ACC report is corroborated by trends in the chemical and other industries. A number of companies have announced new investments in US capacity to benefit from available resources and grow their businesses. Some of these investments are being made in areas of the country that have been hardest-hit by declines in manufacturing. These investments improve the outlook in these economically depressed areas of the country. Further development of the nation’s shale gas and ethane can drive an even greater expansion in domestic manufacturing capacity, provided that policymakers develop balanced regulatory policies and permitting practices.

ACC supports a comprehensive energy policy that maximizes all domestic energy sources including

renewables, alternatives, coal, nuclear, and oil and natural gas; prioritizes greater energy efficiency in homes, buildings and industrial facilities; and employs economically sound approaches to encourage the adoption of diverse energy sources, including energy recovery from plastics and other materials and renewable sources. The United States must ensure that our regulatory policies allow us to capitalize on shale gas as a vital energy source and manufacturing feedstock, while protecting our water supplies and environment.

Introduction This report presents the results of an analysis that was conducted to quantify the economic impact of the

additional production in eight key industries stimulated by improved competitiveness resulting from an increase in natural gas availability. With the development of new shale gas resources, US industry is announcing expansions of capacity, reversing a decade-long decline. With vast new supplies of natural gas from largely untapped shale gas resources, including the Marcellus along the Appalachian mountain chain, a new competitive advantage is emerging for US chemical and other manufacturers. At a time when the United States is facing persistent high unemployment and the loss of high paying manufacturing jobs, these new resources provide an opportunity for new jobs in the manufacturing sector.

Eight key manufacturing industries are expected to spend an estimated $72.0 billion in total in private investment over several years on new plant and equipment. The eight key industries are large consumers of natural gas for fuel and power and also for feedstocks. They are listed here.

Paper

Chemicals (excluding pharmaceuticals)

Plastic & Rubber Products

Glass

Iron & Steel

Aluminum

Foundries

Fabricated Metal Products These investments will engender $121.0 billion in additional industry output by these eight manufacturing

industries, roughly a 7.3% gain above what output would be otherwise in the 2015-20 period. In turn, this will create jobs and additional output in their supplier (or indirect) industries. For example, an increase in steel output would increase demand for iron ore pellets, limestone, coal, oxygen, and other inputs. The output of these supplier industries would rise. Combined, the added output of these supplier sectors of the economy will lead to an additional $143.8 billion in economic output. On top of the direct and indirect effects, spending as a result of the new jobs created (i.e., induced effects) will lead to an additional $76.8 billion gain elsewhere in the economy. Looking at employment, the supply response from shale gas will directly create 200,000 manufacturing jobs in these eight industries. These are high-paying jobs, the type of manufacturing jobs that policy-makers would welcome in this economy. In addition to the jobs created in the eight manufacturing industries, another 462,000 jobs would be created in supplier industries, and another 517,000 jobs would be

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created elsewhere in the economy, leading to a total of 1.18 million new jobs. The jobs created and increased output, in turn, would lead to gains in federal, state and local tax collections, totaling about $26.2 billion per year.

During the investment phase, the $72.0 billion in investments made by these eight industries will directly create 286,000 jobs, largely in construction and capital goods industries. The one-time investment would also lead to an additional $135.6 billion in added output via indirect and induced effects. Thus, the total economic impact during the investment phase would be $207.6 billion in additional output. This added output will create an additional 767,000 indirect and induced jobs, leading to a total of 1.05 million jobs created from just the one-time investment alone. The jobs created and increased output resulting from the investment portion would lead to a gain in federal, state and local tax collections, about $20.9 billion.

Thus, based on a large private investment initiative driven by newly abundant domestic supplies of natural

gas, a significant strengthening of the vital US manufacturing is possible. A reasonable regulatory regime will facilitate this development, while the wrong policy initiatives could derail this recovery and expansion and associated job creation.

The Development of Shale Gas One of the more interesting developments in the last five years has been the dynamic shift in natural gas

markets. Between the mid-1960s and the mid-2000s, proved natural gas reserves in the United States fell by one-third, the result of restrictions on drilling and other supply constraints. Starting in the 1990s, government promoted the use of natural gas as a clean fuel, and with fixed supply and rising demand from electric utilities, a natural gas supply shortage occurred, causing prices to rise from an average of $1.92 per thousand cubic feet in the 1990s to $7.33 in 2005. Rising prices were exacerbated by the effects of hurricanes Katrina and Rita in 2005, which sent prices over $12.00 per thousand cubic feet for several months due to damage to gas production facilities.

Shale and other non-conventional gas were always present geologically in the United States. Figure 2

illustrates where shale gas resources are located in the United States. These geological formations have been known for decades to contain significant amounts of natural gas, but it was not economically feasible to develop given existing technology at the time. It should be noted, however, that uneconomic resources often become marketable assets as a result of technological innovation, and shale gas is a prime example.

Over the last five years, several factors have combined to stimulate the development of shale gas resources.

First was a new way of gathering natural gas from tight-rock deposits of organic shale through horizontal drilling combined with hydraulic fracturing. Horizontal drilling allows producers to drill vertically several thousand feet and then turn 90 degrees and drill horizontally, expanding the amount of shale exposed for extraction. With the ability to drill horizontally, multiple wells from one drilling pad (much likes spokes on a wheel) are possible, resulting in a dramatic expansion of shale available for extraction, which significantly boosts productivity. A typical well might drill 1½ miles beneath the surface and then laterally 2,000-9,000 feet.

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Figure 1: Shale Gas Resources

The second innovation entailed improvements to hydraulic fracturing (or fracking). This involves fracturing the

low-permeability shale rock by using water pressure. Although these well stimulation techniques have been around for nearly 50 years, the technology has significantly improved. A water solution injected under high pressure cracks the shale formation. Small particles, usually sand, in the solution hold the cracks open, greatly increasing the amount of natural gas that can be extracted. Fracturing the rock using water pressure is often aided by chemistry (polymers, gelling agents, foaming agents, etc.). A typical well requires two to three million gallons of water and 1.5 million pounds of sand. About 99.5% of the mixture is sand and water. Figure 2 illustrates these technologies. Another important technology is multi-seismology that allows a more accurate view of potential shale gas deposits.

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Figure 2: Geology of Shale Gas and Conventional Natural Gas

With these innovations in natural gas drilling and production, the productivity and profitability of extracting

natural gas from shale deposits became possible. Further, unlike traditional associated and non-associated gas deposits that are discrete in nature, shale gas often occurs in continuous formations. While shale gas production is complex and subject to steep production declines, shale gas supply is potentially less volatile because of the continuous nature of shale formations. Many industry observers suggest that the current state of shale gas operations is more closely analogous to manufacturing operations than traditional oil and gas exploration, development and production.

These new technical discoveries have vastly expanded estimates of natural gas resources and will offset

declines in other production. Estimates of technically recoverable shale gas were first assessed by National Petroleum Council (NPC) at 38 trillion cubic feet (TCF) in 2003. More recently in 2009, the Potential Gas Committee (PGC) estimated US shale gas resources of 615-680 TCF. And there are some estimates of over 900 TCF. The United States is now estimated to possess over 2,500 TCF of natural gas reserves, one-third of which is shale gas that no one knew how to extract economically as recently as five years ago. This translates into an additional supply of 36 years at current rates of consumption of about 23 TCF per year. Total US natural gas resources are estimated to be large enough to supply over 100 years of demand. In less than two years, the US has sharply reduced gas imports from Canada and liquefied natural gas (LNG) receipts. These new technical discoveries have vastly expanded reserves and will offset declines in conventional associated natural gas production.

