Sound Public Policy Never Hurts

This week, Paul Ryan held a press conference to highlight tax reform initiatives. It didn’t get nearly the attention it deserved. But then, tax policy in general rarely gets the attention it deserves (more on that later). You know what also never gets enough attention? Public policy.

After years of hostility to the notion, the United States appears to be now embracing a move toward more energy independence. The byproducts of that (no pun intended) are just beginning to be felt, which will have far-reaching and positive economic implications for the U.S. beyond energy.

A great article recently appeared in the UK Evening Standard about fracking and the risk not pursuing fracking aggressively presents to the UK. The article, by Anthony Hilton, touches upon an issue that we never talk about enough – the positive mushrooming impact on jobs from energy exploration. It is worth quoting Mr. Hilton at length:

Once you have built a major chemical complex, your main (in many ways, your only) worry is the cost of the raw material you need to feed into it. This can account for half or more of total production costs, and is similarly crucial for other energy ­intensive industries such as refining, iron and steel, glass, cement and paper.

Until a few years ago Europe and America paid more or less the same amount for their petrochemical feedstock — the US had a slight advantage but not so great after transport and other costs had been factored in. (Middle East plants, sited right by the oilfields, did have such a price advantage but lacked scale.)

This is no longer the case thanks to the fundamental changes across the Atlantic. The Marcellus field, which spreads over several states and is just one of many in the US, produces 15 billion cubic feet of gas a day which is almost twice the UK’s entire consumption. But the result is that US prices have disconnected from the rest of the world and the subsequent feedstock prices have given American chemical plants so vast a price advantage that, on paper at least, there’s no way Europe can compete. It is staring down the barrel of bankruptcy, not now, but in a few short years, unless it can find some way to get its raw­ material costs down to American levels.

Thus far, the effect has been muted — and the European industry has had a little time — because the US petrochemical industry was originally not built for indigenous US gas and oil supplies but instead located near ports and configured to process supplies of oil from the Middle East.

But this is changing fast. There has been virtually no big petrochemical investment in Europe in the past decade whereas in the US since 2010 some $85 billion of petrochemicals projects have been completed or are under construction. Spending on chemical capacity to 2022 will exceed $124 billion, according to the American Chemistry Council, creating 485,000 jobs during construction and more than 500,000 permanent jobs, adding between $80 billion and $120 billion in economic output. After years where chemical capacity has run neck and neck with Europe, the American industry is about to dwarf it.

Plainly stated, fracking and horizontal drilling have produced for the US a great economic advantage over Europe and elsewhere. It would be irresponsible to stop. Thankfully, the War on Drilling appears to have ended last November. Let’s hope state governments stay out of the way. . .

I have heard too often in my lifetime that presidential elections aren’t that meaningful because Washington gridlock prevents the U.S. from lurching too far in any direction, which is supposed to be a good thing. I hope the article quoted above can help debunk that idiotic notion. We can think of few things more complementary to economic growth than sound public policy from the Executive branch. Tax policy might be the only thing that matters more.

We will have more on the impact of tax cuts in future posts, but If you are looking for events to cause a sharp pullback in markets, a delay in tax reform, or weaker than expected tax reform, or tax reform being tabled altogether gets our vote as Public Enemy No. 1 for markets.