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0 Jun 14 2012 @ 9:45am by Matt Smith in Economy, energy consulting, Natural Gas

Smoke And Mirrors

Howdy doody. This post is cribbed from a presentation I gave last week, called ‘Smoke and Mirrors‘. It focused on various aspects of the shale gas industry and how mottled, cloudy, and unclear the picture is (= smoke).

In response to each smoke slide, I then attempted to show how the shale gas industry reflected (= mirror, get it?!) onto the US economy or vice versa . It made sense to me at the time, I promise.

As I know well growing up in England, Sundays meant grandpas all over the country hopped into their cars and went for a Sunday afternoon drive. This would not be a rushed affair, it would simply be a drive spent pootling through the country lanes. And this perfectly describes industrial demand for natural gas – it has been pootling lower over the last decade or so, seemingly in a structural decline. However, demand has picked up recently, and this is due to the shale gas industry…but not for the reason you may think.

The immediate assumption (well, mine at least) was that this pick up in industrial demand was due to low natural gas prices encouraging the return of manufacturing from overseas. The reality is however, somewhat different.

Firstly the rebound is due to the increase in demand in industrial sectors such as raw materials, to meet the breakneck expansion rate of infrastructure needed for the shale gas industry – from drills to pipelines.

Secondly, as the below chart illustrates, strength is coming through – and is set to continue – from chemicals. Not only is increasing production of natural gas liquids (NGLs) meaning more production of ethane and propane, but the low price of natural gas is driving down their prices too.

And these two NGLs are key feedstocks to the petrochemicals industry to produce ethylene and propylene – a key ingredient in plastics manufacturing. Their growing prominence is increasing a move away from the more expensive naphtha (an oil-derived feedstock), and causing a wave of companies such as Dow Chemical and Exxon Mobil to invest in petrochemical expansion in the US.

Onto employment we go. If you googled ‘scariest jobs chart ever’ this is what you would find. The below chart illustrates the percentage of jobs lost in the recessions post-WWII. The key takeaway from this chart is that although we are now seeing job creation, we lost nearly 9 million jobs between early 2008 and early 2010, and have not managed to recoup even half of these jobs back.

There is a silver lining, however, provided by the shale gas industry. One of the defining studies on the economic impact of shale gas has been undertaken by IHS Global Insight, whose report highlights that job creation from shale gas reached a level of 600,000 in 2010, is set to reach 870,000, and almost double to 1.6 million jobs by 2035. This jives with a study by PricewaterhouseCoopers, who state a million jobs could be created in manufacturing by 2025 due to low natural gas prices. And just yesterday IHS Global Insight has released an update to this report from last December, revising up job creation to 1.5 million by 2015. That’s quite an upward revision.

(by the way, on the above chart: direct jobs = drilling, indirect = suppliers, induced = supporting services such as restaurants).

So there you have it. I did also highlight five other factors in this speech – the overall economy, consumer spending, transportation, foreign investments, and future trends – a number of topics which I have written about previously here on the burrito. However, if you wish to know more about any of these, I’d be happy to bend your ear about them. I leave you with ‘the alligator chart™’, the product of high oil prices, low natural gas. Thanks for playing!

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