Higher prices for natural gas in the last decade (especially after hurricanes Katrina and Rita) and the advances

in horizontal drilling and hydraulic fracturing (i.e., chemistry in action) changed the dynamics for economic shale gas extraction. The latter technologies allowed extraction of shale gas at about $7.00 per thousand cubic feet, which was well below prices of natural gas during the time just after the hurricanes. With new economic viability, natural gas producers responded by drilling, setting off a “shale gas rush”, and as learning curve effects took hold, the cost to extract shale gas (including return on capital) fell, making even more supply (and demand) available at lower cost. Moreover, natural gas liquids have become paramount in changing the economics of shale gas production. It is the sales of ethane and other liquids that have enabled producers to extract and sell

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natural gas at less than $3.50 per thousand cubic feet. Although the path was irregular, average daily consumption of natural gas rose from 60.3 billion cubic feet (BCF) per day in 2005 to 62.0 BCF per day in 2009. Moreover, since the mid-2000s, US-proved natural gas reserves have risen by one-third. In economists’ terms, the supply curve shifted to the right, resulting in lower prices and greater availability. During this same time, average natural gas prices fell from $7.33 per thousand cubic feet in 2005 to $3.65 per thousand cubic feet in 2009. In 2010 and 2011, a recovery of gas-consuming industries and prices occurred. Average daily consumption rose to 66.9 BCF and prices strengthened to $4.12 per thousand cubic feet. Figure 3 illustrates how this new technology’s entrance into the market expanded supply and pushed prices lower.

Figure 3: The Advent of Shale Gas Resulted in More, Less Costly Supply of Natural Gas

The results of the shift in North American natural gas markets have had the positive effect of lowering prices

and expanding supply. In less than two years, the US has gone from a gas importing nation to a gas surplus nation and is now the largest natural as producing nation. Shale gas is thus a “game changer”. In the decades to come, shale gas could provide over 55% of US natural gas needs, compared to 8% in 2008. The availability of this low priced natural gas could improve US industry competitiveness. Lower natural gas prices have shifted supply curves for several big manufacturing industries to the right, so broader manufacturing will benefit from shale gas by lowering their input (i.e., natural gas) costs. A number of leading industries, including aluminum, chemicals, iron and steel, glass, and paper, are large consumers of natural gas that would benefit from shale gas developments and boost capital investments and output. These manufacturers add a great deal of value to the natural gas they consume.

Manufacturers in these industries compete globally and small cost advantages may be all it takes to tip the

balance for some companies. Indeed, this development was recently covered in a recent Boston Consulting Group study -- U.S. Manufacturing Nears the Tipping Point: Which Industries, Why, and How Much? -- uncovered a “tipping point” in cost-risk among seven key industries (computers and electronics, appliances and electrical equipment, machinery, furniture, fabricated metal products, plastic & rubber products, and transportation

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goods) and that as these industries “re-shore” to the USA, the USA will gain $80 billion to $120 billion in added annual output and two million to three million jobs.

With rising population and incomes, as well as increased economic activity and regulations, promoting natural

gas use in electricity generation would tend to shift the demand curve to the right and move it up along the supply curve. This could partially offset some of the positive gains achieved during the past five years, although further technological developments in drilling and fracturing could spur even more abundant economic resources.

The use of hydraulic fracturing in conjunction with horizontal drilling has opened up resources in low

permeability formations that would not be commercially viable without this technology, but there are some policy risks. Some public concern, however, has been raised regarding hydraulic fracturing due to the large volumes of water and potential contamination of underground aquifers used for drinking water, although fracturing occurs well below drinking water resources. Limiting the use of hydraulic fracturing would impact natural gas production from low permeability reservoirs. Ill-conceived policies that restrict supply or artificially boost demand are also risks. Local bans or moratoria could present barriers to private sector investment. A final issue is the need for additional gathering, transport and processing infrastructure. The Marcellus and some other shale gas deposits are located outside the traditional natural gas supply infrastructure to access the shale gas.

The United States must ensure that our regulatory policies allow us to capitalize on shale gas as a vital energy

source and manufacturing feedstock, while protecting our water supplies and environment. We support state-level oversight of hydraulic fracturing, as state governments have the knowledge and experience to oversee hydraulic fracturing in their jurisdictions. We are committed to transparency regarding the disclosure of the chemical ingredients of hydraulic fracturing solutions, subject to the protection of proprietary information.

Methodology and Assumptions The developments in shale gas will engender the wider availability of low cost, domestic energy. For trade-

exposed gas-intensive manufacturing industries, lower costs for key inputs improve competitiveness in those industries. As discussed above, the industries examined in this analysis are major consumers of natural gas and/or natural gas liquids. All of the industries in the analysis use large quantities of natural gas for fuel and power. In addition, the chemical industry uses natural gas liquids as a feedstock for petrochemicals and natural gas as the feedstock for nitrogenous fertilizer and carbon black. All of these industries compete in global markets and are sensitive to natural gas costs. Economic theory and empirical evidence suggest that technological innovations and lower input costs will shift the supply curve to the right, engendering additional industry output.

The objective of the research was to quantify the effects of lower-priced and abundant shale gas on the

output of these US manufacturing industries as well as identify the indirect and induced effects on other sectors of the economy. That is, the supply responses. The economic impact of new investment is generally manifested through four channels:

• Direct impacts - such as the employment, output and fiscal contributions generated by the sector itself • Indirect impacts - employment and output supported by the sector via purchases from its supply chain • Induced impacts - employment and output supported by the spending of those employed directly or

indirectly by the sector • Spillover (or catalytic) impacts - the extent to which the activities of the relevant sector contribute to

improved productivity and performance in other sectors of the economy

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The analysis focused on the first three channels. Spillover (or catalytic) effects would occur from new investment in petrochemicals, but these positive externalities are difficult to quantify and thus were not examined in the analysis. These positive effects could include heightened export demand and the impacts on the industries from renewed activity among domestic end-use customer industries. Due to model limitations, the impact on exports cannot be separately identified, but clearly, increased production is likely to lead to higher exports because of enhanced competitiveness.

From a policy viewpoint, the analysis assumes no barriers to the development of oil and gas. In particular, a

policy environment amenable to further expansion of shale gas extraction and related pipeline and other infrastructure development is assumed. Furthermore, it is assumed that there are no barriers (e.g., permits) to private sector development

The research methodology was quantitative in nature and employed a triangulating approach, which aids

validity. Initially, a comprehensive and exhaustive search of the literature on each of the industries was conducted. These secondary sources included government data, trade literature, annual reports, security analyst reports, consultant reports, and other publications and were used to better understand the energy use and dynamics of each industry. Using this body of literature, each of the key industries was then examined separately. An assessment of the potential supply-side response from lower natural gas prices was made employing known elasticities from econometric models and the economics literature. Various changes in the long-term price of natural gas were assessed within the context of industry consumption patterns and industry dynamics. The various scenarios suggested declines (from the most recent EIA Annual Energy Outlook’s reference case scenario) in long-term natural gas prices in the 15-23% range during the 2015-20 period compared to the average during the 2000-2008 period. Various combinations of price and industry responsiveness were evaluated and then using a probabilistic approach, expected value of the change in long-term industry output was assessed. The expected change in each industries’ output (from a baseline projection) resulting from lower natural gas prices reflects the long-term in the 2015-20 period. All changes in output are expressed in 2010 constant dollars. These will average roughly 7.3% above what output would be otherwise in this period and will vary from industry to industry, with a range from 1.4% to 14.6%.

