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Outlook


Low-Cost Natural Gas Comes to the Rescue for


Manufacturers


Natural gas has been an important exception to the trend of rising prices for energy sources used by manufactur- ers. Production of natural gas in the US increased rapidly beginning in 2007 as a result of resources found in shale forma- tions. Tat supply increase has in turn lowered the price of natural gas. Te 36% decrease in the average


natural gas price paid by manufacturers between 2006 and 2010, from $7.59 to $4.83 per million Btu, was large enough that the total cost of energy from all sources fell by 11% between 2006 and 2010, from $9.19 to $8.22 per million Btu (in 2005 dollars), according to data from the 2010 Manufacturing Energy Consumption Survey (MECS). Since that survey was conducted, natural gas prices have fallen further. Unlike commercial, residential, and


other types of consumers, many manu- facturers are able to meet a large portion of their energy needs through the use of nonpurchased energy sources, including the on-site combustion of waste or by- products. As much as 28% of the total energy consumed in manufacturing in 2010 came from nonpurchased sources. Similarly, many manufacturers can


freely substitute one purchased energy source for another in a relatively short time. Te ability to switch among fuels varies widely across the manufactur- ing sector. Even with their considerable flexibility to switch fuels, manufactur- ers experienced an increase of more than 50% in their overall unit cost of purchased energy from 2002 to 2006. Energy prices during that period increased for all energy sources, but the greatest increases were for natural gas


and oil products. In fact, from 1998 to 2006, energy prices for all widely-used energy sources measured by the MECS rose consistently, although not as steeply as the rise between 2002 and 2006. Manufacturers’ energy expenditures


rose 29% between 2002 and 2006 even as the amount of energy purchased dropped 15%. In contrast, from 2006 to 2010 their energy expenditures de- creased 16%, even though the amount of energy they purchased fell only 6%. Tere is a general consistency be-


tween prices reported by suppliers of in- dustrial customers in the EIA's Annual


Production of natural gas in the US increased rapidly beginning in 2007 as a result of resources found in shale formations.


Energy Review and MECS consumers, indicating the rise in prices peaked in 2008 before falling in 2009. Te generally rising prices through 2008 led manufacturers to cut energy purchases. Tere is anecdotal evidence that


manufacturers are starting to react to lower natural gas prices by planning to open new facilities in the US. Tere are other factors, including rising employ- ment costs overseas, but the industries for which natural gas is an important input are anticipating an advantage of locating their operations here. Given their large volumes of energy


purchases, greater flexibility in shiſting among fuels, and greater freedom in choosing among alternative suppliers, manufacturers have generally been more tightly linked to changes in wholesale energy markets than residential or com-


Energy Information Administration


US Department of Energy Washington, DC


mercial customers. For example, manu- facturers have generally had the ability to negotiate their own arrangements for supply and transportation of natural gas because interstate natural gas pipelines were able to open access to large users of natural gas in 1985. Although bypassing the local distribution company’s (LDC) pipelines is allowed under the regula- tions, most manufacturers find it more economical to use the LDC’s system while purchasing other services such as supply and transportation separately. Manufacturers oſten work with natural gas marketers who will bundle services for groups of consumers. Manufacturers in 2010 purchased


about 68% of their natural gas from nonutilities. However, the resultant price differences are similar to those observed in the MECS since 1994 when data by source differences were first collected. In all regions, the utility price is higher than the nonutility price. However, even more influential is the region of the country in which the manufactuer is located. Prices are highest in the North- east and lowest in the South, regardless of the source. Te difference may result from a combination of establishments being closer to a source of natural gas in the South or the greater prevalence of high-volume users in that region. Tis situation may change with the develop- ment of natural gas resources in the Marcellus Shale of Pennsylvania.


This report was prepared by the Energy Information Administration, the statistical and analytical agency of the Department of Energy. SME thanks the DOE for help- ing provide this material.


Energy Manufacturing 2014 25


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