For four decades my job has been to monitor and forecast the Louisiana economy.
Prior to 2012, we got excited if a $300 million project was announced for the state. In the recent Louisiana Economic Forecast, we documented $133.9 billion in projects either underway or announced on or below I-10. Billions more in projects have been completed since 2012.
What is driving this remarkable boom? The answer lies in Figure 1, which shows the price of natural gas in the U.S.'s Henry Hub, Europe's Title Transfer Facility (TTF) and National Balancing Point (NBP), and Asia's Japan Korea Marker (JKM) over the period of January 2018 to April 2021. Note the huge initial gap that existed throughout 2018 in Figure 1. This big differential existed going back to about 2012.
Natural gas is a key input in chemical plants. Natural gas is converted into ethane, then ethane is converted into ethylene, and ethylene is converted into thousands of consumer and industrial products.
Louisiana presents some ideal location advantages to prospective plants:
- Easy access to many pipelines carrying natural gas.
- Access for deep draft ships via the Calcasieu Ship Channel and Mississippi River.
- Access to the world chemical market via the Gulf of Mexico.
Between 2012 and 2021, the size of the pie representing global chemical demand grew marginally, but the U.S. share of that pie grew dramatically. European and Asian chemical firms simply could not compete with U.S. firms when foreign natural gas costs were so much higher.
When COVID-19 hit, many chemical firms in Europe and Asia shut down, and the price differential disappeared for a few weeks in mid-2020. However, the reopening of the economy also reopened the differential. By April 2021 - the last data point in Figure 1 - the differential returned to about $5 per 1 million (MM) Btus.
Then, in December 2021, the wind quit blowing in the North Sea, a major source of electrical power for Europe. Power plants had to switch to natural gas. Because the European Union outlawed fracking, the continent had to import natural gas from Russia or the U.S. In December 2021, the Dutch TTF was at a stunning $100 per MMBtu and the Asian JKM was near $80 per MMBtu. The U.S. price stayed in its comfortable range of $3.25-$3.75. The U.S. competitive advantage became huge.
The wind will eventually start to blow again in the North Sea. Today's massive differential will decline, but the gap will still remain very significant, continuing to feed Louisiana's industrial boom. We expect the first firms to pull the trigger on new facilities in Louisiana will be LNG exporters - specifically, the $8.5 billion Venture Global Plaquemine and the $16.8 billion Driftwood LNG projects. Prospects look very good for the Gron Fuels renewable diesel plant at the Port of Baton Rouge and the Formosa Plastics mega-facility in St. James Parish (if the environmental hurdles can be jumped). Both projects are $9.4 billion each. We are currently aware of $7.5 billion in announced projects in Louisiana to supply the emerging, booming world methanol market.
That global natural gas price differential is poised to ignite a whopping boom in Louisiana's construction industry.
Dr. Loren C. Scott is president of Loren Scott & Associates Inc. and professor emeritus of economics at Louisiana State University.
For more information, visit www.lorenscottassociates.com or call (225) 751-1707.