In a second phase, the preliminary results were shared with economists and policy experts within associations (and companies) representing the major industries in this study. In some cases the expected change in output was revisited to reflect these insights. In addition, projections and opinions of industry consultants were elicited and taken into account. This was especially the case for the chemical industry, where a number of leading consultant organizations have examined the effects of lower cost shale gas on industry capacity, production, and exports. These were all rich sources of data. Subsequent analysis was iterative.

The analysis excludes the endogenous effects of shale developments by the oil and gas sector itself. These

effects could generate hundreds of thousands, if not millions of direct, indirect and induced jobs. The scope of this study focuses on these eight natural gas-intensive industries and the economic and employment effects from their increased expansion of output and capital spending. To the extent that increased output of the eight industries examined in this case study do purchase oil and gas products, those effects are captured. For example, the steel industry uses lubricating oil for moving machinery and the steel industry’s increased output would lead to increased demand for lubricants.

The analysis was broken into two parts: the one-time change in final demand that occurs during the initial

capital investment phase when new plant and equipment are purchased and the ongoing change in final demand that occurs as a result of lower natural gas prices and increased availability of ethane. The expected changes in these industries’ output were then used to drive the modeling of the economic response. In addition to added output, the effects on employment and tax revenues also were assessed. To accomplish the goals of the analysis, a robust model of the direct, indirect and other economic effects is needed, as well as reasonable

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assumptions and parameters of the analysis. To estimate the economic impacts from increasing investment in US petrochemicals production, the IMPLAN model was used. The IMPLAN model is an input-output model based on a social accounting matrix that incorporates all flows within an economy. The IMPLAN model includes detailed flow information for 440 industries. As a result, it is possible to estimate the economic impact of a change in final demand for an industry at a relatively fine level of granularity. For a single change in final demand (i.e., change in industry spending), IMPLAN can generate estimates of the direct, indirect and induced economic impacts. Direct impacts refer to the response of the economy to the change in the final demand of a given industry to those directly involved in the activity. Indirect impacts (or supplier impacts) refer to the response of the economy to the change in the final demand of the industries that are dependent on the direct spending industries for their input. Induced impacts refer to the response of the economy to changes in household expenditure as a result of labor income generated by the direct and indirect effects.

Table 1: Additional Output of Eight Gas-Intensive Manufacturing Industries from Renewed Competitiveness Arising from Shale Gas

$ Billion

Paper $3.70 Chemicals (excluding Pharmaceuticals) 70.22 Plastic & Rubber Products 33.28 Glass 0.66 Iron & Steel 5.03 Aluminum 1.69 Foundries 0.62 Fabricated Metal Products 5.81

Total $121.00

Because some of the output of one industry, i.e., petrochemicals, is a key raw material for another industry, i.e., plastic and rubber products, the IMPLAN model was calibrated so that there was no double counting of the upstream supplier impacts.

An input-output model such as IMPLAN is a quantitative economic technique that quantifies the interdependencies between different industries (or sectors) of a national economy. Although first suggested by Francois Quesnay (1694-1774) and by the general equilibrium work of Léon Walras (1834-1910), it was Wassily Leontief (1905-1999) who developed this type of analysis and took the Nobel Prize in Economics for his work on this model. Although complex, the input-output model is fundamentally linear in nature and as a result, facilitates rapid computation as well as flexibility in computing the effects of changes in demand. In addition to studying the structure of national economies, input-output analysis has been used to study regional economies within a nation, and as a tool for national and regional economic planning. A primary use of input-output analysis is for measuring the economic impacts of events, public investments or programs such as base closures, infrastructure development, or the economic footprint of a university or government program. The IMPLAN model is used by the Army Corp of Engineers, Department of Defense, Environmental Protection Agency, and over 20 other agencies, numerous government agencies in over 40 states, over 250 colleges and universities, local government, non-profits, consulting companies, and other private sector companies.

Because the IMPLAN model does not include the effects of the investment needed to produce the added

output of the paper, chemicals, plastic & rubber products, glass, iron & steel, aluminum, foundries, and fabricated metal products industries arising from renewed competitiveness enabled by shale gas, the value of the capital investment was separately estimated. Based on the economics and engineering literature, typical

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capital-output ratios for each of the eight industries are estimated to range from 0.27:1 to 0.73:1. That is, $1.0 billion in added manufacturing output could require new capital investment ranging from $270 million to $730 million. Data sources for calculating these capital-output ratios include the Quarterly Financial Report prepared by the US Census Bureau, fixed asset and industry data from the Bureau of Economic Analysis (BEA), and the Corporation Sourcebook prepared by the Statistics of Income Division of the Internal Revenue Service. The capital-output ratio of 0.49:1 that was used was based on an average of ratios calculated. That is, $1.0 billion in added chemicals output, for example, would require new capital investment on the order of $490 million. The scope of the analysis was limited to these eight manufacturing industries and did not include the investment or business activity generated by the extraction, recovery or infrastructure related to delivery of the natural gas to manufacturing.

The results of the analysis indicate that the added $121.0 billion output of the paper, chemicals, plastic &

rubber products, glass, iron & steel, aluminum, foundries, and fabricated metal products industries would necessitate new capital investment of $72.0 billion. These investments could be a combination of plant restarts, debottlenecking, brownfield, and greenfield projects. Because the capital stocks of many of these industries are worn-down, it is likely that greenfield investment may account for a significant share of the capital investment.

Figure 4: New Capital Investment Needed by Industry

The composition by asset type for this capital investment was derived using the average historical mix for each

of the eight industry’s expenditures for fixed assets. The fixed asset data from the BEA was used. These assumed spending by asset type were assigned to the appropriate NAICS industry and the IMPLAN model was re-run to incorporate the effects of the new investment. Nearly 80% of the $72.0 billion in investment would be for industrial equipment and machinery, other mechanical equipment, and structures.

Paper 4%

Chemicals (excluding

Pharmaceuticals) 60%

Plastics & Rubber Products

24%

Glass 1%

Iron & Steel 5%

Aluminum 2%

Foundries 0%

Fabricated Metal Products

4%

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Figure 5: The Composition (by Asset) of New Capital Investment Needed

Effects on added output, jobs, and tax revenues from the new investment spending were assumed to be a

one-time impact and were modeled as such. Although the spending would likely occur over the period of five or so years, distinct phases in the project are likely, with engineering and design occurring early, followed by equipment procurement, and then construction and installation. Some overlap of construction activity is possible but assumed to be modest in scope.

The subsequent sections of this report examine the effects that lower natural gas costs (arising from the

revolution in shale gas) would have in fostering renewed manufacturing competitiveness, output, and investment. The following is a brief review of the dynamics affecting these industries as well as how natural gas (and energy in general) is used by each industry and likely supply responses.

Paper Firms in this $170.2 billion industry manufacture wood pulp (made by separating the cellulose fibers from

impurities in wood or other materials), paper rolls and reams (including newspaper) which are sold to downstream manufacturers of paper products, such as coated or treated paper, office stationery, paper bags, newspaper or magazine publishers, printing services and others; and various paperboard products, including unbleached and bleached packaging paperboard, coated paperboard, industrial converting paperboard and recycled paperboard. This manufacturing activity may occur in integrated or stand-alone mills. Also included are manufacturers of cardboard boxes and containers, sanitary paper products, labels, egg cartons, and other paper products. According to data from the EIA, the paper industry uses about 460 billion cubic feet (BCF) of natural gas per year for fuel and power purposes. Natural gas represents 20% of the industry’s fuel and power consumption.

