Gary D. Huss recently described the toll rising natural gas prices is having on his small manufacturing firm.

"At Hudapack Metal Treating, we have struggled with increases in group insurance and workers comp insurance, but these increases pale by comparison to our cost increases for natural gas," said Huss, president of the Elkhorn, Wis.-based manufacturer, in testimony before a Senate subcommittee last October. His company operates two plants and employs 160 workers. "During the past two years, natural gas prices have skyrocketed and have been averaging about 75% higher than the 2002 price."

The spiraling costs, he said, "threaten our survival as a company."

Dow Chemical Co. announced on Jan. 27 record sales in the fourth quarter of 2004. However, the achievement, said the Midland, Mich.-based firm, came in spite of escalating fuel costs. Dow improved margins "despite incurring feedstock and energy costs that were 50% higher than the same quarter of last year." The manufacturer, which uses energy both as a fuel and a raw material for making other chemicals, said its feedstock and energy costs rose more than $3.4 billion in 2004 compared with 2003.

No doubt about it -- manufacturing is a powerfully hungry energy consumer. Some estimates show manufacturing may account for as much as one-fourth of electricity consumption in the United States and one-third of natural gas consumption. In 2002, the industrial sector (which includes manufacturing, mining, minerals and construction) accounted for nearly one-third of all U.S. energy consumption, according to the Department of Energy's statistical arm, the Energy Information Administration (EIA).

Its enormous appetite for fuel puts manufacturing squarely on the firing line in today's changing energy landscape. Political turmoil in key energy-producing markets, environmental concerns, increasing global demand, as well as the lack of a national energy policy, are just a few of the factors wreaking havoc on both energy availability and cost. How companies respond to these changing and challenging dynamics could provide a strategic advantage or drag their businesses under.

U.S. manufacturers operate in a world largely fueled by fossil fuels. Total primary energy consumption in the U.S. reached 98.2 quadrillion British thermal units (Btu) in 2003, with 86% of that appetite being met by petroleum products, natural gas and coal, according to the EIA. In its "Annual Energy Outlook 2005," the statistical agency projects U.S. energy consumption will increase to 133.2 quadrillion Btu in 2025, with a large percentage of that demand still met by fossil fuels.

Such heavy reliance on fossil fuel comes at a cost. Energy demand in developing Asia, including China and India, is projected by the EIA to more than double in the next 25 years, making them formidable competitors in the energy markets. A review of the fossil fuels illustrates additional shortcomings of these traditional energy sources.

Oil - While growing world demand is helping boost crude oil prices, nearing $50 a barrel at January's end, price volatility and spikes also result from political and economic instability in key petroleum-producing nations in the Middle East, Nigeria and elsewhere. Additionally, if EIA predictions hold true, U.S. demand will increase more rapidly than domestic production, making the United States ever more dependent on imported sources of energy. Meanwhile, efforts to increase U.S. production by opening the Arctic National Wildlife Refuge in Alaska and other environmentally protected areas to drilling are stymied by intense opposition.

Natural Gas - Until recently, natural gas prices in the United States were relatively inexpensive. Growing constraints on domestic supply have sent prices surging in the last three years. Unlike oil, a world market for natural gas does not exist due to problems associated with its transport, notes economist Donald Norman of the Manufacturers Alliance/MAPI, an Arlington, Va.-based business research group. Therefore, regional supply drives costs. A number of suggestions have been advanced to increase the U.S. supply of natural gas, including building a pipeline to access the large natural gas reserves in Alaska. Environmental and financial considerations make that a long-term prospect at best. A shorter-term solution is to increase imports of liquefied natural gas (LNG). Three of four existing U.S. LNG terminals are expected to expand by 2007, with additional terminals on the horizon. However, LNG terminals raise environmental and safety concerns. They also are incurring some "not in my backyard" resistance, says the Conference Board, a New York-based business research organization.

Coal - Coal is plentiful in the United States. It also is cited as a major source for acid rain and greenhouse gas emissions. Nonetheless, the rising cost of natural gas, as well as a robust domestic supply, is re-energizing interest in the fuel. The Department of Energy, educational institutes and manufacturers, particularly chemical manufacturers, are engaged in research of "clean coal" technology, including the conversion of coal into gas or oil. Coal gasification has been pursued in the U.S. and has been proven technically, but development has been directed on utility power generation, not industrial/manufacturing facilities, says the DOE's Paul Scheihing, team leader, chemicals and enabling technologies at the Office of Industrial Technologies, Office of Energy Efficiency and Renewable Energy. "The challenge is to gasify coal and make heat and power and feedstocks for chemical and other industrial plants cost effectively and also meet stringent environmental requirements."

Electricity - A major blackout in parts of the United States and Canada in August 2003 exposed weaknesses in the nation's electricity grid, and many warn that the problem will only grow worse without major investments to upgrade the infrastructure. Those warnings come as electricity demand in the U.S. is forecast to soar. Total U.S. electricity consumption is projected by the EIA to grow at an average rate of 1.8% per year between 2003 and 2025. Moreover, electricity generation today depends largely on fossil fuels, primarily coal and increasingly on natural gas, followed by nuclear power. MAPI's Norman notes that much of the increasing generating capacity expected in upcoming years is natural-gas fired, "but a lot of these plants were planned when natural gas prices were much lower."

