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The Cost of Our Energy Policy on Manufacturing

By Tim Cabot, Founder, Alacrity Material Technology LLC

With the Energy Policy Act of 2005 soon to become law, pundits will stake widely disparate views on the effectiveness of this legislation to resolve our future energy needs. Between the many strident claims, there is near complete unanimity on the requirement to throw vast amounts of public money at this issue; either to incent new well drilling or wind farm construction, depending on the politics. As a result, this may be a good time to stand back and look more closely at the consequences of higher energy pricing and how it affects business in New England.

Much has been written about how escalating oil and, more so, gas costs are breaking the backs of long-established New England companies. This is especially true in the chemicals and plastics industries where the latest surge coincides with further high profile plant closures and the ensuing indirect impact on many smaller companies that support them. Furthermore, the extraordinary amount of private investment in these same industries in China and the Middle East cements the argument that only government intervention can level the playing field and stave off the collapse of the remaining players.

Misplaced Arguments

Without minimizing the real hardship created by business failure, arguments in favor of policies to reduce energy prices to save our industrial base are misplaced on two fronts. First, whether prices are relatively high or low, the North American manufacturing base in mature industries will continue to rationalize as companies reduce costs and become more efficient. In spite of our proud industrial heritage, New England does not have many intrinsic long-term advantages to drive investment in this region.

Secondly, the argument minimizes the positive effects of higher energy prices. As Martin Wolf noted in his June 22 nd article in the Financial Times, historically cheap energy prices, while good for the consumer, act as a deterrent for investment in certain types of innovation, such as more efficient manufacturing processes. The cost analyses to change just do not add up. With real vs. nominal energy prices getting back to the long term trend line, a range of investments in both efficiency improvements as well as input substitutions now make more economic sense.

And who will meet this new demand? In large part, companies in New England, due to our ability to develop, finance, and commercialize new materials and tools to drive ever greater efficiency.

Prospering in the New Environment

One does not have to look far to see the myriad of companies who will prosper in this new environment. Take Metabolix in Cambridge which is creating a new generation of biodegradable plastics out of bioengineered plants. Or Aspen Aerogels in Northborough which produces advanced thermal insulation materials. In all such cases, higher energy prices will accelerate sales growth and the consequent investment back into our economy.

While the Energy Bill will help to resolve many real problems, one has to wonder whether government incentives to lower energy costs make economic sense. Saving the money and letting individual enterprises determine investment allocation is likely to have more impact on whether it is used wisely and improves our economic welfare.

If the choice is between trying to extend the future of a 40 year-old commodity chemical company which cannot attract much new investment and allowing the next generation of value added, high skilled, and wealth generating industries to take root, the choice is clear.

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