The industry faces a number of challenges. Volatile commodity prices coupled with weak demand conditions

decreased profit for the industry in recent years. The wood pulp segment is highly globalized with strong growth in emerging economies providing US mills with an alternative means of sustaining production as domestic

Structures 10% Fabricated Pipe

and Fittings 3%

Industrial Equipment and

Machinery 59%

Other Mechanical Equipment

10%

Computers and Communications

Equipment 4%

Electrical Equipment

1%

Software 7%

Other 6%

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demand for wood pulp declined. As a result, export demand helped offset declining domestic demand. Rising packaging requirements and increased paper-based advertising provide some support as well. Should the US dollar continue depreciating, it would make US exports relatively more competitive in the global market and favorably affect industry revenue. In the paper segment, revenue from domestic customers relies heavily on the performance of downstream industries like paper converting, publishing and printing. Domestic demand has declined due to competition from electronic communication, offshoring practices by downstream industries, and high import competition. These have restricted production. Since paperboard is not very cost-effective to transport, this segment of the industry has some protection from imports. Still, the industry has been declining, a direct result of falling US industrial production, offshoring of manufacturing activity, and increasing import penetration of downstream consumer goods. These practices have reduced demand for cardboard. Since paperboard is primarily sold to cardboard packaging industries, demand for paperboard has followed suit. Prospects in the long-term will also depend upon the strength of the US dollar, which if high could encourage more imported consumer goods. As a result, cardboard requirements for packaging would decrease, diminishing demand for paperboard over time.

Extrapolating from the econometric models and the economics literature, various changes in the long-term

price of natural gas were assessed within the context of paper industry consumption patterns and industry dynamics. Various combinations of price and industry responsiveness were evaluated and then using a probabilistic approach, expected value of the change in long-term industry output was assessed. For the paper industry, a 2.2% boost in industry output (above a baseline) could occur in the 2015-20 period given the underlying assumptions about reductions in natural gas prices and industry consumption patterns and dynamics. This is the equivalent of $3.7 billion in additional paper industry output (as measured in constant 2010 dollars). Details on the industry’s direct, indirect, and induced effects on output, payrolls and jobs are provided in the appendix.

The geographic spread of the paper industry is highly concentrated in the Southeast. Major producing states

include California, Georgia, Florida, Maine, Michigan, Mississippi, New York, Ohio, Pennsylvania, South Carolina, Tennessee, Washington, and Wisconsin.

Chemicals Excluding pharmaceuticals, firms in this $483.6 billion industry produce a variety of chemistry products

including chlorine, caustic soda, soda ash and other inorganic chemicals, bulk petrochemicals and organic chemical intermediates, industrial gases, carbon black, colorants, pine chemicals, other basic chemicals, adhesives and sealants, coatings, other specialty chemicals and additives, plastic compounding services, fertilizers, crop protection products, soaps and detergents, and other consumer chemistry products. Although pharmaceuticals are classified by the government as part of chemicals, for the purposes of this analysis, pharmaceuticals were excluded because of the different industry dynamics. The chemical industry transforms natural raw materials from earth, water, and air into valuable products that enable safer and healthier lifestyles. Chemistry unlocks nature’s potential to improve the quality of life for a growing and prospering world population by creating materials used in a multitude of consumer, industrial and construction applications. The transformation of simple compounds into valuable and useful materials requires large amounts of energy. According to data from the EIA, the chemical industry uses 1.7 trillion cubic feet (TCF) of natural gas per year, largely for fuel and power purposes. Natural gas represents 33% of the industry’s energy consumption.

The chemical industry is energy-intensive. This is especially the case for basic chemicals, as well as certain

specialty chemical segments (e.g., industrial gases). The largest user of energy is the petrochemical and downstream chemical derivatives business. Inorganic chemicals and agricultural chemicals (especially fertilizers) also are energy-intensive.

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Unique among manufacturers, the chemical industry relies upon energy inputs, not only as fuel and power for its operations, but also as raw materials in the manufacture of many of its products. For example, oil and natural gas are raw materials (termed “feedstocks”) for the manufacture of organic chemicals. Petroleum and natural gas contain hydrocarbon molecules that are split apart during processing and then recombined into useful chemistry products. Feedstock use is concentrated in bulk petrochemicals and fertilizers.

There are several methods of separating or “cracking” the large hydrocarbon chains found in fossil fuels

(natural gas and petroleum). Natural gas is processed to produce methane and natural gas liquids (NGLs) that are contained in the natural gas. These natural gas liquids include ethane, propane, and butane, and are produced mostly via natural gas processing. That is, stripping the NGLs out of the natural gas (which is mostly methane) that is shipped to consumers via pipelines. This largely occurs in the Gulf Coast region and is the major reason the US petrochemicals industry developed in that region. Ethane is a saturated C2 light hydrocarbon; a colorless and odorless gas. It is the primary raw material used as a feedstock in the production of ethylene and competes with other steam cracker feedstocks. Propane is also used as a feedstock but it is more widely used as a fuel. Butane is another NGL feedstock. Natural gas is directly used to manufacture nitrogenous fertilizers.

Petroleum is refined to produce a variety of petroleum products, including naphtha and gas oil, which are the

primary heavy liquid feedstocks. Naphtha is a generic term for hydrocarbon mixtures that distill at a boiling range between 70°C and 190°C. The major components include normal and isoparaffins, naphthenes and other aromatics. Light or paraffinic naphtha is the preferred feedstock for steam cracking to produce ethylene, while heavier grades are preferred for gasoline manufacture. Gas oil is another distillate of petroleum. It is an important feedstock for production of middle distillate fuels—kerosene jet fuel, diesel fuel and heating oil—usually after desulfurization. Some gas oil is used as olefin feedstock.

Naphtha, gas oil, ethane, propane and butane are processed in large vessels or “crackers”, which are heated

and pressurized to crack the hydrocarbon chains into smaller ones. These smaller hydrocarbons are the gaseous petrochemical feedstocks used to make the products of chemistry. In the US petrochemical industry, the organic chemicals with the largest production volumes are methanol, ethylene, propylene, butadiene, benzene, toluene and xylenes. Ethylene, propylene and butadiene are collectively known as olefins, which belong to a class of unsaturated aliphatic hydrocarbons. Olefins contain one or more double bonds, which make them chemically reactive. Benzene, toluene and xylenes are commonly referred to as aromatics, which are unsaturated cyclic hydrocarbons containing one or more rings. Another key petrochemical feedstock -- methane -- is directly converted from the methane in natural gas and does not undergo the cracking process. Methane is directly converted into methanol and ammonia. Olefins, aromatics and methanol are generally referred to as primary petrochemicals, and are the chemical starting point for plastics, pharmaceuticals, electronic materials, fertilizers, and thousands of other products that improve the lives of a growing population.

