This paper was commissioned by the Department of Energy to assess the impact of hypothetical energy price increases on energy use by the chemical industry and also to assess the impact of the price increases on the competiveness of the US chemical industry. The fuel price adders are assumed not to apply to developing countries or to the Middle East. This restriction has a great impact in shapeing the results of the analysis. The key conclusions of the paper are: Policies that affect energy prices only in the developed world will cause the high energy portions of the chemical industry to relocate to countries not subject to these fuel price adders. The chemical industry is a global battlefield. The current trends toward locating new facilities in the developing world and the Middle East would be accelerated by any such differentially applied policy. A fuel price adder that is only applied to the developed world, will give a minor net global saving in energy. Secondary points that are developed: The chemical industry is dominated by capital rather than energy. There is an optimum economic trade of capital against energy. Industry optimizes this trade to lower its costs. Because of the long useful lifetime of capital facilities, it will probably take 15 to 25 Most of the US chemical industry would survive the fuel price increase in the form that The US chemical industry is currently the world leader by many important measures, A truly global energy price increase would result in a drop in process energy use: The key is that all global competitors need to see the same fuel prices. A greenhouse gas limitation policy that doubled process energy prices and was It was assumed that the fuel price adders would be limited to process energy and would not include feedstock. Process energy is about half the total energy use, with feedstock being the balance. This distinction on the base to which the fuel price adder would apply will cause implementation problems and will generate a great deal of regulatory activity along with technical, legal and accounting argument. Technological progress will reduce energy use (in both the baseline and policy cases). Since this paper keys against the trade of capital against energy, it expends many of its words (Sections 3 and 4) on explaining the technical fundamentals that underlie this relationship, and in clarifying distinctions between this trade and technological progress (Section 8). [1] THE CHEMICAL INDUSTRY The chemical industry lies at the front end of the raw material processing cycle. Most of its products flow to other producers rather than to the consuming public. The chemical industry spans an enormous range and is really a multitude of smaller industries. C&EN (June 24. 1996) lists 50 compounds with USA output greater than 1.6 billion pounds per year; and these are only the low-cost, high volume materials. CMA (1995) refers to "...more than 70,000 products". 1.1 General Health in the USA The US chemical employment is stable and twice as large as our closest global competitor, Germany. Financial measures such as R&D expenditures, capital expenditures and profit also point to good health. (Not all values are on the same basis. Some are by companies that are classed as Swift of CMA, (1995) estimated US chemical industry value added at and total energy for "process" and feedstock at - $126 billion $26 billion These are net to the overall chemical industry. There is much internal trading within the industry (not counted above), that tends to exaggerate the value of industry shipments. For the overall US industry, the energy use is about equal for "process" and feedstock; although feedstock energy use is a larger fraction for the major energy using chemicals. Generally the feedstocks are more expensive on a BTU basis than fuels because the feedstocks have purification costs imbedded in their production. The chemical industry has a symbiotic relationship with the science of chemistry. This science provides a basis for much broader contributions. Morrison, (1996) has estimated, based on Census Bureau and National Science Foundation data, that the count of chemists in the USA is 540,000. But he estimates only~ 65,000 of these are employed as "chemists" in industry, and of this number, only - 33,000 work as "chemists" in the chemical industry, with about one third of these in pharmaceuticals. A few other industries with a high count: In addition, a total of 18,000 are employed as biochemists, environmental engineers and computer scientists, and a further 58,000 are employed as managers. The count of chemists employed in schools is 11,000, the same as in government. The importance of these individuals lies in the insights and innovations they contribute. A major share of new technology-based companies have their roots in chemistry, and in the minds of bright people who enter the USA because of the attraction of our educational and research systems. The US technology base continues to generate breakthroughs such as biotechnology. Measures such as patents and chemical literature also attest to technical contribution and global competitiveness for the US. It is a sophisticated industry, with an increasing tendency to see competition on a global basis rather than as a fight for ranking against other national companies. Most large companies have flexibility to shift production between countries. More importantly, most large companies have shown a willingness to place their new investments anywhere in the world where economics dictate. The most important elements in dictating location economics are: regional cost of capital construction market size and growth rate raw material (feedstock) prices and energy prices The stability factor (risk of losing capital) seems to be less decisive than it once was, as The most direct measure of health is employment. The US employment has dropped slightly but it appears to have maintained its position relative to its global competitors. Note in Table IC that employment in the US industry exceeds the combined total of that of its largest global competitors, Germany and Japan. In general, employment parallels chemical shipment value although Germany runs a higher number of employees per shipment value than the US, and Japan runs a lower number. This may reflect more internal company transfers in Germany as a result of greater dominance by a few companies. "Bottomlines" on Section 1: => => [2] The chemical industry is a global battlefield. The US chemical industry is important, in terms of technology contributions as well as employment. The US is currently the world leader by many measures. THE CHEMICAL INDUSTRY and ENERGY USE The largest energy using portions of the chemical industry are relatively young. This means that they are fairly high on the learning curve and are still generating significant energy efficiency gains. The energy use per pound of product has historically fallen an average of -2% per year. This is due to broad technological progress as discussed in Section 8. As shown by Figure 1, efficiency increased at a steeper rate during periods of rising energy price, but it has also increased during periods when energy price was stable or falling. Over the last 14 years, process energy use by the chemical industry shows a slight decrease and feedstock energy shows a slight increase (CMA, 1995)): When feedstock is included, the chemical industry consumes - 25 % of industrial energy use (DOE, 1994) and ~ 8% of the total energy use in the USA. These totals includes the energy used in generation of the electricity that the chemical industry buys. The stability of the numbers in Table 2A suggests that different values from different years can be mixed without a major loss of accuracy. |