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Inward Investment Guides

Ranked #10: Energy Availability & Costs

The ranking of Energy availability and costs in Area Development's 2005 Corporate Survey should be viewed in the context of the survey's timing.

Ed McCallum, Senior Principal, McCallum Sweeney Consulting (Oct/Nov 06)
Surprisingly, the relative importance ranking of energy availability and costs dropped to number 10 in the 2005 Corporate Survey from number 5 in the 2004 Corporate Survey. This represented a 3.0 percent change, from 85.2 percent (in 2004) to 82.8 percent (in 2005). Of course, energy costs at that time were not nearly as high as they are now, so this is logical in the context of the survey at the time. I suspect, however, if the same survey were taken today, the results would be much different.

Let's examine the cost of oil then and now. The nominal average costs per barrel of oil for the years 2003 and 2004 were $27.69 and $37.66, respectively. The cost for 2005 was $50.04, with the price climbing to $59.44 in the first quarter of 2006. Crude oil prices, according to Bloomberg1 on August 16, 2006 were at $72.86 on the spot market. Natural gas prices have followed the same trend.

Unfortunately, there is no accurate way to predict what the future energy picture will be. Trends are impacted by supply and demand, U.S. and world economic growth, technology advances, public policy decisions, and world events. Still, there is a clear consensus among the experts: Increased energy costs will continue in the foreseeable future. There is no industry that is not, or will not, be affected in some way by increased energy costs. One way or another, energy costs flow through and affect everyone - some more than others. With that in mind, there are opportunities for both the public sector (recruitment leverage) and the private sector (cost savings).

Opportunities to Reduce Costs
In this author's opinion, there is little likelihood that new energy sources away from fossil fuels will fundamentally change the course of energy costs in the near future. From a macro-perspective, the economics of conversion to hydrogen, biomass, wind, or other non-fossil fuel sources are simply too high without concerted government intervention to guide and subsidize such a program. Even then, the idea is difficult to completely rationalize. Add to this the regulatory pressure for environmental compliance, coupled with both market forces and policy decisions regarding energy exploration and discovery, and there is little chance that the United States will wean itself from imported oil soon. From a micro-perspective, industry cannot justify the conversion of existing facilities to newer technology or alternative fuels for the same reasons. While this is problematic from an industry perspective, it is an opportunity waiting for economic developers.

Companies are constantly looking for new and innovative ways to increase efficiency within their organizations, throughout the entire supply chain and manufacturing process. As a consequence of these efficiencies, they either establish or maintain a competitive advantage in the marketplace. Some have the resources in-house, while others seek assistance outside the organization. Regardless, the more efficient they are, the more productive they become. Unless the firm is energy-intensive with a heavy demand and high load factor, there is little that can be done about energy costs except through streamlining operations. As a consequence, anything that can be done to reduce energy costs - whether it is logistics, improved process flow, better energy management practices, or other process modifications - is welcomed.

Electricity costs have increased dramatically in some parts of country and are not likely to let up in the near future. One logical partner - that is many times overlooked and usually underappreciated - is the local utility company. Most, if not all, provide free consultation on ways to reduce total energy costs and increase efficiencies. In fact, some offer incentives up front to encourage smart design.

Product Innovations Will Help
Because of the increased cost of energy, new product innovations will no doubt be just around the corner, particularly in the automotive and aerospace industries. New composite materials for body and frame sections are already more pronounced in the aerospace industry. For instance, 45 percent of the Boeing 787 aircraft's structure is made of graphite composites. Another 5 percent or so is composed of fiberglass, for a total of about 50 percent of the aircraft. General Electric's GEnx Powerplant™ (which powers the 787 aircraft) offers fuel efficiency benefits over current generation turbofan engines, thanks in part to composite components that make the GEnx lighter than comparably sized engines. The net result of these and other innovations in the aircraft has resulted in a 20 percent savings in fuel economy and 35 percent savings in operating and maintenance cost.

This same effort is being made in the automotive industry as well and is comprised of basically two activities: (1) those that represent incremental improvements/advancements in conventional power trains; and (2) those that represent significant changes in power train design (electric, hybrid, fuel cell, and battery-powered). Innovation will also affect building materials, electronics, logistics services, and many other products in the future.


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