Cheap Natural Gas Could Save U.S. Households as Much as $1,200 a Year by 2020

CHICAGO, IL--(Marketwired - Dec 18, 2013) - The average U.S. household is estimated to be saving between $425 to $725 each year in energy costs due to a sharp drop in domestic natural gas prices since 2005. And those savings could potentially rise to as much as $1,200 a year by 2020 -- roughly equal to a boost in U.S. disposable income of nearly 10 percent. These are among the findings of new research released today by The Boston Consulting Group (BCG).

The research assesses the impact on household expenditures from rising U.S. production of natural gas recovered from the country's vast underground shale deposits. Wholesale natural gas prices in the U.S. have fallen by around 50 percent since 2005, when production ramped up using hydraulic fracturing techniques, and are projected to remain low for decades. The research is part of BCG's ongoing Made in America, Again series, produced by the firm's Operations and Global Advantage practices.

"Our research shows that cheap natural gas is already having a bigger impact on family budgets than many Americans think," said Justin Rose, a BCG partner and a co-author of the study. "Those benefits should grow in the years ahead as more of the cost savings from low gas prices are passed along to the end consumer."

The average U.S. family spends around $9,000 a year on energy. Assuming an average household income of around $50,000, that comes to 18 percent of total expenditures. Around one third of that spending is on direct energy expenses, such as electricity, home heating, and gasoline for cars, as well as for energy embedded in everyday products, such as the petrochemical feed stocks in materials used to make everything from clothing and detergents to plastic bottles. Around two-thirds of Americans' energy spending is "indirect." This is the energy used to process and deliver finished goods and services, such as the fuel burned to heat and light factories and to transport components and finished products.

To estimate consumer cost savings, BCG used the most recent U.S. Energy Information Administration data on energy spending. It compared these data with estimates of what energy would cost had prices of natural gas -- which accounts for around one-quarter of U.S. energy consumption -- remained on the trajectory that had been expected prior to when large-scale recovery of shale gas began.

BCG estimates that around 30 to 50 percent of the cost savings to companies from cheaper natural gas have likely been passed along to consumers. These savings come in the form of prices that are lower than they otherwise would have been, according to the research, resulting in average household savings in the U.S. of $425 to $725. This is equal to an extra 3 to 6 percent of additional discretionary spending each year for the average U.S. household.

"It takes time for changes in wholesale energy prices to flow through from utilities, manufacturers, and other big industrial users to end consumers," explained Michael Zinser, a BCG partner who co-leads the firm's Manufacturing practice. "But we expect that the benefits of these energy-cost savings could rise significantly over the medium term."

By 2020, BCG projects that average U.S. households could save between $725 and around $1,200 a year as an estimated 60 to 80 percent of the cost savings from cheaper energy flow to consumers. The high estimate would translate into a nearly 10 percent increase in discretionary spending power in the U.S., and potentially a significant boost to the economy.

Previous BCG research has highlighted the benefit that low domestic energy costs driven by shale gas will help give the U.S. a growing manufacturing cost advantage over other major manufacturing economies. "In addition to being a significant boost to U.S. industry, it's increasingly clear that declining gas prices can be great news for American consumers as well," said Harold L. Sirkin, a BCG senior partner, who along with Rose and Zinser is co-author of "The US Manufacturing Renaissance: How Shifting Global Economics Are Creating an American Comeback" (Knowledge@Wharton, November 2012).

To arrange an interview with one of the authors, please contact David Fondiller at 212 446 3257 or at fondiller.david@bcg.com.

About The Boston Consulting Group
The Boston Consulting Group (BCG) is a global management consulting firm and the world's leading advisor on business strategy. We partner with clients from the private, public, and not-for-profit sectors in all regions to identify their highest-value opportunities, address their most critical challenges, and transform their enterprises. Our customized approach combines deep insight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable competitive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with 78 offices in 43 countries. For more information, please visit bcg.com.

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