A two-thirds plunge in U.S. natural gas prices thanks to soaring output of shale gas has given a boost to U.S. industry that is now being felt in the rest of the world. The impact in terms of competition threatens to be particularly strong in Europe, where high labour and energy costs are discouraging investment and driving companies elsewhere.
Fallout from the shale gas revolution in the United States is causing “a huge problem” for Europe, says Karel Cool, Professor of Strategic Management and BP Chaired Professor of European Competitiveness at INSEAD. And the front line in what threatens to become a battle for economic survival is Europe’s chemicals industry.
Cool’s research paper, “Europe’s Shale Gas Competitiveness Challenge and Consequences for the Petrochemical Sector,” is written with Philippe Quentin (MBA’12) of Boston Consulting Group in London.
Over the past five years, the price of natural gas to U.S. industry has fallen sharply, from about US$12 per million British Thermal Units, or MBtu, in the first half of 2008 to an average of US$3/MBtu in 2012. In contrast, European prices ranged between US$8 and US$11/MBtu in 2012. Chemicals companies use natural gas both for energy and as a raw material; and the price differential in America’s favour represents a big competitive setback for European firms. “The U.S. petrochemical sector is now among the most competitive in the world and attracts major investment,” Cool points out. “This is a real game-changer.”
Belgium’s Solvay, for example, has calculated that it faced a price disadvantage of 300 million euros in 2012 compared with its U.S. competitors. Looking forward, European chemicals producers face a major challenge from cheap imports, as U.S. chemicals firms ramp up their production to take advantage of these lower prices. In response, some European producers are looking to close plants, says Cool, while others are embarking on joint ventures in the U.S.
The woes of Europe’s chemicals industry are prompting calls for Europe to move urgently to develop its own resources of shale gas, even though the cost of doing so would be much higher than in the US. "It is not because shale gas exploitation in Europe will be more expensive than in the U.S. that the resources should not be exploited,” Philippe told INSEAD Knowledge.
On the contrary, he asserts, even limited shale gas production can help lower prices and reduce imports of natural gas, thereby improving Europe’s trade balance and strengthening its bargaining hand in negotiations with existing suppliers of natural gas such as Russia, Qatar and Algeria.
The alternative would be a further weakening of Europe’s commercial position that could leave it vulnerable to pressures from suppliers. “Caught between the U.S., Russia and the Middle East,” says Cool, “Europe would be ‘a sitting duck’.”
The Competitiveness Factor
Chemicals firms aren’t alone in being hit by the fall-out from low U.S. gas prices. According to a study by Natixis, the investment management and financial services arm of French banking group BPCE, shale gas gave a competitive boost to U.S. industry in 2012 equivalent to a 17 percent cut in wages by comparison with companies in the Eurozone.
Under such conditions, Natixis observed, “It’s not surprising that the U.S. should be reindustrialising and regaining market share internationally, essentially to the detriment of the Eurozone.”
The economic effects of these shifting relationships are already making themselves felt.
While hundreds of thousands of jobs are being created in the U.S., taking the jobless rate to a four-year low of 7.5 percent in April, unemployment in the 17-nation Eurozone rose to a record 12.1 percent in March. According to the latest forecasts from the European Commission, the Eurozone’s gross domestic product is to shrink by 0.4 percent in 2013, the second annual decline in a row.
BY : Nicholas Bray, European Correspondent with Karel Cool, Professor of Strategic Management and Quentin Philippe (MBA '12D), Boston Consulting Group