Ethane and propane derived from natural gas liquids are the primary feedstocks used in the United States to

produce ethylene, a building block chemical used in thousands of products, such as adhesives, tires, plastics, and more. While propane has additional non-feedstock uses, the primary use for ethane is to produce petrochemicals; in particular, ethylene. Thus, if the ethane supply in the US increases it is reasonable to assume that, all things being equal, ethylene supply will also increase. In turn, the additional ethylene and other materials produced from the ethylene are expected to be consumed downstream, for example, by plastic resin producers. Other than ethylene, the increased availability of lower cost natural gas could also boost methanol and ammonia production. In addition, other downstream chemistry output (inorganic and organic chemicals, synthetic rubber, man-made fibers, other fertilizers, coatings, other specialty chemicals, and consumer chemistry products) could also be boosted if petrochemical supply were expanded. A more detailed discussion on energy use is provided in the ACC’s March 2011 analysis “Shale Gas and New Petrochemicals Investment: Benefits for the Economy, Jobs, and US Manufacturing”.

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The results presented in this report differ from those presented in ACC’s March 2011 report. The analysis discussed in the report “Shale Gas and New Petrochemicals Investment: Benefits for the Economy, Jobs, and US Manufacturing” focused solely on petrochemicals and products associated with a petrochemical complex (e.g., bulk petrochemicals, and plastic resins). This current analysis is expanded in scope and also includes fertilizers, carbon black, methanol and other direct consumers of natural gas as well as likely supply responses from producers of other commodity inorganic and organic chemicals, organic intermediates, other downstream petrochemical derivatives, coatings, adhesives, coatings, plastic compounders, other specialty chemicals and additives, pesticides, and other chemistry products.

The chemical industry faces a number of challenges and opportunities. Volatile energy costs, other raw

material costs and selling prices have a marked effect on industry performance. Demand is dependent upon the health of downstream sectors such as construction, light vehicle, appliance, furniture, electronics, other consumer goods, machinery, textiles, and food industries. In between and along the supply chain are packaging, paper, and other intermediate manufacturing industries. Light vehicles and construction (most notably housing) are the major end-uses, and demand has fallen appreciably in the last five years and has yet to fully recover. Globalization and the movement of customer industries to low-wage nations have adversely affected demand during the past two decades. Nowhere has this been more pronounced than in man-made fibers, where demand from customers is anticipated to fall further as textile mills close or move overseas. A recovery of consumer spending and other economic activity and the downstream customers will determine future demand. In some segments such as printing ink and photographic chemicals, new electronic media and technological developments have resulted in much lower demand. Environmental, energy, and other government policies play a role and in general have raised costs and slowed innovation. On the other hand, environmental policies have been favorable for industrial gases. In addition, plastics, adhesives, and coatings continue to make inroads against competing materials and systems. In recent years, the effect of shale gas has been very pronounced, positively affecting industry competitiveness and boosting exports.

Extrapolating from the econometric models and the economics literature, various changes in the long-term

price of natural gas were assessed within the context of chemical industry consumption patterns and industry dynamics. Various combinations of price and industry responsiveness were evaluated and then using a probabilistic approach, expected value of the change in long-term industry output was assessed. For the chemical industry, a 14.5% boost in industry output (above a baseline) could occur in the 2015-20 period given the underlying assumptions about reductions in natural gas and ethane prices and industry consumption patterns and dynamics. This is the equivalent of $70.2 billion in additional chemical industry output (as measured in constant 2010 dollars). The supply response varies among segments. In ethylene and downstream derivatives, for example, the expansion of US capacity is anticipated to exceed 31% and in nitrogenous fertilizers if sound and consistent policies were in place the capacity gains could be nearly 20%. For carbon black and synthetic rubber, capacity gains of 15% are possible. The large supply response reflects that in addition to improved competitiveness from lower fuel and power cost, competitiveness is especially enhanced because the industry’s feedstock and raw materials are energy-intensive as well. Details on the industry’s direct, indirect, and induced effects on output, payrolls and jobs are provided in the appendix.

ACC member companies, including Bayer MaterialScience, Chevron Phillips Chemical, The Dow Chemical

Company, LyondellBasell, Methanex, Shell Chemical, and others have announced new investments in US petrochemical capacity to benefit from available resources and grow their chemical businesses. Other chemical companies making similar announcements include Formosa Plastics, Westlake Chemical, and Williams and others are also eyeing US expansions. PCS Nitrogen has announced an ammonia plant project in Louisiana. Ammonia is one of the few chemicals that are directly derived from natural gas. In total, over 30 major projects have been announced. Some of these represent foreign direct investment (FDI) from chemical companies in Brazil, Canada, Germany, Indonesia, Saudi Arabia, South Africa, Taiwan, and elsewhere.

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The geographic spread of the chemical industry is highly concentrated on the Gulf Coast as well as other major industrial states. Major producing states include Texas and Louisiana as well as California, Florida, Georgia, Illinois, Iowa, New Jersey, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, and Virginia.

Plastic & Rubber Products Firms in this $185.7 billion industry convert plastic resins or rubber into a variety of products. The largest

segment of this industry is comprised of establishments that engage in converting plastic resins into plastic bags and forming, coating or laminating plastics film and sheets into single-wall or multiwall plastic bags; producing plastic pipes, plastic fittings for plastic pipes, and plastic profile shapes such as rods, tubes, plates and automotive parts; laminated plastic shapes, plates and sheets; foam products such as bedding, cushioning, food containers and cups, insulation, packaging products and other applications; and bottles and containers for soft drinks, milk, condiments, food, and household and automotive chemicals. The smaller segment is rubber products, which is dominated by manufacturers of tires and related products for motor vehicles, aircraft, and other equipment. Companies in this segment also manufacture a range of rubber hoses and belts (including garden hoses) as well as other rubber products such as balloons, doormats, membrane roofing, prophylactics, rubber bands, and sheeting used in a variety of consumer and industrial products. According to data from the EIA, the plastic and rubber products industry uses about 125 billion cubic feet (BCF) of natural gas per year for fuel and power purposes. Natural gas represents 38% of the industry’s fuel and power consumption.

The industry faces a number of challenges and opportunities. In recent years, raw material (plastic resin,

additives, synthetic rubber, etc.) prices have been volatile, and in combination with import competition has resulted in tightened profit margins. In plastic products, declining demand from downstream industries, major changes to the competitive landscape and opposition to the use of plastic bags. Plastic packaging manufacturers able to offer advanced barrier-protection technologies will likely gain market share. This move will also provide the industry with some defense against low-cost Asian imports. The industry will also continue to benefit from economies of scale achieved from recent mergers and acquisitions. Shifts in the construction industry, food service establishments and food retailers and distributors have directly affected foamed polystyrene producers where environmental concerns also play a role. The pipe segment’s fortunes have been affected by softness in demand for its products, primarily from the construction and light vehicle markets. Growth in the agriculture market will help offset this volatility in demand. In addition to the weakness in construction and light vehicles, many consumer goods manufacturers, such as electronic and appliance producers, reduced production, requiring fewer plastics. Light-weighting in automobiles to foster fuel efficiency will provide opportunities.

Nonetheless, many of these markets will experience cyclical recovery. The collapse of housing and softness in

light vehicles has adversely affected foamed polyurethane products as did bedding, furniture, and appliances. In plastic bottles, changes in consumer tastes and overall reductions in spending due to the recession led to reduced demand for the plastic bottles in which soft drinks are packaged. Environmental issues also play a role in this area. Despite these challenges, plastic remains the preferred way to package staple products which will offset pressures from imported goods and a shift of manufacturing offshore. Research and development for plastic products as substitutes for other materials will continue to provide opportunities for growth in a number of market segments. In rubber products, demand for tires and other industry products is determined by the performance of the light vehicle and construction industries. The recession caused steep declines in light vehicles sales and other consumer spending. Despite a projected increase in demand for tires over the next 10 years, industry outsourcing will continue as firms widen profit margins by moving facilities to countries with lower labor costs and proximity to key markets. Low-cost manufacturers of other rubber products from emerging economies (especially Asia) are catching up to the domestic industry players and with intensified competition, inhibiting domestic prospects.

