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Page added on May 24, 2017

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Big Oil Is Betting on Plastics. It May Be a Risky Bet.

Business

Big Oil is betting on plastics. In a world awash with oil, and amid mounting consensus that demand for oil-based transport fuel for automobiles might decline over time, the world’s largest oil companies are counting on a rising need for petrochemicals.

There’s some justification for that. McKinsey & Co.’s projected demand for oil to make petrochemicals shows a robust gain of 1.4% a year between now and 2050, or roughly 60% of the total demand rise expected for oil. As many as 3 million barrels a day of increased oil demand globally is expected to come from the chemicals sector between now and 2025 while demand from light-duty vehicles may be neutral to negative over the same period. As Chinese consumers embrace e-commerce, burgeoning consumer packaging demand can be expected. And, ironically, the very electric cars that consumers might choose to reduce environmentally harmful greenhouse gas emissions from internal combustion engines require specialty plastic casing to prevent batteries from overheating.

Exxon Mobil announced recently it was writing down its $20 billion Kearl Oil Sands Project, and told shareholders it would be investing a similar amount in refineries, petrochemicals and other projects on the U.S. Gulf Coast. And petrochemicals are now a cornerstone of ExxonMobil’s strategy to alter perceptions that the company is poorly positioned to compete long-term given its high-cost oil and gas reserve assets in the Arctic and Canada.

But Big Oil may find that the future for petrochemicals isn’t as rosy as its hopes. For one thing, the petrochemical sector is known for its cyclical overbuilding. This month, Dow Chemical abandoned plans to increase prices for polyethylene when it became clear that sufficient market demand was not apparent. More capacity from other competitors is due to come on line later this year, with bets that Chinese and Indian demand will absorb the chemicals. Petrochemical demand is highly dependent on GDP growth and any unexpected faltering of the global economy could create overcapacity virtually overnight, a crisis the petrochemical industry has experienced repeatedly in past decades.

Moreover, plastics themselves are an environmental problem. Increasingly, countries are looking to develop policies to curb their use. McKinsey suggests that the trend toward plastics recycling and design efficiency that reduces the amount of plastics needed per package could contribute to the phenomenon now referred to as peak oil demand. McKinsey’s peak demand scenario postulates that recycling alone could eliminate one quarter of oil use from plastics.

Many localities have banned the use of plastic bags in retail stores but other, more stringent policies may come to the fore in the future that could make the industry’s bet on petrochemicals riskier than it currently seems.

Will consumers remain on board with the rise in plastics pollution world-wide? Signs of a nascent global advocacy movement to address plastics pollution are emerging. The World Economic Forum with support from the United Nations, the Ellen MacArthur Foundation and McKinsey & Co. has published a plan to organize a global compact to reduce plastics use in the coming decades.

They warn that at least 8 million tons of plastics leak into the ocean each year, resulting in about 150 million tons of plastics pollution in the ocean today. If no action is taken, the ocean could contain as much as one ton of plastic for every three tons of fish by 2025. By 2050, the oceans would actually contain more plastics than fish. In terms of greenhouse gas emissions, the plastics sector would account for 15% of the total annual carbon budget under a 2 degrees warming scenario.

The new plan calls for a “circular future for plastics” based on the establishment of a global protocol that would promote innovation in intelligent plastics design, the promotion of renewable feedstocks (substitute bio-based products reliant on crops like cotton, corn and sugar cane) and recycling.

If such plastics conservation efforts take hold, the rosy scenarios behind Big Oil’s bet on plastics will need to be revised, but there will be more room for fish as well as better climate management for the rest of us.

WSJ



4 Comments on "Big Oil Is Betting on Plastics. It May Be a Risky Bet."

  1. rockman on Wed, 24th May 2017 8:43 am 

    They seem to confuse the importance of oil in the petrochemical business with that of the natural gas liquids…in particular ethane. And the processing side of ExxonMobil isn’t beginning to mutate into a “cornerstone” of the company. It has been for many decades.

  2. bobinget on Wed, 24th May 2017 9:37 am 

    When the planet consumes 95 Million Barrels a day, of course “The world is Awash With Oil”

    I’ll be few humans can envision 95 million barrels of anything without some exemplar metaphor, like Niagara Falls or one hundred of the world’s largest oil tankers, bow to stern.

    Oh, on topic. Plastics are by and large recyclable.
    Soon, we hope, mandatory recycling.
    Lubricating oil, fertilizer, plastics, medicines etc use a tiny proportion of oil & gas produced.

  3. bobinget on Wed, 24th May 2017 9:53 am 

    Fuel efficient car taking a tiny bite from consumption.

    Summary of Weekly Petroleum Data for the Week Ending May 19, 2017

    U.S. crude oil refinery inputs averaged 17.3 million barrels per day during the week
    ending May 19, 2017, 159,000 barrels per day more than the previous week’s average.
    Refineries operated at 93.5% of their operable capacity last week. Gasoline production
    increased last week, averaging over 10.2 million barrels per day. Distillate fuel
    production increased last week, averaging 5.2 million barrels per day.

    U.S. crude oil imports averaged 8.3 million barrels per day last week, down by 296,000
    barrels per day from the previous week. Over the last four weeks, crude oil imports
    averaged 8.2 million barrels per day, 8.1% above the same four-week period last year.
    Total motor gasoline imports (including both finished gasoline and gasoline blending
    components) last week averaged 725,000 barrels per day. Distillate fuel imports averaged
    101,000 barrels per day last week.
    U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum
    Reserve) decreased by 4.4 million barrels from the previous week. At 516.3 million
    barrels, U.S. crude oil inventories are in the upper half of the average range for this time
    of year. Total motor gasoline inventories decreased by 0.8 million barrels last week, but
    are near the upper limit of the average range. Both finished gasoline inventories and
    blending components inventories decreased last week. Distillate fuel inventories
    decreased by 0.5 million barrels last week but are in the upper half of the average range
    for this time of year. Propane/propylene inventories increased by 1.5 million barrels last
    week but are in the lower half of the average range.

    Total commercial petroleum
    inventories decreased by 3.5 million barrels last week.
    Total products supplied over the last four-week period averaged 20.2 million barrels per
    day, down by 0.8% from the same period last year. Over the last four weeks, motor
    gasoline product supplied averaged over 9.4 million barrels per day, down by 1.9% from
    the same period last year. Distillate fuel product supplied averaged over 4.2 million
    barrels per day over the last four weeks, up by 3.6% from the same period last year. Jet
    fuel product supplied is up 10.4% compared to the same four-week period last year.

    Considering imports were a million barrels or 8.1%
    over last year.. (Saudis still larding on) Last week’s report is Bullish on the 1 to 10 scale of 7.
    Note, jump in consumption last week. (9.6 to 20.2)
    (that 20.2 number must also include Exports, but so did week prior.)

    I believe we are seeing many more miles driven, using less fuel per unit.

  4. Sissyfuss on Wed, 24th May 2017 12:29 pm 

    “By 2050 the oceans could contain more plastic than fish.”. I loves me some PETE #1 flounder.

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