San Francisco Chronicle

Fuel Crisis May Boost Manufacturing
By L. Joseph Thomas, Sunday, August 31, 2008

The recent surge in oil prices has shocked the Golden State, but painful as they may be, higher oil prices present California with an opportunity in unexpected quarters: the state’s manufacturing base.

The days of cutting lumber in the Pacific Northwest, shipping it to China for production and sending it back to Pleasanton as a new dining room table are almost over, now that shipping a container from Shanghai to Oakland costs $8,000, compared with $3,000 a decade ago.

Oil prices may have dropped from $140 per barrel, but the era of cheap oil is over – and no amount of debate over offshore drilling or tire gauges can change that.

State and national policies based on alternative energy, natural gas, better mass transportation, more stringent auto mileage standards, tax breaks for greener technologies, increased nuclear power and offshore drilling (although results will be years in the future) will be necessary to power up industry and consumers.

As we saw from increased demand for hybrid vehicles when these cars received HOV stickers to drive in carpool lanes, government can and does affect behavior. But private industry must do its part as well.

Here’s what I believe will happen. First, the manufacturing sector will stabilize. The California Manufacturers and Technology Association reported 50,000 manufacturing jobs lost from May 2007 to May 2008. But high oil prices and the devaluation of the dollar will reverse this trend as Asian goods become more expensive to purchase and ship.

There is already evidence that this is happening.

The California Manufacturing Technology Consulting, a survey of 500 small manufacturers in Southern California, found an overall $243 million increase in sales during the fiscal period June 2007 to May 2008. Economists at Chapman University reported that manufacturing production has actually grown across most industries, from chemicals and plastics to electronics and aerospace, according to their California Purchasing Managers Index released this summer.

The high cost of transporting steel and other materials means domestic auto production has become much more appealing. This will benefit operations surrounding Fremont’s Nummi plant, for example, as it sources more parts from its more than 1,000 in-state suppliers, supporting upward of 50,000 jobs.

Much of California’s economic growth comes from small and midsize enterprises across the supply chain, which can provide better customer service and faster response time by keeping their manufacturing local. This competitive advantage will keep manufacturing jobs in California.

Silicon Valley innovators have increasingly shifted their focus to renewable energy, and clean-tech manufacturing is poised to be a huge boon for the Bay Area. High-tech industry luminaries like Intel, IBM and National Semiconductor have each poured millions into solar panel development.

While California has already taken great strides to invest in homegrown renewable energy sources, the Energy Information Administration says California still imports more electricity than any other state due to sheer quantity of energy demand. The Center for Energy Efficiency and Renewable Technologies recently reported that if California generates one-third of its electricity from renewables by 2020, the state could see an increase of 200,000 manufacturing jobs and a $60 billion injection for the ailing economy.

Oil at its current prices makes this target highly feasible. With increased investment, the private sector will find ways to improve the technology and drive down costs for alternative energy sources, including biofuels (from sources other than corn).

Many trends begin in the Golden State, and California’s decisions could greatly influence a new national energy policy. For years, gas prices were too low, and it made consumers and industry do things that were not economically justifiable. But Californians and the rest of the country are becoming better at conserving.

A comprehensive energy policy that helps manufacturing, the environment and the economy needs to be enacted. We need tougher mileage standards, more domestic drilling, nuclear energy, solar and wind power and other renewable energy. Higher oil prices make many of these economically efficient and more appealing to consumers and industry.

While there is no one magic bullet to solve our energy situation, our dependence on cheap oil can no longer prop up the California economy. That’s good for California and good for America.

L. Joseph Thomas is the Anne and Elmer Lindseth Dean of Cornell University’s Johnson School of Management and a professor of Operations Management. E-mail us at [email protected].

This article appeared on page G – 9 of the San Francisco Chronicle