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Extrapolating from the econometric models and the economics literature, various changes in the long-term price of natural gas were assessed within the context of plastic and rubber products industry consumption patterns and industry dynamics. Various combinations of price and industry responsiveness were evaluated and then using a probabilistic approach, expected value of the change in long-term industry output was assessed. For the plastic and rubber products industry, a 17.9% boost in industry output (above a baseline) could occur in the 2015-20 period given the underlying assumptions about reductions in natural gas prices and industry consumption patterns and dynamics. This is the equivalent of $33.28 billion in additional plastic and rubber products industry output (as measured in constant 2010 dollars). The large supply response reflects that in addition to improved competitiveness from lower fuel and power cost, competitiveness is especially enhanced because the industry’s raw materials (plastic resin, additives, synthetic rubber, etc.) are energy-intensive. Details on the industry’s direct, indirect, and induced effects on output, payrolls and jobs are provided in the appendix.

Tire manufacturing is an energy-intensive process and the major raw material (synthetic rubber) is derived

from hydrocarbon fuels. Bridgestone, Continental Tire and Michelin have all announced plans to construct new tire plants. Other rubber products and plastic products are energy-intensive as well. In many of these segments, smaller companies predominate, making it hard to monitor project announcements.

The geographic spread of the plastics and rubber products industry is highly concentrated in major industrial

states. Major producing states include California, Florida, Illinois, Indiana, Michigan, North Carolina, Ohio, Pennsylvania, South Carolina, Texas, Virginia, and Wisconsin.

Glass Firms in this $19.7 billion industry produce a wide range of glass products by melting silica sand or cullet, and

fabricating purchased glass. The industry is comprised of four segments: flat glass manufacturing (including laminated glass); pressed or blown glass and glassware; glass container manufacturing (including bottles and jars); and product manufacturing from purchased glass, which includes lighting, mirrors, architectural glass and electronic glassware. According to data from the EIA, the glass industry uses nearly 150 billion cubic feet (BCF) of natural gas per year for fuel and power purposes. Natural gas represents 53% of the industry’s fuel and power consumption.

The industry faces a number of challenges. Industry sales have steadily declined since the late 1990s, but this

trend accelerated during the last decade. The acceleration reflects the economic recession on consumer spending and most notably, the severe contraction in housing and other construction. The steady contraction in the domestic glass manufacturing industry over recent decades is partly the result of imports capturing a greater share of the domestic market as well as the substitution of glass containers by alternative packaging materials, notably aluminum cans and plastic bottles. In the long-term, further product substitution and import penetration will restrain the pace of industry expansion.

Extrapolating from the econometric models and the economics literature, various changes in the long-term

price of natural gas were assessed within the context of glass industry consumption patterns and industry dynamics. Various combinations of price and industry responsiveness were evaluated and then using a probabilistic approach, expected value of the change in long-term industry output was assessed. For the glass industry, a 3.3% boost in industry output (above a baseline) could occur in the 2015-20 period given the underlying assumptions about reductions in natural gas prices and industry consumption patterns and dynamics. This is the equivalent of $656 million in additional glass industry output (as measured in constant 2010 dollars). Details on the industry’s direct, indirect, and induced effects on output, payrolls and jobs are provided in the appendix.

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The geographic spread of the glass industry is highly concentrated in major industrial states. Major producing states include California, Indiana, Michigan, North Carolina, Ohio, and Pennsylvania.

Iron & Steel Firms in this $113.8 billion industry manufacture iron and steel into a variety of shapes through rolling

processes to customer specifications. Iron is manufactured in a blast furnace or via direct reduction methods. Steel may be manufactured in basic oxygen furnaces or in electric arc furnaces both of which use virgin materials and recycled steel in varying amounts. The industry includes firms that manufacture basic steel shapes (such as bars, plates, rods, sheets, strips and wire) or form pipe and tube from steel they have produced themselves or from semi-finished steel they have purchased. According to data from the EIA, the iron and steel industry uses over 375 billion cubic feet (BCF) of natural gas per year for fuel and power purposes. Natural gas represents 35% of the industry’s fuel and power consumption. Coal and coke represent the dominant fuel due to their direct use by the industry.

The global recession resulted in a dramatic reduction in demand for steel products as the primary customer

markets are construction and manufacturing. The light vehicle, construction, appliance and machinery industries are particularly large consumers of steel. The industry is characterized by international competition as 40% of steel is traded globally. Volatile raw materials costs and selling prices have had a marked effect on industry performance. Shale gas exploration and distribution has favorably impacted demand in the steel pipe manufacturing sector. A return to sustained growth in construction activity in the middle of this decade will positively influence steel demand. Also, a recovery in light vehicle manufacturing will increase demand for steel products.

Extrapolating from the econometric models and the economics literature, various changes in the long term

price of natural gas were assessed within the context of iron and steel industry consumption patterns and industry dynamics. Various combinations of price and industry responsiveness were evaluated and then using a probabilistic approach, expected value of the change in long-term industry output was assessed. For the iron and steel industry, a 4.4% boost in industry output (above a baseline) could occur in the 2015-20 period given the underlying assumptions about reductions in natural gas prices and industry consumption patterns and dynamics. This is the equivalent of $5.03 billion in additional iron and steel output (as measured in constant 2010 dollars). Details on the industry’s direct, indirect, and induced effects on output, payrolls and jobs are provided in the appendix.

Shale gas development has exerted a favorable impact on natural gas prices and energy costs at steel facilities.

One step removed from the direct supply/demand relationship is the overall uptick in U.S. manufacturing due to lower energy prices, which the steel sector believes will have a positive impact on domestic steel consumption as more companies choose to manufacture goods domestically. The development of shale gas has also led to sharply increased demand for pipe and tube for production and transmission. A number of domestic pipe mills in Ohio and Missouri, are now expanding or renovated, and even foreign direct investment in new pipe mills to be built in Ohio and Mississippi, is occurring. Of interest are the plans of V&M Star Steel (the North American subsidiary of the French pipe maker Vallourec) to invest $650 million to build a small-diameter rolling mill in Youngstown, Ohio. Carpenter Technology, ThyssenKrupp, Timken, and U.S. Steel have all announced projects as have a number of small producers and steel service centers. These are all demand-driven, but lower natural gas prices are also motivating projects. Most notably, Nucor Corporation has broken-ground on a $750 million direct reduced iron (DRI) making facility in Louisiana. Direct reduction technology converts natural gas and iron ore pellets into high quality iron (traditionally produced in the blast furnace) used by steel mills to produce numerous high quality steel products such as sheet, plate and special bar quality steel. The Nucor DRI facility is the first phase of a multi-phase expansion. Energy costs and availability have been cited as important factors.

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The geographic spread of the iron and steel industry is highly concentrated in major industrial states. Major producing states include Indiana, Ohio, Alabama, Arkansas, Illinois, Pennsylvania, Michigan, South Carolina, North Carolina, and Texas.

