Source: International Trade Administration, Compared to the manufacturing average of 12 thousand British thermal units (btus) of energy used per dollar of value added, the chemical industry is among the most energy-intensive of the major industries, using 21 quadrillion btus per dollar of output. Natural gas is the predominant fuel, but the chemical industry is dependent, of course, on petroleum as a feedstock base. International Trade The chemical industry is a large net exporter. In 1994, chemical imports were almost $30 billion (or 4.5 percent of the total of $668.6 billion), while exports were $43.9 billion (or 8.7 percent of the total of $502.5 billion). Imports to the U.S. now come primarily from Canada, Germany, Japan, and the United Kingdom and exports generally go to Canada, Japan, and Mexico. It is estimated that more than onehalf of the chemical firms in the U.S. are foreign-owned. Investment and Employment New capital expenditures in the chemical industry were about $15.5 billion in 1994, or almost 14 percent of all new capital investment for the manufacturing sectors. Of this total, $12.9 billion was for machinery and equipment and $2.6 billion for buildings and structures. In addition, $388.5 million was spent on used capital, $124.2 million for buildings and $264.3 million for machinery and equipment. During recent years, the industry has spent as much as one-third of its total capital expenditures on environmental abatement or compliance. Of the total of approximately 123 million civilians employed in the U.S. in 1994, 18.3 million were employed in manufacturing. A total of 824,500 were employed in the chemical industry, with almost three-fifths of them, or 471,400 of the 1994 employees, categorized as production workers. THE CHEMICALS INDUSTRY 1. SUMMARY OF DAN STEINMEYER'S PAPER Overview Steinmeyer outlined a perspective that the domestic chemical industry would survive a large energy cost increase. The energy intensive portion of the industry would become disadvantaged competitively with resulting loss of business and jobs, and greater imports. The industry is presently healthy and diverse. When new plants are constructed, however, differential energy costs would become more important and location choices may not be the U.S. An energy price increase that is only applied to the developed world will cause the An energy price increase that is only applied to the developed world will give a minor Steinmeyer also presented quantitative estimates of the impact of the fuel price adders. For one. the U.S. would shift from a net exporter to a net importer in the high energy components of the industry. The current net export balance of about $6 billion would become an import balance of about $6 billion. Assuming that $2 billion of these imports would be energy, the chemical industry would experience a net shift of about $10 billion in the trade balance. The economic effects of a cost increase in any input depend in part on the ability of the industry to substitute low cost inputs for the more expensive one. The assumed fuel price adders produce a significant cost increase in one input, which is energy. The output of any industry, including chemicals, depends on inputs of capital, labor, and energy. If lower-cost capital or labor could readily be substituted for energy, the overall costs to the industry would not rise significantly. If they cannot be substituted for energy, the impact of these costs must either be absorbed by the industry or passed forward to consumers. Because of global competition, it is unlikely that these higher costs could be passed on. Much of Steinmeyer's analysis focuses on the ability of the chemicals industry to trade (or substitute) capital for energy. The chemicals industry is a large user of energy, but it is also capital intensive. There exists for any segment of the industry an optimum combination of capital and energy. The chemical industry attempts to achieve this optimum. Capital investments have useful lifetimes of perhaps 15 to 25 years, and such a time period would be required for the industry to fully respond to new environmental constraints. The implication is that short run substitutions of capital for energy are not typically feasible in this industry and the feasible substitutions would occur over a much longer time period with the normal turnover in the capital stock. Steinmeyer concluded that most of the chemical industry would survive the imposition of the assumed fuel price adders. The industry is financially healthy overall, particularly compared with other manufacturing industries. Although this industry uses large amounts of energy, it consists of numerous diverse segments, some of which are not high energy users. The industry is dominated by capital and it will continue to operate even with large increases in its variable costs. When new plants are constructed, energy costs become more important and location choices may not be the U.S. The main threat to the industry would come from foreign competition that is not subject to such input cost increases. While existing U.S. plants should remain economically viable under conditions where world capacity is fully utilized, the energy price adders assumed in this study are likely to impact the "dispatch order" of plants producing energy-intensive commodity chemicals under conditions where world capacity exceeds demand. Under such circumstances, the operation of existing U.S. plants could be affected by the assumed price adders. Furthermore, the impact of the adders on the dispatch order of these plants is likely to be sensitive to which scenario of price adders is considered. In this respect, differences among developed countries can be important. Steinmeyer noted that the U.S. chemical industry is currently the world leader. This position, resulting from the U.S. scientific and technical base, relatively low energy prices, large domestic market. and stable political and economic system, is diminishing over time as growth is occurring most rapidly in developing countries. About one-half of the energy used in the chemical industry is process energy i.e., for combustion, while the other half is feedstock use. The fuel price adders are assumed to affect only energy used as a fuel not as a feedstock (a raw material in the production process). Fuel used for combustion produces more emissions than energy used as a feedstock; however, emissions in the latter case are not negligible. Steinmeyer concluded that major technical, legal, and accounting problems would arise in trying to regulate the application of the fuel price adders based on the type of fuel use. Energy intensity in the chemical industry has decreased over time and will continue with further technical progress. Steinmeyer concluded that technical progress will occur in this industry, but independent of any climate change policy. Industry Analysis A major focus of Steinmeyer's work was to define the ability of the industry to substitute capital for energy in response to higher energy costs. He concluded that "Energy efficiency can be gained through the trade against capital but the gain is costly in terms of capital expended and hard to justify in terms of economics. This is the dominant theme of this paper." Steinmeyer viewed capital in this industry as having two components: one component is fixed relative to other inputs, and the other component allows some substitutability relative to other inputs. This substitutability was defined by Steinmeyer as the trade of capital. For instance, Steinmeyer suggested that capital costs increase linearly with plant size. The intercept is large and "outside the trade of capital" and covers such costs as support facilities which vary little with scale. In this industry, the intercept accounts for feedstock and product storage. Steinmeyer estimated that the tradeable component of capital costs is about 20% to 40% of total capital costs. He then undertook an analysis of the optimum share of (tradeable) capital and energy with an example of insulation, heat exchanges, and piping. The optimum thickness of insulation was obtained by assuming an increasing level of insulation until the incremental cost for insulation equals the lifetime cost for heat loss. If the price of energy were to rise, an optimum allocation would be made by adding insulation until the lifetime cost of energy and insulation were again equal at the margin. Steinmeyer offered some generalizations about the effect of energy prices on input substitution, given reasonable assumed values for capital, energy and tradeable capital. Assuming that half of the capital is tradeable, a doubling in the cost of process energy would result in a 37 percent drop in process energy and a 9 percent increase in total costs. An extensive analysis of alternative input assumptions led Steinmeyer to conclude that higher energy costs would result in substitutions of capital for energy, but this occurs over a long time period and at high cost. However, the cost increases would enable much of the existing chemical industry to remain in business. The application of the fuel price adders to some countries and not to others was considered by Steinmeyer (and by the panel) to be critical in the choice of future investment areas. Three of the four largest chemical firms in the world are located in Germany. As noted by Steinmeyer in Table 6A. these three German firms had sales of $62 billion in 1995. Germany once had large coal reserves that supported the industry, but these reserves have apparently been played out. Steinmeyer offered an explanation of the continued location of these large firms in Germany by suggesting a large "information" content to the location decision. Such information includes the availability of technical and scientific information as well as political and economic stability. Although location economics is changing in the direction of the Middle East and developing countries, variables such as the science base, market size, and political stability all favor the U.S. and would enable the U.S. industry to survive a significant cost increase. |