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The Gift that Keeps Giving Part II

May 4, 2012

Fracking has provided us with the opportunity of becoming energy independent.

But there’s more: Fracking can lead to the reindustrialization of America.

Because of fracking, and all that it implies, America could have the lowest cost feedstock of any country in the world, with the possible exception of Qatar.

Increased output of hydrocarbons, coupled with secondary effects on other areas of the economy, from steel to transportation, can increase GDP by 2% – Or more. (Source, Citigroup.) A 2% increase in GDP growth would be huge for the United States, where GDP quarterly growth has languished at 1% for the past six years and around 2.5% for the past ten years.

Imagine consistent GDP growth of between 4.5% and 5.5% with the creation of 3 million new jobs by 2020.

Energy consumption in major industries can be a significant cost component. Using low cost natural gas can lower production costs. In the metals segment for example, natural gas has represented nearly 60% of energy usage so that natural gas at $2.2 per million BTU can significantly lower costs. Natural gas usage in the machinery segment represents 45% of energy usage.

Then there is the ability to shift from coal and oil to low cost natural gas. These substitutions will also lower the cost of production.

In transportation there has been the beginning of a shift from diesel fuel to natural gas, either CNG or LNG, for long haul trucks and truck fleets. The shift to natural gas could expand to construction equipment and possibly even to light vehicles, such as pick-up trucks.

The Chemicals industry will be a major beneficiary of low-cost natural gas, shifting production from foreign countries back to the United States. Examples of this are the restart of the Dow Chemical ethylene plant, the reopening of a large ammonia plant in Beaumont, Texas and CF Industries planned $1 billion investment in a new ammonia plant.

The list goes on, with Brownfield expansions becoming prevalent.

It should be noted that it will be necessary to build many new pipelines in order to provide unrestricted transport of natural gas and oil from the new production regions, such as Bakken and Ford, as well as from Canada. Building pipelines also creates jobs and increases GDP.

Increased natural gas usage is bound to result in the cost of natural gas increasing as demand begins to overtake supply, but any large increase is several years away.

Natural gas has fallen from a peak of nearly $13 per million BTU to a low of under $2 per million BTU. More realistically, before the peak, the average price was around $5 per million BTU, but had been rising steadily because of dwindling natural gas supplies in the United States.

The question will be: How long can natural gas prices remain at current low levels?

The ebb and flow between production, which can cause an excess of supply, and increasing demand, will keep the price of natural gas fluctuating for many years – assuming that government regulations don’t curtail fracking.

It’s highly likely that prices will remain below $5 per million BTU, with $5 per million BTU being the forecast made by Chesapeake Energy. On the low side, it’s possible the price will reach $3 per million BTU after the current glut is worked off.

This $5 to $3 range can sustain continued growth in GDP at levels 2% higher than the recent past for many years to come, because of fracking and all the benefits arising from new oil and natural gas production.

The major obstacle to achieving energy independence and the reindustrialization of America is politics – specifically, overzealous environmental groups such as Greenpeace.

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