Aluminum Firms in this $22.3 billion industry use one or more of the processes to convert aluminum-bearing ore bauxite

into products like alumina (a semi-refined aluminum product), aluminum ingots and rolled or drawn aluminum products (such as plate, sheet, foil and extrusions). The industry also includes firms that recover aluminum from scrap. According to data from the EIA, the aluminum industry uses over 180 billion cubic feet (BCF) of natural gas per year for fuel and power purposes. Natural gas represents 49% of the industry’s fuel and power consumption.

As evidenced by the growing number of US firms establishing operations overseas and the rising importance

of US exports, the aluminum industry is becoming increasingly global. Although Canada and Mexico remain a major destination for US exports, China and other Asian counties are quickly becoming major export markets for US producers. As other manufacturers of light vehicles and parts locate operations in countries with lower wage costs, total exports will likely continue to increase. Downstream demand from transportation equipment manufacturing is a major determinant of industry performance. Automobile manufacturers will increasingly use aluminum for car bodies, engines, and components since it is a lighter alternative to other metals, helping them meet fuel-efficiency standards.

Extrapolating from the econometric models and the economics literature, various changes in the long-term

price of natural gas were assessed within the context of aluminum industry consumption patterns and industry dynamics. Various combinations of price and industry responsiveness were evaluated and then using a probabilistic approach, expected value of the change in long-term industry output was assessed. For the aluminum industry, a 7.6% boost in industry output (above a baseline) could occur in the 2015-20 period given the underlying assumptions about reductions in natural gas prices and industry consumption patterns and dynamics. This is the equivalent of $1.69 billion in additional aluminum industry output (as measured in constant 2010 dollars). Details on the industry’s direct, indirect, and induced effects on output, payrolls and jobs are provided in the appendix.

The geographic spread of the aluminum industry is concentrated in major industrial states. Major producing

states include California, Florida, Illinois, and New York.

Foundries Firms in this $25.7 billion industry make iron and steel castings, either from purchased metals or in integrated

secondary smelting and casting plants; or melts and pours non-ferrous metals (aluminum, copper, magnesium, titanium, zinc, etc.) into molds of a desired shape to make castings. Non-ferrous castings can also be made from purchased metals or in integrated secondary smelting and casting facilities. According to data from the EIA, the foundry industry uses over 120 billion cubic feet (BCF) of natural gas per year for fuel and power purposes. Natural gas represents 44% of the industry’s fuel and power consumption.

The foundry industry relies heavily on demand from other sectors of the economy, particularly manufacturing.

The recession hurt the manufacturing sector deeply, thus pulling down the demand for foundry products. After the recession, returning demand from automobile manufacturers for castings has been the primary reason for industry recovery. Should consumer spending improve, demand for light vehicles will increase, thereby increasing the demand for foundry products. Major international markets will also support the industry’s recovery, with higher exports. Raw material costs and selling prices have been volatile, which has hurt industry performance. Slim or negative profit margins have led to industry exits or acquisition by larger players.

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Furthermore, major customers in automobile manufacturing have increasingly outsourced their purchases to international foundries in China, Mexico, and other emerging nations. Growth in demand from light vehicles will engender industry performance in the coming years. Furthermore, the increased use of lighter metals, such as aluminum in automobile bodies, should contribute to the competitiveness of aluminum castings against steel. Downward pressure on US production, however, will be a factor as key markets offshore their casting needs to international producers, reducing demand for US-made foundry products.

Extrapolating from the econometric models and the economics literature, various changes in the long-term

price of natural gas were assessed within the context of foundry industry consumption patterns and industry dynamics. Various combinations of price and industry responsiveness were evaluated and then using a probabilistic approach, expected value of the change in long-term industry output was assessed. For the foundry industry, a 2.4% boost in industry output (above a baseline) could occur in the 2015-20 period given the underlying assumptions about reductions in natural gas prices and industry consumption patterns and dynamics. This is the equivalent of $617 million in additional foundry industry output (as measured in constant 2010 dollars). Details on the industry’s direct, indirect, and induced effects on output, payrolls and jobs are provided in the appendix.

The geographic spread of the foundry industry is highly concentrated in major industrial states. Major

producing states include California, Illinois, Indiana, Michigan, Ohio, Pennsylvania, Texas, and Wisconsin.

Fabricated Metal Products Firms in this $327.1 billion sector include a variety of industries, the common feature of which is they

transform metal into intermediate or end-products, or treat metals and metal formed products fabricated elsewhere. Important fabricated metal processes are forging, stamping, bending, forming, and machining, used to shape individual pieces of metal; and other processes, such as welding and assembling, used to join separate parts together. Major segments include forging and stamping, cutlery and hand tools, hardware, spring and wire products, architectural and structural metals, coating, heat treating, boilers and tanks, cans and other metal containers, fasteners, bearings, and other fabricated metal products. According to data from the EIA, the fabricated metal products industries use about 235 billion cubic feet (BCF) of natural gas per year for fuel and power purposes. Natural gas represents 61% of the industry’s fuel and power consumption. Heat is needed for transforming metal products.

The industries face a number of challenges and a unique, detailed story is available for each the major

segments. In general, each has been affected by the Great Recession, which led to a sharp downturn in the construction, light vehicle, appliance, machinery, aircraft, and other end-use customer industries. Weak consumer spending has also played a role as has the strength in business investment. Raw material and other key input costs can be volatile, and with consolidation among customer industries (and buyers) can hurt industry performance. Many manufacturers of light vehicles, hand tools, and parts are locating operations in China, Taiwan, Mexico, and other low-wage countries. In addition, import competition in a number of segments has been high. In addition, competition from other materials (plastic and aluminum containers vs. metal cans) and competing technologies (adhesives vs. fasteners) has been a major factor behind demand dynamics. Downstream demand sectors such as residential and commercial construction, will foster recovery, as will infrastructure construction.

Extrapolating from the econometric models and the economics literature, various changes in the long-term

price of natural gas were assessed within the context of fabricated metal products industry consumption patterns and industry dynamics. Various combinations of price and industry responsiveness were evaluated and then using a probabilistic approach, expected value of the change in long-term industry output was assessed. For the fabricated metal products industry, a 1.8% boost in industry output (above a baseline) could occur in the

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2015-20 period given the underlying assumptions about reductions in natural gas prices and industry consumption patterns and dynamics. This is the equivalent of $5.81 billion in additional fabricated metal products output (as measured in constant 2010 dollars). Details on the industry’s direct, indirect, and induced effects on output, payrolls and jobs are provided in the appendix.

The geographic spread of the fabricated metal products industry is highly concentrated in major industrial states. Major producing states include California, Connecticut, Florida, Georgina, Illinois, Indiana, Kentucky, Massachusetts, Michigan, Missouri, New York, North Carolina, Ohio, Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas, and Wisconsin.

Added Output and Job Creation The output and employment generated by renewed competitiveness and expanded production of the paper,

chemicals, plastic & rubber products, glass, iron & steel, aluminum, foundries, and fabricated metal products industries is significant. The additional $121.0 billion in manufacturing activity would directly generate nearly 200,000 high-paying, desirable jobs in these eight manufacturing industries.

Table 2: Economic Impact from Expanded Production of Eight Manufacturing Industries from Renewed Competitiveness Arising from Shale Gas

Impact Type Employment Payroll

($ Billion) Output

($ Billion)

Direct Effect 199,518 $14.6 $121.0

Indirect Effect 462,292 31.7 143.8

Induced Effect 516,719 24.2 76.8

Total Effect 1,178,528 $70.5 $341.6

In addition, the increased competitiveness arising from shale gas and expanded output by these eight manufacturing industries would generate purchases of raw materials, services, and other supplies throughout the supply chain. Thus, through indirect effects, another 462,000 jobs would be supported by the boost in the output of the paper, chemicals, plastic & rubber products, glass, iron & steel, aluminum, foundries, and fabricated metal products industries.

