The Atlanta Fed's SouthPoint offers commentary and observations on various aspects of the region's economy.
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Energy Brightens Louisiana's Manufacturing Outlook
Oil and gas activity is at its strongest level in decades, and investment is a big part of the story. The Atlanta Fed’s Energy Advisory Council reported an estimated $160 billion in capital investment across the Gulf Coast for pending projects related to liquefied natural gas (LNG) import/export terminals and petrochemicals over the next several years. Numerous gas shale plays (a term for shale formations containing natural gas) and technological innovation in hydraulic fracturing (commonly called “fracking”) techniques have made supply of natural gas abundant and prices low.
This increased investment and plentiful and low-cost natural gas are having a major impact on manufacturing in Louisiana in particular, leading many industry experts to declare a “renaissance” and “new industrial revolution” in Louisiana. Chemicals manufacturing in particular is expanding at a rapid pace in Louisiana, considering natural gas is a key feedstock in its production process. Over the next two years, chemical firms are planning more than $60 billion in new and expanded investments in the state.
Loren Scott, an emeritus faculty member in Louisiana State University’s E.J. Ourso College of Business’s economics department, conducted a study of the chemicals industry in Louisiana, published by the Louisiana Foundation for Excellence in Science, Technology and Education in 2012. Scott reported the state’s chemical industry is thriving and providing thousands of jobs, billions of dollars in economic impact, and generous tax revenues to state and local governments. “The chemical industry is the top producer of direct jobs in the Louisiana manufacturing sector, a major player in the national economy and is the state’s top manufacturing exporter,” Scott said. The industry accounted for 7.3 percent of all earnings in the state in 2011, generating $8.9 billion and 26,944 jobs. Scott’s report provides a list of nearly 20 chemical firms that announced billions of dollars in expansions across Louisiana in 2012. He attributes this wave of growth to the competitive advantage generated by low natural gas prices.
The boom in Louisiana manufacturing is not limited to the chemicals industry. Others are reaping the benefits of low natural gas prices. Steel makers, for example, are gaining from both the reduced cost of manufacturing as a result of low natural gas prices and from strong demand for steel pipe used for oil and gas drilling. Companies are setting up shop closer to major gas distribution hubs in Louisiana, and others are polishing up aging plants to replace coal with cheaper natural gas. The Atlanta Fed’s Energy Advisory Council reported this capital investment is being made in the utility sector.
Employment growth in manufacturing should increase as these investments and relocations accelerate. The chart below shows that manufacturing job growth in southern Louisiana, where much of the state’s energy-related activity is located, has consistently outperformed the rest of the state and the nation as a whole.
What does all of this mean for the future of Louisiana manufacturing? It looks bright, as long as natural gas remains accessible and low cost—which could be challenged by other parts of the world with vast, untapped shale plays. With all of the excitement and progress it’s easy to forget that just three years ago, manufacturing was considered a declining industry in Louisiana. Energy-related activity, especially in the southern part of the state, is helping to shift that perception.
By Rebekah Durham, economic policy analysis specialist in the Atlanta Fed’s New Orleans Branch
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