After 40 years of empty promises, the prospect of U.S. energy independence has finally become a real part of the national conversation.
In fact, if current production trends continue, the United States will overtake Saudi Arabia and Russia as the world's largest oil producer in 2017, according to both the U.S. Energy Information Administration and the International Energy Agency.
But this stunning reversal of fortune is only half of the story.
The other side of the coin is that those same domestic energy supplies are going to have a major impact on global trade.
According to a study released this week by the Boston Consulting Group (BCG), "cheap" domestic energy could result in the U.S. taking between $70 and $115 billion in annual exports from other countries by the end of this decade.
This will provide significant economic advantages to America as this new era is ushered in.
And it will open up huge potential returns for average investors…
"Cheap" Energy is the Key to a Major Global Shakeup
Now I hasten to add upfront, the "cheap" energy referred to in the study is a relative matter. This is not the knee-jerk assumption of some that, if we have all of this shale gas and tight oil sitting around, that is bound to result in lower domestic energy costs.
We may well be able to cut imports, but the truth is the overall price you pay at the pump or when heating your home is subject to other factors.
Rather, it's that the energy will be "cheap" relative to what it costs elsewhere in the world. And that is becoming the key in a major global shakeup.
By 2015, according to the BCG's report entitled, "Behind the American Export Surge," natural gas prices in the U.S. are projected to be 60% to 70% lower, while electricity may be 40% to 70% below what it will cost in Europe and Japan.
But the American advantage hardly ends there.
The study also notes a source not likely to be considered by most, at least initially. That is, until you factor in other elements contributing to this energy advantage.
BCG points out that lower labor costs will also be important sources of a competitive advantage for manufacturing in the U.S. Adjusted for productivity, America's labor costs for many products are projected to be 15% to 35% lower than those of Western Europe and Japan within two years.
In addition, America will have a manufacturing cost advantage in machinery of roughly 7% over Japan, 14% over Germany and France, and 15% over Italy. But Labor costs will be the big differentiator, BCG said.
That is a major shift in a very short period of time.
As Gas Business Briefing has reported, only a decade ago average productivity-adjusted American factory labor costs were around 17% lower than in Europe, and only 3% lower than in Japan.
Here, the rise of domestic energy has been a major catalyst in a remarkable change.
Beginning in the 1960s, all manner of manufacturing moved from high-cost to low-cost countries. Then, the emergence of competitors to U.S. factory dominance resulted from this transition.
However, one senior author of the BCG report concludes that, "Now, as the economics of global manufacturing changes, the pendulum is finally starting to swing back. In the years ahead, it could be America's turn to be on the receiving end of production shifts, as more companies use the U.S. as a low-cost export platform."
Big Benefits for Seven U.S. Industries
A range of economic sectors are identified as likely to benefit from this change, making the U.S. particularly well positioned to increase exports.
In the report, BCG lists seven specific industries in which American exports will be rising at the expense of competing nations. They include: Chemicals, machinery, transportation equipment, oil and coal products, computer and electronic products, electrical equipment and appliances, and primary metals.
Of great interest is the BCG observation that these seven sectors account in the aggregate for about 75% of total global exports. In turn, employment gains would come directly through added factory work and indirectly through supporting services, such as construction, transportation, and retail, the report concludes.
But the industrial shakeup that is coming because of the energy advantage will be multifaceted.
Some companies will increasingly use the U.S. as a low-cost export base for the rest of the world, while others will use American production to replace imports. Throughout, both American and foreign companies will be relocating the manufacturing of products sold in the U.S. that otherwise would have been made offshore.
"It will take several more years for the full impact of improved U.S. competitiveness to translate into significantly more jobs and higher industrial output," said Michael Zinser, a BCG partner who leads the firm's manufacturing practice in the Americas and a report co-author.
Yet Zinser adds, "We already are seeing early evidence. Foreign companies such as Toyota, Airbus, Yamaha, Siemens, and Rolls-Royce are starting to move more production to the U.S. for export around the world."
The Great American Rebound
Some of the findings from the study mirror themes discussed here in OEI over the past several years, providing tangible figures in support.
For example, by 2015, the U.S. is projected to take $7 to $12 billion in chemical exports from Western Europe and Japan. Fundamental to such a transition is the relative cost advantage of domestically-produced natural gas, a major feedstock for chemicals.
BCG points out that production costs in Germany, where the natural gas used in chemical manufacturing will be more than three and a half times more expensive, are projected to be 29% higher than in the U.S. by 2015. Meanwhile, gas costs are expected to be 16% higher in China and as much as 28% higher in France.
As the energy component's comparative advantage kicks in, it will have positive results in wide export categories. As another example, BCG projects that by 2015, the U.S. will take $3 to $12 billion from Western Europe and Japan in exports of machinery, including everything from a construction and industrial machinery, to engines and air conditioners, the study says.
The energy component has never been more important to the U.S. economy than it is going to be in the next decade. An American economic expansion is going to result and the advantages will be substantial.
There is just one overarching concern…
We need the elected children inside The Beltway to play nice and come up with a national energy plan.
About the Author
Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle.