For energy-intensive industries, fuel is not a rounding error. It can represent 25% to 90% of operating costs. When regional energy prices diverge, industrial production and capital can move with them.
The original work showed natural gas at roughly 40% of refinery operating costs, 25% for aluminum smelting, and 70–90% for fertilizer, then connected regional gas-price gaps with industrial production and capital allocation.
For energy-intensive industries, fuel is not a rounding error. It can represent 25% to 90% of operating costs. When regional energy prices diverge, industrial production and capital can move with them.
Steel, chemicals, fertilizer, refining and aluminum all require enormous amounts of energy. In some of these businesses, energy costs can determine whether an asset is globally competitive at all. Recurrent's 2024 work highlighted how natural gas represented roughly 40% of refiners' operating costs, about 25% for aluminum smelters and 70% to 90% for fertilizer production.
When energy is that important to the cost structure, regional price differences can do more than change quarterly margins. They can change where companies choose to produce, expand and invest.
Cheap energy is not just a consumer benefit. It is an industrial advantage.
Oil is globally transportable and relatively easy to store, so regional oil prices tend to remain connected. Natural gas is different. Infrastructure constraints can create dramatic regional price gaps, making the same unit of energy far cheaper in one part of the world than another.
The shale era created a durable natural-gas cost advantage for North America relative to many overseas markets. During periods of particularly wide regional gas-price gaps, U.S. industrial production outpaced Europe by a meaningful margin. Companies also responded by reallocating capital toward lower-cost regions.
The larger lesson is durable: energy abundance affects much more than the energy sector. When fuel represents a major share of production costs, cheap and reliable energy becomes a competitive advantage for chemicals, aluminum, fertilizer, refining, paper, steel and other energy-intensive industries.
This research note is adapted from the Natural Resources discussion in Recurrent's June 2024 Monthly Investment Commentary.