A Real Economy publication

Energy industry outlook: Fall 2022

Manufacturers squeezed by soaring natural gas prices

Aug 29, 2022

Energy industry outlook key takeaways

The price of natural gas is a particular hurdle for manufacturers given the industry’s reliance on this fuel source.

Resulting cost pressure has sparked manufacturers to evaluate all aspects of their current operating models.

Supply chain insights and resources
Icon - Supply chain insights and resources

Organizations should evaluate supply chain resiliency in the context of current global economic circumstances. 

Energy Economics

The impact of high natural gas prices on the manufacturing sector

Soaring energy costs are taking a toll on the manufacturing industry. The price of natural gas stands out as a particular hurdle for manufacturers due to the industry’s heavy reliance on this historically low-priced fuel source. The resulting cost pressure has sparked manufacturers to evaluate all aspects of their current operating models. From supply chain adjustments and increased automation to investment in alternative energy, everything is on the table for consideration as companies search for efficiencies.

Historically, natural gas has been the preferred energy source in the industrials sector due to its abundance, affordability and low carbon emissions compared to other fossil fuels. Manufacturers with energy-intensive processes, such as plastics, petrochemicals, steel and iron, have benefited from the accessibility of this lower-priced fuel source. However, global inflation, reduced gas flows from Russia, supply chain interruptions and labor shortages have sent natural gas prices skyrocketing globally. Notably, natural gas prices in Europe and Asia have increased 400% and 300%, respectively, in the past year. 

Natural gas prices

Natural gas prices
Natural gas prices

It’s important to consider the factors behind these unprecedented prices. Natural gas prices are largely a function of supply and demand. The major factors affecting the supply side are production volumes, the amount of natural gas in storage (high inventory levels indicate a supply surplus and tend to drive prices down, and vice versa), and import and export activity (including the ability to liquefy and transfer natural gas). On the demand side, we typically look to seasonality (weather) and overall economic activity and consumer habits.

Geopolitical factors also play an important role on both the supply and demand sides, influencing import and export activity as well as consumer behavior. For example, last year the European Union, a major consumer of natural gas for manufacturing and other industrial processes, was the largest importer of Russian natural gas, accounting for nearly 75% of Russia’s natural gas exports regionally, according to the U.S. Energy Information Administration. Due to the war in Ukraine, the EU imposed sanctions on Russian oil and gas imports, posing a major challenge in replacing Russian natural gas.

Adding to the issue, available volumes for liquefied natural gas off-take are limited due to several LNG terminal outages (both planned and unplanned) and lower-than-expected production, with 6 million metric tons less of global LNG supply for the remainder of the summer, according to Bloomberg. These, among other factors, are driving the supply constraints resulting in the current rally in natural gas prices globally. 

Manufacturers should prepare for a shifting energy sector landscape

As the world shifts its attention from oil to natural gas, the manufacturing industry will be profoundly affected due to its heavy dependence on natural gas. In fact, in 2021, the U.S. manufacturing sector accounted for approximately one-third of the country’s natural gas consumption, according to the U.S. Energy Information Administration. 

U.S. natural gas consumption by sector, 2021

U.S. natural gas consumption by sector, 2021
U.S. natural gas consumption by sector, 2021

Higher natural gas prices have several direct and indirect implications for the industrial sector. Directly, natural gas is used for powering machinery, as fuel for process heating, and as feedstock in the production of chemicals, fertilizer and hydrogen. Indirectly, the costs of electricity, materials and transportation are all affected by natural gas prices and will ultimately hit manufacturers’ bottom line. Even the smallest surge in natural gas prices has a significant impact on a company’s profitability and the manufacturing industry as a whole.

How a company considers and acts on these implications will be critical to its sustainability and continued growth. Here are a few areas of critical importance for leaders to consider: 

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