How Cheap Oil Is Fueling a Surge In New Factories

The construction of chemical plants is making up for a slowdown in oil-well drilling

Oil And Gas Plant Operated By NIS Gazprom Neft
Photographer: Oliver Bunic/Bloomberg

America's energy rebirth is the gift that keeps on giving for the economy. But this year, it's more about construction than drilling holes in the ground.

While the collapse in oil and gas prices since the middle of last year caused energy companies to slash investment in oil wells, Thursday's report on second-quarter GDP showed an interesting dynamic taking shape — investment in factories has been running full bore.

It may be surprising on the surface, given that manufacturing has simmered down this year on the heels of a weaker global economy, but spending on all types of production facilities increased at a 65 percent annualized pace in the second quarter. That was almost enough to offset a 68 percent plunge in investment in wells and mines that marked the biggest drop in 29 years.

Outlays for factory-related structures jumped even more from January through March -- surging at a 95 percent pace. Over the last four quarters, investment in plants increased an average 64 percent, the strongest since records began in 1958.

"There's a manufacturing boom underway tied to the chemical industry" building new plants that refine oil and natural gas into other products, said Joe Carson, director of global economic research at AllianceBernstein LP in New York. "The gift is long term. The energy renaissance triggers a manufacturing revival."

Spending on chemical plant construction in the private sector stood at a seasonally adjusted annual rate of $48.4 billion in May, up almost 10 percent from a month earlier, according to the latest data from the Census Bureau. During the first five months of this year,  an unadjusted $15.9 billion was spent on chemical plants, more than double the $7 billion for the same period in 2014. 

Auto making also probably helps explain the pickup in factory construction, according to Stephen Stanley, chief economist at Amherst Pierpont Securities LLC in Stamford, Connecticut.

"Certainly the auto industry is in good health," he said, so "there's no question autos are a piece of that.'' While further gains in corporate investment in new plants are possible, Stanley said it's doubtful such a robust pace can be sustained. "I wouldn't expect to see this huge pace of advance continue for too much longer unless businesses become more confident." 

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