There is an increasing amount of attention on the natural gas industry in the U.S. As well there should be. The price of natural gas is currently very low while the price of crude oil is quite high. Throughout most of history, the ratio of the price of a standard crude oil contract to the price of a natural gas contract has been in the range of 10 to 1. This is because there is about eight to 10 times more energy per contract in crude oil than there is in natural gas. This 10 to 1 relationship between the two markets remained very consistent until about three years ago. Then the two markets diverged dramatically.

At the present time, the ratio between the price of the two contracts is more than 50 to 1! Put another way, at the current price for natural gas in the U.S., the price of oil should be less than $20 per barrel if oil and gas were perfect substitutes. Most cars do not burn natural gas, so obviously these commodities are not perfect substitutes. But my guess is that very soon this will change.

At the current price levels, it makes economic sense not only for many types of cars and trucks to convert to using natural gas as a fuel, but also all home heating systems that currently use heating oil should also convert to gas. And in the plastics industry, most resins that are currently made from crude oil-based derivatives will soon be made from gas-based derivatives.

The markets for electricity, motor vehicle fuel, heating fuel, and plastics resins are likely to all be based on the natural gas market in the not-too-distant future. This will push the price of gas up and at the same time it will pull the price of oil down, and the 10 to 1 ratio is likely to re-emerge in the coming years. This shift will represent many opportunities for U.S. manufacturers. And moldmakers who can take advantage of this shift at the early stages will have an advantage.

 

As I write this at the end of March, the price of gasoline is in a firmly established trend upward and it is fast approaching a record high. Gasoline prices usually trend higher at this time of year as we head into the summer driving season. Refining capacity is tight, and the price of chemical additives that alleviate some of the environmental issues must also be included. Predictably, this has consumers, as well as analysts and politicians, uneasy about the impact that higher gas prices will have on their pocketbooks and the overall economic recovery.

The myopic thinkers are already pushing policies that will attempt to rectify the problem of higher gasoline prices. These include: regulating speculation in energy markets, drilling more wells, laying more pipeline, and releasing oil from the nation’s strategic reserves. Unfortunately, none of these issues will solve the problem, and they all come with built-in negative consequences that will end up making the problem worse over time. This is because any positive effects these measures would have in the short-term would quickly be offset by increased demand in the medium- to long-term. In other words, it would not take very long for all of the extra supply to be absorbed by the market and we would then be right back where we are now. This problem cannot be truly solved by marginal increases in supply.

If we truly want lower gasoline over the long-term, then we must quit demanding it. Our current economic model is addicted to cheap oil, and we cannot outrun this addiction. There is simply not enough gasoline in the world to sate our appetite for “more.” We must cure it. This will require new products, new infrastructure, and most importantly, a new mindset. But it is the only way to reduce permanently the exorbitantly high costs of crude oil and its derivatives on our economy and our culture.

Just as the age of the automobile represented a huge opportunity for an economy that was emerging from the horse and buggy days, the development of an alternative energy economy will be a huge opportunity for manufacturers as we progress through the next century. So the question is, “Are you currently doing everything you can do to reduce your use of gasoline and promote the development of alternative fuels that are more supportive of America’s domestic resources?” If not, WHY not?

Misguided/misinformed aggregate demand is the root cause of all of the problems that we face in this country, and educated/enlightened aggregate demand is the solution to all of these problems. In order to change or re-focus aggregate demand, we must first identify it, then we must analyze it. Once we understand it, then we can put it to work to achieve our goals.

#1 Challenge: Employment Gap in the Moldmaking Industry

There are a lot of people in the U.S. looking for jobs, and there are more than a few moldmakers looking to hire qualified people. The problem is that the people who want jobs do not have the requisite skills for moldmaking. There are a number of reasons for this skills gap. We should look at this blog as an opportunity for all of us to identify and then accurately and thoroughly discuss these reasons.

Is the compensation offered by the industry sufficient? Is there any reason to believe that the demand for these skills will last? It takes several years to acquire these skills, but the recent demand for them has been short-term. The industry is increasingly technology-driven, not labor-driven. Is the investment of time and money that workers must make worth it in order to train for an industry that has been shrinking and also becoming more mechanized over the long-term?

The aggregate demand angle here is that the global market must demand more U.S.-made molds and molded products over the long-term if we are to support the long-term development of the labor force required to make these products. There is little evidence to suggest that this is yet happening on a sustained basis. If the demand is there, then the jobs will appear and the wages will increase for an extended period of time. This will provide the necessary incentive for workers to acquire the skills and enter the industry. Thoughts?

The U.S. currently runs a negative trade balance with the world. This means we are a net importer. Our trade relationship with China has been a serious problem for moldmakers and many other industrial sectors. The other glaring trade issue is the amount of foreign oil imported into the U.S. As a country, we are addicted to both cheap Chinese-made goods and oil. These addictions are bad for our economy, but more importantly, they are bad for our national security. An addiction is another way of saying “uncontrolled demand.” These addictions were the result of uncontrolled aggregate demand. There are many ways in which our addictions are expressed, so there are many things we could choose to do to correct them. Not engaging in foreign trade is not one of the things we should choose. What we should do is learn to limit our consumption of the products to which we are addicted. Energy independence will not be achieved by digging more wells or by building more pipelines, though these activities might be marginally helpful. What we need to do is demand products that promote energy efficiency and the development of alternative energy products. We do not have a production problem, we have a consumption problem. Our trade problems with China are not the fault of the Chinese. They are a WE problem, not a “them” problem. Our economy can benefit greatly from globalization and expanded trade agreements. But we must first take care of business at home by making better use of the power of our aggregate demand.

Every year, Americans demand more government services than they pay for. Thus we have chronic budget deficits at every level of government. As a society, we are addicted to government services that we do not pay for. To cover these deficits, the Federal government has borrowed trillions of dollars. This process is no longer sustainable.

Politicians have avoided solving this problem because it has not been possible to make the decisions that are required and then get elected or re-elected. The aggregate demand for services purchased with credit and then paid for by somebody else at some future date is out of control. This will be one of the central themes of the election year, but it will likely be overshadowed by the promise from both parties to create jobs.

Jobs created by politicians are often not good. Many times (not always) they are not good for the economy, and they are not good for the people who have them. Aggregate demand can create jobs. Properly focused aggregated demand can quickly create large numbers of excellent jobs. In fact, aggregate demand is really the only way to solve the jobs problem. Thoughts?