July 6, 2015

Increased Natural Gas Production Could Drive U.S. Manufacturing Costs Below Costs In China

According to a report from Harvard Business School (HBS) and the Boston Consulting Group (BCG), highlighted by Brian Dumaine in Fortune last week, manufacturing costs in the United States are now only five percent higher than they are in China. While increased costs in the Asian nation have contributed to the narrowing of the cost gap, Dumaine says the United States’ natural gas revolution has been another significant factor. Indeed, natural gas production has helped reduce U.S. energy prices to approximately 30 percent to 50 percent below what other major exporters’ pay, Dumaine reports. 

The HBS/BCG report cited by Dumaine found natural gas production could reduce the United States-China cost gap by another two to three percentage points by 2018. The report, which is available here, concludes, “Unconventional gas and oil resources are perhaps the single largest opportunity to improve the trajectory of the U.S. economy, at a time when the prospects for the average American are weaker than we have experienced in generations. America’s new energy abundance can not only help restore U.S. competitiveness but can also create geopolitical advantages for America. These benefits can be achieved while substantially mitigating local environmental impact and speeding up the transition to a cleaner-energy future that is both practical and affordable.” 

The report found the U.S. has a 10 to 15-year advantage over other countries when it comes to natural gas production. However, if the United States doesn’t get its production policy right, it risks eroding that advantage. The report outlines an 11-step proposal that HBS and BCG say would allow the U.S. to retain its competitive advantage while reducing concerns about hydraulic fracturing, or fracking. Notably, that list includes repealing a ban on exports, which Connecting the Dots has written about previously. 

 While the report also suggests producers must continually improve operations so that they address environmental and safety concerns, it also applauds them for doing so already. The report found, “While [safety and environmental] risks are real, significant progress has already been made in improving leading practices for mitigating impacts.”