Why the U.S. Chemical Industry Is About to Boom

Cheap energy is a rising tide that lifts all other industries with it. From the Science and Environmental Policy Project’s The Week That Was:

In his blog, Master Resource, Robert Bradley, Jr. recognizes that energy is the lifeblood of the modern economy, and that it significantly affects the production and use of other resources. The energy industry should be viewed differently from other industries by politicians and analysts.

Mr Hilton discusses the highly successful UK petrochemical firm Ineos. The firm may invest €2 billion (£1.76 billion) expanding its European petrochemicals capacity, possibly in Belgium. But location is only part of the issue. As Mr. Hilton states:

Once you have built a major chemical complex, your main (in many ways, your only) worry is the cost of the raw material you need to feed into it. This can account for half or more of total production costs, and is similarly crucial for other energy­intensive industries such as refining, iron and steel, glass, cement and paper.

Until a few years ago Europe and America paid more or less the same amount for their petrochemical feedstock — the US had a slight advantage but not so great after transport and other costs had been factored in. (Middle East plants, sited right by the oilfields, did have such a price advantage but lacked scale.)

This is no longer the case thanks to the fundamental changes across the Atlantic. The Marcellus field, which spreads over several states and is just one of many in the US, produces 15 billion cubic feet of gas a day which is almost twice the UK’s entire consumption. But the result is that US prices have disconnected from the rest of the world and the subsequent feedstock prices have given American chemical plants so vast a price advantage that, on paper at least, there’s no way Europe can compete. It is staring down the barrel of bankruptcy, not now, but in a few short years, unless it can find some way to get its raw­material costs down to American levels.

Thus far, the effect has been muted — and the European industry has had a little time — because the US petrochemical industry was originally not built for indigenous US gas and oil supplies but instead located near ports and configured to process supplies of oil from the Middle East.

But this is changing fast. There has been virtually no big petrochemical investment in Europe in the past decade whereas in the US since 2010 some $85 billion of petrochemicals projects have been completed or are under construction. Spending on chemical capacity to 2022 will exceed $124 billion, according to the American Chemistry Council, creating 485,000 jobs during construction and more than 500,000 permanent jobs, adding between $80 billion and $120 billion in economic output. After years where chemical capacity has run neck and neck with Europe, the American industry is about to dwarf it.

Hydraulic fracturing and horizontal drilling have given the US a great economic advantage in many industries over Europe and elsewhere. It would be economically irresponsible for Washington to stop it by the Paris Agreement or other means.