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Natural Gas Impact On The Industrial Sector: Not The Industry s Finest Hour

2. Overview OF Impact On The Industrial Sector. The Primary Response To Date To High Prices Has Been Demand Destruction In the Industrial SectorIndustrial demand 1 declined 2.8 BCFD, or 13 percent, from 2000. Some of this decrease represents a permanent loss in demand.On a composite basis, for the six energy intensive industries that account for 65 to 70 percent of gas demand within the industrial sector, production has declined sharply, since it peaked at the beginning of 2000.It is not c9455

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Natural Gas Impact On The Industrial Sector: Not The Industry s Finest Hour

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    1. Prepared for National Petrochemical & Refiners Association 1899 L Street, Suite 1000 Washington, D.C. 20036-3896 Natural Gas Impact On The Industrial Sector: Not The Industrys Finest Hour

    2. 2

    3. 3 Overview Of Impacts On The Industrial Sector

    4. 4 Overview Of Impacts On The Industrial Sector

    5. 5 Regional Impacts Industrial Gas Demand by State1

    6. 6 Impact On Specific Industries: Chemicals The Industries Most Heavily Impacted By High Gas Prices Are: Chemical Industry1 Primary Metals High Gas Prices Represent A Fundamental Change For The U.S. Chemical Industry There have been a series of bankruptcies, plant closings and reductions in production levels at several facilities, because they can no longer compete at the current elevated gas prices The golden era of the U.S. chemical industry (i.e., the 1980s and 1990s) is over U.S. chemical sector is based heavily upon natural gas and natural gas liquids. European and Asian chemical sector is based heavily upon oil (i.e., naphtha).

    7. 7 There has been a fundamental shift in the cost ratio of these two feedstocks In the 1990s the simple ratio between gas and oil prices was approximately 0.6, while at present that ratio is approximately 1.0. This is about a 40 percent shift in the relative competitive advantage of feedstocks. Dow Chemical has noted that the U.S. has the highest gas prices in the world.1 The petrochemical segment of the chemical industry has been affected more by high gas prices than most other segments of the chemical industry (i.e., see chart on page 8). One of the clearest indicators of this shift is the change in U.S. balance of payments for chemicals From over $8 billion surplus in 1999 to an estimated $9 billion deficit for 2003. U.S. used to be the worlds largest supplier of chemicals. Anecdotal evidence of Latin American chemical producers switching from importing U.S. chemicals to importing European chemicals. Impact On Specific Industries: Chemicals

    8. 8 Impact On Specific Industries: Petrochemicals

    9. 9 Impact On Specific Industries: Chemicals

    10. 10 One of the Hardest Hit Segments in the Chemical Sector is the Fertilizer Industry The U.S. ammonia-based fertilizer industry can not compete with foreign imports (i.e., Trinidad, Mexico, Russia and the Middle East) at elevated gas prices.1 Tidewater plants along the Gulf of Mexico are particularly vulnerable. Inland facilities have a modest transportation advantage. The combination of the very high gas prices during 2000/2001 and in 2003 have caused several firms to declare bankruptcy and others to shut down plants.2 Impact On Specific Industries: Fertilizers

    11. 11 Impact On Specific Industries: Primary Metals The Primary Metals Sector Also Has Been Impacted Severely By High Gas Prices The U.S. aluminum industry has become the swing producer for the world because of its high costs Particularly its high power costs with gas-fired generation in most instances setting the marginal power prices. This has caused eight U.S. facilities to idle capacity and it is questionable if these idled plants will ever reopen1 It is doubtful if there will ever be another greenfield aluminum plant built in the U.S. At present there are only two plants operating in the Pacific Northwest, which is the heart of the U.S. aluminum industry, and one of these is at 20% capacity

    12. 12 Impact On Specific Industries: Other Industries Other Industries Have Been Adversely Affected By High Gas Prices. Specific Examples Included the Following: Sugar or Sweetener Industry1 High fuel costs (e.g., elevated gas prices) have been a critical factor in the closing of a number of sugar beet factories and sugar cane processing mills.2 A recent example is the closure of the Western Sugar Cooperative facility in Greely, Colorado. Sugar beet growers also have been impacted by high gas prices. Natural gas is the primary fuel used to operate irrigation pumps and is a major cost for the sugar beet growers.

    13. 13 Impact On Specific Industries: Other Industries Agriculture industry has been impacted adversely by high gas prices Corn growers, in particular, are heavily dependent on ammonium fertilizers in order to maintain yields. High gas prices have caused fertilizer prices to increase. Corn growers also are incurring higher fuel costs (i.e., natural gas) to run their irrigation pumps. There are indications that corn growers will reduce fertilizer usage and as a result sacrifice yields. Estimated impact of these phenomenon is that corn yields could be reduced one bushel per pound of fertilizer.1 1 Wall Street Journal, Natural- Gas Prices may affect plantings of Corn and Soybeans, March 10, 2003, p.c-11

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