Energy price shocks and plant level productivity: A study of the cement industry

Obsolescence of capital caused by energy price shocks has long been posited as a cause of the slowdown in U.S. productivity growth during the 1970s. This work examines plant level data in the cement industry for evidence of capital obsolescence following the energy price shocks of the 1970s.; The production of cement takes place using one of two technologies: (1) the relatively fuel-efficient wet process, and (2) the relatively fuel-inefficient dry process. An equilibrium model of industry evolution developed by Lambson (1991) implies that cement plants using the fuel-inefficient wet technology will exit the industry and plants using the fuel-efficient dry technology may enter the industry following an increase in the cost of fuel relative to the cost of other factors of production. That is, plants employing the fuel-inefficient wet process are rendered obsolete by the change in relative factor prices.; Estimation of a probit model of exit, using cement plant data from the Annual Survey of Manufactures and Census of Manufactures linked with data compiled by the Portland Cement Association, suggests that plants using the wet process were more likely to exit the cement industry during 1974-90. These results are consistent with the obsolescence of plants employing the fuel-inefficient wet process following the energy price shocks of the 1970s.