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Fracking Has Boosted U.S. Manufacturers, London Economic Study Finds

The London School of Economics and Political Science (LSE) has published a paper showing what many in the oil and gas industry already suspected: the proliferation of hydraulic fracturing (fracking) has made U.S. manufacturers more competitive.

The study, conducted by economists Rabah Arezki, Thiemo Fetzer and Frank Pisch and highlighted late last week by the LSE Business Review, focused on the indirect effects of unconventional shale development and low natural gas prices on industrial activity in the United States.

The costs and barriers associated with exporting natural gas compared to other commodities contributed to a commodity price gap between the United States and Europe that began to develop in the early 2000s as U.S. production increased, the study found. By 2012, the end of the study’s review period, this price gap had grown to around $10/Mcf, according to the researchers.

“Given that the price gap widened to $10 by 2012, we find that average manufacturing exports have expanded by roughly 10% due to the shale gas boom,” the researchers wrote. “This amounts to roughly 4.4% of the overall value of exports of goods and services from the United States in 2012.

“Our results suggest that the cost advantage due to the shale gas boom may have helped the U.S. economy recover significantly faster than it would otherwise have done after the financial crisis of 2007-2008.”

Not surprisingly, the researchers found that energy-intensive industries saw the greatest benefit from the price advantages of cheaper U.S. gas.

The study looked at chemical manufacturing as an example, finding that it has “an energy cost share of roughly 8% (the overall industry average is 5%)” and on average “accounted for almost 20% of overall manufacturing” gross domestic product in the United States from 2006-2012.

“For every dollar increase in the price gap of natural gas between the United States and Europe, output in chemical manufacturing increased by 1.6%,” the researchers wrote. “In the face of nearly a $10 gap by the end of our sample period, this baseline result is large. Moreover, we find that employment and gross capital expenditure increased by 0.6% and 3.3%, respectively, for every dollar price difference.”

The shale revolution also provided an indirect boost to U.S. manufacturing employment overall, the study found.

“Using the average sector-level employment together with average energy intensity, we can arrive at an overall estimate of the employment gains: total manufacturing sector employment increased by around 356,000 jobs up to 2012,” the researchers wrote. Comparing their results to earlier research, the economists found that “for every two jobs created in direct relation to fracking, this indirect effect adds more than one additional job elsewhere in the economy.”

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