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Germany continues to have a strong chemical industry, decades after its base in coal has largely played out. For these parts of the industry, the question, of energy pricing is less relevant than issues such as funding for R&D and education.

An approximate impact will be to change the high-energy content area of the industry from export of ~ $6 billion to import of -$6 billion. If $2 billion of this is assigned to energy which has to be imported, the net is a drop in the chemical industry's positive trade balance of $10 billion. This is 8% of the total value added and about 30% of the value added for the 10 polymers shown in Table 2F. It is a significant impact but not a crippling one.

The numbers are intended only to convey an order of magnitude of the impact. The logic for this order of magnitude is simply that a major cause of our current export position in materials such as ethylene derivatives is our relative low cost natural gas compared to Western Europe and most parts of Asia. The Middle East producers have still lower energy costs than the US and are forecast to absorb some of our exports as shown by Table 6D. If we put ourselves at a further disadvantage because of significant greenhouse gas policy-induced energy price increases, we will have a very tough time exporting against the Middle East producers.

The main argument for a lower impact is that Germany has maintained its exports at high level in the face of what appears to be a competitive disadvantage. The countering argument is that this is historic and current plans for Western Europe show very little new capacity planned for the high energy chemicals such as ethylene. See Table 6C. The second argument for a lower impact is that the political and economic stability of the US override most other considerations, such as energy costs. The countering argument is again, that history has shifted and Table 6C shows that financing is available for facilities sited in the Middle East and China. The arguments for a higher impact are the converse of the above, that we are in a period of high change and a governmental action associated with higher energy prices would further destabilize things.

If we accept the $10 billion net loss in trade, the job loss, based on $50k per job would be - 200,000. Of this,~ 100,000 would be in direct employees of the chemical industry and - 100,000 would be in workers that support it, for example: plant construction crafts, and equipment manufacturers.

There will be parallel job losses not covered in these numbers:

in the engineering and technical licensing industry because the loss of the US manufacturing base would undercut US dominance in processes such as ethylene in the equipment supply industry that receives orders from engineering and technical licensing firms, since the US engineering industry is biased toward US equipment supply

in the US industries that use chemicals to make other products such as molders of plastic parts since they will lose their current competitive advantage.

No attempt is made to quantify these job losses.

The impact on Europe and Japan would be similar but not as severe because of the greater US capital investment in high-energy parts of the business, and the US status as the leader in the engineering and technical licensing areas.

"How quickly will the impact be felt in the USA?"

Again the answer is subjective, but this author's view is

".....since capital dominates costs in the chemical industry, a rise in energy prices would not cause an immediate permanent shutdown of many facilities.....a trained staff is not easily replaced and the restart costs associated with mothballing a unit are high.....the useful life of a chemical plant is normally in the range of 10 to 25 years"

Stated more clearly

"....a drift into sub-marginal economics will probably show itself slowly.....employment loss will not show a major impact for perhaps 5 to 10 years....and full impact will not be seen until 25 years due to facilities that are in the early stage of their useful life at the time of the rise in energy prices"

The issue is company longterm capital decisions and this hinges on what companies believe will happen over an extended time. The transfer of manufacturing facilities is a slow process.

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If fuel price increases are confined to the OECD, production will simply shift to other areas. There will be a slight increase in energy efficiency because the newer plants will be built with newer, better technology.

If the fuel price increases were not confined to the OECD but were truly global, the expected reduction in energy use because of the trade of capital for energy in new facilities could be substantial, as shown by Table 7E.

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Again, k is the ratio of energy cost to tradeable capital at the optimum as discussed in Section 4.

"Bottomlines" on Section 7:

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The assumed fuel price increases do not cover developing countries or the Middle East.
This restriction distorts the impact of the price increases.

The fuel price increases will cause much of the high energy portions of the chemical industry to relocate to countries not subject to the price increases.

There will be a long time delay for the full impact.

If the fuel price increases are only applied to the developed world, they will have a minor net global saving in energy.

If the fuel price increases were applied globally the energy effect could be fairly large.

Most of the USA chemical industry would survive the fuel price increases in the form that is proposed. The net loss of value added would be in the range of 5 to 10 percent of the total for the industry.

It is assumed that the fuel price increases are limited to process energy and do not include feedstock. The distinction will generate a great deal of regulatory activity and a great deal of technical, legal and accounting argument.

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A comparison of Figure 1 against Table 7D argues for a focus on technology rather than energy price increases.

This section looks beyond the narrow focus on the chemical industry and the capital/energy trade to the broader issue of how technological progress has been achieved and how energy efficiency has historically been improved. The intent is to clarify:

the distinction between technological progress and the capital/energy trade
the relative contribution to energy efficiency of technological progress

Technological progress and the capital/energy trade are often confused but are distinctly different:

The capital/energy trade is basically a game played with marginal economics in a static setting with a given technology. As Figure 2 shows, the rewards for playing the game perfectly (making the capital/energy trade perfectly) are only marginally greater than for playing imperfectly.

Technology improvement is a game where the player with the best "information" wins. "Information" grows over time. The player that enters the game later has a large advantage, as shown by Figure 1.

The capital/energy trade is driven purely by relative prices. One energy price increase, generates only one reduction in energy. The reduction is costly and the player is not really certain whether he has won or not. Again, see Figure 2.

Technology improvement is driven by the time spent playing the game. It has no direct tie to energy prices although some economists speculate that it is sometimes driven by concern over shortages in energy availability. There is a new win generated every 20 years or so. Usually the win is clear and often it is dramatic. It typically comes along with "other wins" in other areas such as capital productivity. It is not usually driven by the desire for energy improvement, and often is simply a byproduct of changes in other areas.

Most of the rise in energy efficiency that we've seen has come from technological progress. Technological progress evolves as a byproduct of the pressures of a competitive industrial society to increase productivity and lower costs. It includes "dematerialization" of the things we buy. It comes from technological progress much broader than energy -- for example, computers permit better designs and stronger plastics replace steel. It includes the long pattern of incremental changes referred to here as "learning". It also includes major new developments referred to here as "breakthroughs".

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Much discussion (Steinmeyer, 1992) has focused on the long term improvements in energy efficiency. These are real and are illustrated by the example of ethylene plants. Figure 1 (page 1) tracks the energy efficiency of new plants offered by The Lummus Company, an engineering contractor. The gains can be traced to a mix of sources:

Better reactor designs giving higher yields and fewer byproducts:

- through better alloys permitting higher temperature cracking furnaces

- through better understanding of the fundamental chemistry, resulting in shorter

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The individual events are not exciting. Neither is the 3 percent annual improvement in energy efficiency. But the net result was a 60 percent drop in energy use of new facilities over a 35 year period.

These are all broadly referred to as "learning." In most manufacturing processes, for each doubling of cumulative production, total processing costs, including energy, drop by about 20 percent. Often energy and capital savings are merely a by-product of changes made to improve overall productivity which includes quality, reliability and safety.

However, learning curve progress is inherently limited and would have run its course long ago where it not for fresh starts on new curves, due to fresh inputs of new science and radical innovations.

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While the incremental, evolutionary improvements are important, major breakthroughs are more important in the long run, particularly when we face barriers such as the world appears to be approaching today in the interface between energy and the environment. Breakthroughs are the reason why the future rarely turns out the way we foresee it. It is usually much more exciting, and often happier.

Some economists believe that inventions and innovations come when they do in response to a generally perceived constraint (Haustein, 1982). An extrapolation would suggest that if the scientific/industrial community sees an imperative for more energy, it will find it -- and will

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