An Uncertain Future

Exacerbating an already complex energy situation is the lack of national direction on energy policy, says the Conference Board, in its 2004 report, "Strategic Energy Management: The State of the Debate." "In some countries, such as the United States, the lack of a clear national energy policy can complicate and compound investment decisions and management priorities already made complex by supply and price uncertainties," the report notes.

The absence of federal action also has spurred states to pursue their own divergent policies, further complicating business decision-making. For example, while the United States has withdrawn from the Kyoto Protocol, 29 states have completed climate change action plans to meet their share of the U.S. target under Kyoto, says John Byrne, director of the Center for Energy & Environmental Policy at the University of Delaware in Newark. Further, he says, 19 states have passed "what are called renewable energy portfolio standards that require suppliers in these states to provide a portion of their electricity from renewable energy options." For example, he cites New York, which requires 25% by 2013, and New Jersey, which requires 6.5% by 2008.

Whether President George W. Bush can get national energy legislation passed during his second term in office remains in question, although he clearly intends to try. The president attempted and failed to achieve that goal during his first term, when the 108th Congress was unable to reach agreement on a comprehensive energy package. "Four years of debate is enough: I urge Congress to pass legislation that makes America more secure and less dependent on foreign energy," Bush said during his State of the Union address Feb. 2.

The National Association of Manufacturers is among associations urging Congress to take up energy legislation quickly in 2005.

"I can only reflect the conventional wisdom, that with increased majority in both the House and Senate, the likelihood has increased that [energy] legislation will pass this year," says Paul Bledsoe, a spokesperson for the National Commission on Energy Policy, Washington, D.C.

The commission, a privately funded, bipartisan group of 16 members representing labor, business, government, education and environmentalists, in December released its strategy to meet the United States' long-term energy challenges. The result of more than two years of research, the proposal cites recommendations in six key areas: enhancing U.S. oil security, reducing risks from climate change, improving energy efficiency, increasing the U.S. energy supply, strengthening the energy-supply infrastructure, and promoting the development of improved energy technologies for the future.

"Our goal," says Bledsoe, "was to show that you could create a coherent strategy out of these diverse elements."

The organization has already met with dozens of Congressional members to advocate its energy package and will continue to due so throughout 2005, Bledsoe says.

Business Responds

Manufacturing's response to the growing energy challenge has been varied, including the relocation of some activities abroad, where energy is less expensive, says Norman. And many firms are taking a "wait-and-see" attitude with regard to renewable forms of energy, he says. However, that doesn't mean manufacturers aren't aggressively working to reduce both their energy costs and dependence on fossil fuels.

For example, Pittsburgh-based Alcoa Inc. has targeted $100 million annual environmental and energy cost savings by 2006. In one project to achieve this goal, the company has replaced old boilers at its Lafayette, Ind., plant with direct-fired heating systems. The $1.8 million project is expected to generate $1.3 million in annual cost savings, Alcoa says.

3M Corp., St. Paul, Minn., reports that it has improved energy efficiency by some 62% at its U.S. operations since 1973. It has achieved such results from a variety of measures, including employee team efforts and new equipment and facilities. Its plant in Cottage Grove, Minn., for example, eliminated its dependence on coal as a boiler fuel through an agreement with an adjacent combined heat and power (CHP) facility. The CHP facility produces electricity and provides much of the plant's steam needs from waste heat.

Organic foods maker Horizon Organic, Longmont, Colo., announced in October 2004, that it would join sister brand, organic soy foods producer White Wave, in purchasing renewable energy credits from wind power providers to meet 100% of its production and processing needs. In 2004, White Wave's purchase of wind energy credits approached 25,000 megawatt hours; Horizon Organics' purchase in 2005 is expected to be about the same. With those purchases, the electricity Horizon Organics and White Wave (both subsidiaries of Dean Foods Co.) draw from the national grid is offset by wind power added to the grid. White Wave, which makes Silk soy milk, promotes wind power in its marketing efforts.

Dow Chemical is exploring the potential of hydrogen fuel cells. Dow and General Motors Corp. in November announced the launch of the second phase of their joint project to prove the viability of hydrogen fuel cells for motor vehicles and distributed power generation. The first phase, a single GM test cell, has advanced to a multicell pilot plant at Dow's Texas operations in Freeport, Texas, home to Dow's largest chemical manufacturing installation. Hydrogen is produced there as a byproduct of its manufacturing processes.

The company's reasons for participating in fuel-cell research are threefold, says George Kehler, Dow's commercial manager for renewable and alternative energy. As a big energy consumer, Dow is committed to sustainable energy development, and, he says, "we need to diversify our portfolio; we use a lot of natural gas." Additionally, "For us to be on the leading edge of emerging technology is exciting for Dow."