Finally, the wages earned by new workers in these eight manufacturing industries and workers throughout the

supply chain are spent on household purchases and taxes generating nearly 517,000 jobs induced by the response of the economy to changes in household expenditure as a result of labor income generated by the direct and indirect effects. All told, the additional $121.0 billion in the output of the paper, chemicals, plastic & rubber products, glass, iron & steel, aluminum, foundries, and fabricated metal products industries (from renewed competitiveness of the shale gas revolution) would generate $346.1 billion in output to the economy and nearly 1.2 million new jobs in the United States generating a payroll of $70.5 billion. This comes at a time when 14 million Americans are out of work. Moreover, the new jobs would primarily be in the private sector. A detailed table on jobs created by industry is presented in Appendix Table 1.

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Table 3: Economic Impact from New Investment in Plant and Equipment by the Eight Industries

Impact Type Employment Payroll

($ Billion) Output ($ Billion)

Direct Effect 286,258 $20.5 $72.0

Indirect Effect 313,371 20.4 68.1

Induced Effect 454,244 21.2 67.5

Total Effect 1,053,872 $62.1 $207.6

Following a decade of deindustrialization, new plant and equipment would be required to support the expansion of the paper, chemicals, plastic & rubber products, glass, iron & steel, aluminum, foundries, and fabricated metal products industries. The $72.0 billion in needed investments would generate more than 286,000 jobs, mostly in the construction and capital equipment-producing industries. Indirectly, another $68.1 billion in output and more than 313,000 jobs would be generated throughout the supply chain. Finally, a further $67.5 billion in output and more than 454,000 jobs would be created through the household spending of the workers building, making, and installing the new plant and equipment and those throughout the supply chain. All told, a $207.6 billion investment in the eight manufacturing industries would support 1.1 million jobs and $62.1 billion in payrolls. These impacts would likely be spread over several years.

Tax Revenues The IMPLAN model allows a comprehensive estimation of additional tax revenues that would be generated across all sectors as the result of increased economic activity. Table 4 details the type and amount of tax revenues that would be generated from the investments made by the eight industries and as well as their added output. Table 5 details the type and amount of tax revenues that would be generated from an output boost by the eight manufacturing industries. The additional jobs created and added output in turn would lead to a gain in taxes receipts. Federal taxes on payrolls, households, and corporations would yield about $15.2 billion per year. On a state and local level, an additional $11.0 billion per year would be generated.

Table 4: Tax Impact from Expanded Production of Eight Manufacturing Industries from Renewed Competitiveness Arising from Shale Gas ($ Billion)

Payroll

Households and

Proprietors

Corporations and Indirect

Business Taxes Total

Federal $7.1 $4.8 $3.3 $15.2

State & Local $0.2 $1.8 $9.0 $11.0

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There are also considerable tax revenues generated from the $72.0 billion investment in new plant and equipment. Federal tax receipts would be $12.6 billion, while state and local receipts would be $8.3 billion. While the impact from the new plant and equipment investment would be short-lived, it would be welcomed during these times of fiscal imbalances. Table 5: Tax Impact from New Investment in Plant and Equipment by the Eight Industries ($ Billion)

Payroll

Households and

Proprietors

Corporations and Indirect

Business Taxes Total

Federal $6.4 $4.1 $2.1 $12.6

State & Local $0.2 $1.6 $6.6 $8.3

Combining the additional federal tax revenues from the added output with tax revenues associated with this one time private-sector boost in investment of $12.6 billion. Similar large gains in revenues would accrue to the states and various localities.

Conclusion The economic effects of new investment by eight energy-intensive manufacturing industries (paper, chemicals, plastic & rubber products, glass, iron & steel, aluminum, foundries, and fabricated metal products) in the United States are overwhelmingly positive. Recent breakthroughs in technology have made it productive and profitable to tap into the vast amount of shale gas resources that are here, in the United States. Barring ill-conceived policies that restrict access to this supply, further development of our nation’s shale gas resources will lead to a significant expansion in domestic manufacturing capacity. And this opportunity comes at no better time. The United States is facing persistent high unemployment and the loss of high paying manufacturing jobs. Access to these new resources, building new manufacturing capacity, and the additional production of manufactured products will provide an opportunity for more than 1.18 million jobs – good jobs. A large private investment initiative would enable a renaissance of US manufacturing and in this environment, a reasonable regulatory regime will be key to making this possible.

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ACC Economics & Statistics The Economics & Statistics Department provides a full range of statistical and economic advice and services for ACC and its members and other partners. The group works to improve overall ACC advocacy impact by providing statistics on American Chemistry as well as preparing information about the economic value and contributions of American Chemistry to our economy and society. They function as an in-house consultant, providing survey, economic analysis and other statistical expertise, as well as monitoring business conditions and changing industry dynamics. The group also offers extensive industry knowledge, a network of leading academic organizations and think tanks, and a dedication to making analysis relevant and comprehensible to a wide audience. Dr. Thomas Kevin Swift Chief Economist and Managing Director 202.249.6180 kevin_swift@americanchemistry.com Martha Gilchrist Moore Senior Director – Policy Analysis and Economics 202.249.6182 martha_moore@americanchemistry.com Dr. Smita Bhatia Director, Chemistry and Industry Dynamics 202.249.6184 smita_bhatia@americanchemistry.com Emily Sanchez Director, Surveys & Statistics and Editor 202.249.6183 emily_sanchez@americanchemistry.com

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Appendix Table 1: Economic Impact from Expanded Production of the Eight Industries from Renewed Competitiveness Arising from Shale Gas (by Industry)

Employment

Payroll ($ billion)

Output ($ billion)

Paper Direct 6,991 $0.6 $3.7 Indirect 18,485 1.2 4.7 Induced 20,065 0.9 3.0 Total 45,541 $2.7 $11.4 Chemicals (excluding Pharmaceuticals) Direct 40,292 $4.7 $70.2 Indirect 294,741 20.9 101.7 Induced 284,159 13.3 42.2 Total 618,922 $38.9 $214.1 Plastic & Rubber Products Direct 116,155 $6.9 $33.3 Indirect 89,585 5.8 23.1 Induced 140,711 6.6 20.9 Total 346,451 $19.2 $77.3 Glass Direct 2,464 $0.2 $0.7 Indirect 2,946 0.2 0.7 Induced 3,991 0.2 0.6 Total 9,401 $0.5 $1.9 Iron & Steel Direct 4,810 $0.5 $5.0 Indirect 27,514 1.8 6.7 Induced 26,257 1.2 3.9 Total 58,581 $3.5 $15.7 Aluminum Direct 2,300 $0.2 $1.7 Indirect 6,720 0.5 2.0 Induced 7,462 0.3 1.1 Total 16,482 $1.0 $4.8 Foundries Direct 2,752 $0.2 $0.6 Indirect 2,320 0.1 0.5 Induced 3,597 0.2 0.5 Total 8,668 $0.5 $1.6 Fabricated Metal Products Direct 23,755 $1.5 $5.8 Indirect 20,251 1.3 4.5 Induced 30,476 1.4 4.5 Total 74,482 $4.2 $14.8