There is one reason the U.S. economy is recovering: Low gas prices. Natural gas, that is. The price is at a 10-year low and expected to stay that way for awhile. This glut of inexpensive energy is why so many companies have been moving manufacturing back to the U.S.
Yesterday the price of natural gas fell 2.5 percent after the government said supplies remain significantly higher than average levels for this time of year. According to the Energy Information Administration, supplies are more than 40 percent higher than the five-year average. The U.S. is actually a net exporter of natural gas.
The low price is because of two things: A warm winter and a lot of drilling.
Outside of Alaska, the nation has seen one of the warmest, driest winters on record. In Minneapolis, temperatures didn't drop below zero until Jan. 19th. This has cut the residential demand substantially. More than half of all U.S. Households use natural gas for heating and 25 percent of the nation's electricity is made from it. By spending money that otherwise would have gone to pay for heating, consumers have increased economic demand.
At the same time the domestic supply has increased radically because of the increased use of hydraulic fracturing or fracking. According to the EIA, gas from fracking went from 1.0 trillion cubic feet in 2006 to 4.8 trillion cubic feet in 2010. Fracking is environmentally problematic, to say the least. It involves injecting a well with millions of gallons of chemically treated water at high pressure to crack surrounding shale and release trapped gas. In New York State alone more than 50 communities have passed fracking bans.
The cheap price has been a boon to many industries, like plastics, fertilizers, chemicals and other things derived from natural gas. It has also helped manufacturers of everything from steel to beer, which use large amounts of energy. This, more than anything else, is responsible for the return of so much manufacturing to the U.S.
Manufacturing employment rose by 225,000 jobs last year, sustaining gains for the first time since 1997.
President Obama wants to encourage this trend, which he calls insourcing, by scrapping tax deductions for shipping jobs overseas and offering new incentives for returning them to the U.S. The fact that manufacturing is growing without any tax changes tells you everything you need to know about the uselessness of these policies.