Low oil price destabilising process industries

The petrochemical industry globally is undergoing change at an ever increasing rate.

The Middle Eastern oil which has dominated the sector’s raw material pricing for decades has seen its dominance challenged by the development of shale gas production in North America.

In the UK we have already seen this impact on us with SABIC on Teesside announcing a huge and very important investment for the UK chemical industry, a new ethane terminal; in order that this Middle Eastern-owned company can feed its cracker and downstream polyethylene supply chain with gas from the US.

Manufacturing industry across North America is experiencing unprecedented growth because of exploitation of shale gas and the availability of ethane and other oil related products from this activity.

Ethane has become a cheap by-product of shale gas exploitation adding to the fact that the US has reported its highest oil producing levels for 30 years.

In the Middle East, the OPEC countries have not yet agreed a plan to cut production to maintain prices and they may continue to fall.

Until now, and over the last 30 years, the Middle East has seen uninterrupted growth in its chemical process industry, largely based on the availability of local low-price feed stocks.

This is also beginning to be challenged as advantageous access to a supply of new gas is now reported to be declining across the Middle East.

Over the next few years these are all going to be causes of market instability.

The recent oil price decline has clearly meant that oilfields like the North Sea, where it is more difficult to operate than onshore, cannot compete medium term at today’s crude oil prices of just under $60 a barrel.

Other commentators have predicted that we could see many jobs lost from that sector.

This clearly would have a negative impact on those individuals involved but there could be short term positive outcomes for the UK process industries who regularly report that they are desperately short of skilled people.

One’s first thought might be that falling oil prices is good for chemicals and manufacturing as a whole, but the impacts are sector and product dependant.

In fact, instability in raw material and energy pricing increases the risk profile of any project, and investment is invariably slowed or even stopped until the risk is diminished and stability returns.

Secondly, lower oil and gas prices should put more money into consumer pockets through lower energy costs and this could bring increasing demand for the chemical products that underpin just about everything the consumer buys.

However, the chemical industry is a global industry that lost a lot of capacity during the last recession and is already busy thanks to economies picking up.

So a jump in consumer demand could have an inflationary impact on chemical prices around the world.

Of more concern to me would be that downstream manufacturers see their raw materials becoming scarce and more expensive as a result.

Historical trends show that chemical prices, including commodities, are impacted by crude oil prices.

Chemical prices move up with the oil price enabling chemical companies to improve margins on the way.

Conversely, as the oil price falls those purchasing chemicals will use this to lever the price downwards.

Chemical companies are the “piggy in the middle” of this economic uncertainty because their direct customers who see a fall in oil prices tend to assume that this should lead to a similar fall in their costs.

However, the relationship between oil price and the cost of manufacturing chemicals, and ultimately the cost of consumer products derived from oil and gas, is much lower than one would at first think.

While the oil price can have a 70% impact on petrochemical prices, for speciality chemicals like PET plastics and lubricants the impact is only in the range of 20-30%, and for consumer products like food additives and cosmetics the oil price’s impact on final product price is only 0.2%.

We are now in a new period of uncertainty for the chemical industry and the manufacturing sector as a whole.

Whether we like it or not we are all part of the global economy, where those countries that have control of their own raw materials and energy can have huge impacts on our local industry.

The sooner we in the UK exploit our asset base by extracting our own shale gas and energy from underground coal gasification, the better and more stable our own economy will be.