The ongoing shale boom and increasing use of hydraulic fracturing has comparative advantages that could drive US manufacturing growth, said Fitch Ratings analysts who believe low natural gas prices provide a competitive advantage for petrochemicals, steel, and other energy-intensive industries.
The primary effect of shale gas will be lower costs for US industry and consumers and expanded capacity and profits for certain manufacturers. Fitch also sees the cooper, aluminum, and cement industries as benefitting from low gas prices.
“Petrochemicals benefit most from lower prices for natural gas as it is both the raw material and the source of energy for US petrochemicals producers,” Fitch said. The US petrochemical industry, based on gas, is expected to be more competitive than the European industry, based on oil.
“This appears to be a permanent advantage,” analysts said in a Jan. 10 special report on shale entitled “Shale Boom: A boost to manufacturing but not to energy independence.”
Coal-fired power generation is unlikely to disappear in the US.
“In the short run, low gas prices translate into low wholesale power prices because gas-fired plants are the price-setting, marginal cost-plants in most regions,” Fitch said. “This makes many coal-fired plants uncompetitive. This has already led to a number of defaults of coal-fired electricity producers—and the resurrection of Calpine, a gas-fired producer.”
Even with growing US gas production from shale, Fitch does not expect coal production will contract significantly, and foresees an eventual rebound when market conditions improve. While coal will have a smaller share of the US electric generation, it still will be the biggest single energy source, Fitch said.
Analysts noted that not all the coal displacement is related directly to gas prices. About 12% of coal-fired capacity is being retired because of the power industry’s inability to support environmental investments needed to comply with US clean-air standards.
Currently, utilities are paying about $2.50/Mcf for gas compared with $8/Mcf in 2008, Fitch said. The manufacturing recovery also is being driven by forces other than low natural gas prices, such as the recession and depreciation of the US dollar, Fitch said.
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