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U.S. Industrial Energy Demand Growing

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Each year, the U.S. Energy Information Administration (EIA) evaluates a wide range of trends and issues that could have major implications for U.S. energy markets. The results are published in their Annual Energy Outlook and provide an in-depth look at the past, present and future states of the energy environment in the U.S. One of the key subjects covered in this report is the energy demand of the U.S. industrial sector, and it’s growing!

The EIA reported that the industrial sector consumed about one-third, or 24 quadrillion Btu, of the total energy delivered in the U.S. in 2011. This industrial demand is expected to grow by 16% to 27.8 quadrillion Btu in 2035, and to 28.7 quadrillion in 2040. Due to lower gas prices stemming from the expansion of shale gas production, industrial energy consumption is greater from 2011 to 2025 than after 2025. After 2025, shale gas production is expected to grow at a much slower rate, resulting in higher prices for natural gas. Coupled with increased international competition, the growth of industrial energy consumption is expected to be much slower after 2025 as well.

As prices for other energy sources used by manufacturers have continually risen, natural gas has bucked this trend. According to a 2010 Manufacturing Energy Consumption Survey, the price paid by manufacturers for natural gas fell 36%, from $7.59 to $4.83 per million Btu. The decrease in natural gas prices was so large that the total cost of energy from all sources fell by 11% in the same time period. Since that survey was conducted, gas prices have continued to decline. And since international shale gas development is far behind the U.S., this gives American business a significant cost advantage.

Many large industrials have the ability to shift to different fuels for their energy needs based on the cost of the different fuels used. For example, some power plants can use coal or gas as a fuel source. If they are using coal as fuel to generate electricity, and the price of gas falls below the price of coal, they may switch to using gas as their source of fuel.

Given their large volumes of energy purchases, greater flexibility in shifting 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 commercial customers. In some cases, manufacturers have 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.

One of the old sayings in commodity prices is that the “best solution to low prices is low prices” because low prices will eventually suppress supply and stimulate demand. Increased U.S. industrial demand is a prime example of a bullish factor brought on by the bearish impact of shale gas. This is a key result of gas prices being near their lowest levels of the last 10 years. While this trend could mitigate some of the impact of shale gas on prices, it is great news for the domestic economy as manufacturers plan to open new facilities to take advantage of low energy price. Manufacturing in the U.S. ain’t dead yet!

Posted: October 08, 2013

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