Forecasts predicting the peak of oil demand often focus on the pace at which the world adopts electric vehicles. The faster EVs spread across the globe, the sooner peak demand will be reached.
While EVs and international trends towards greater fuel efficiency will play a vital role in cutting into demand, the conversation ignores the role played by petrochemicals. Crude oil and natural gas liquids are critical to the production of plastics, resins and fibers. As EVs increasingly penetrate the mainstream auto market, demand for petroleum fuels will plateau or even decrease. However, few analysts see a peak on the horizon for oil demand used in petrochemicals. In fact, it may be one of the few sectors that sees the most significant growth, a trend that has enormous ramifications for the overall consumption levels of crude oil.
Petrochemicals drive oil demand
Global investment in petrochemicals is set to hit $20 billion in 2018, an increase of 15 percent from a year earlier. “The availability of cheap ethane and LPG from shale oil and gas production provides attractive petrochemical returns,” reads a recent report from the International Energy Agency. Discounted feedstocks in the Marcellus Shale and along the U.S. Gulf Coast have sparked an investment boom in petrochemical production.
However, the U.S. shale bonanza is also leading to higher investment in petrochemicals abroad. The U.S. is increasingly exporting a feedstock—ethane—to Europe, India and China, where it is processed into various petrochemical products. “The resurgent interest in petrochemical projects by oil majors and NOCs alike is probably not just an opportunistic rent-seeking driven by cyclically high petrochemical margins,” the IEA concluded. “For many of them, it is a strategic move, where market growth is more assured even in a decarbonizing world.”
In China, the investment trend is concentrated in new oil refineries that are integrated with onsite petrochemical facilities where demand for both gasoline and plastics is strong. Meanwhile, national oil companies (NOCs), such as Saudi Aramco, have formed joint ventures in Asia and are investing billions of dollars in downstream operations as a way of both diversifying assets as well as securing a market for exported crude oil.
“The resurgent interest in petrochemical projects by oil majors and NOCs alike is probably not just an opportunistic rent-seeking driven by cyclically high petrochemical margins,” the IEA concluded. “For many of them, it is a strategic move, where market growth is more assured even in a decarbonizing world.”
Demand for crude oil will be increasingly concentrated in the petrochemical sector going forward. In the IEA’s Sustainable Development Scenario as part of its 2017 World Energy Outlook, a scenario that incorporates more aggressive policies intended to cut fossil fuel consumption, petrochemicals is “the only end-use sector that sees any growth in oil demand after 2020.” In that scenario, oil consumption for transportation falls by nearly 15 million barrels per day (Mbd) between 2016 and 2040, a massive reduction by any measure. But even in that scenario, which would require a staggering level of policy ambition, oil used in petrochemicals still rises by 4.2 Mbd.
In the IEA’s more central scenario, which only incorporates announced policy plans, oil demand for road transport rises by 3.3 through 2040. Meanwhile, oil used in petrochemicals jumps by 6.2 Mbd, nearly double that for transportation. In other words, the future of oil demand growth is overwhelmingly concentrated in petrochemicals, not in road transport.
As of yet, there are few alternatives to crude oil and natural gas liquids for petrochemical feedstocks, which increasingly differentiates it from the transportation sector. Moreover, government policy has not yet curtailed demand for the end-use products. “In contrast to gasoline or diesel, there are only very few countries with any tax imposed on disposable plastic products,” the IEA said. However, that is beginning to change with corporate decisions to cut single-use plastics such as straws and lids, while taxes and outright bans on plastic bags are proliferating at the municipal and state level. The European Union has proposed a ban on single-use plastic items.
The European Union has proposed a ban on single-use plastic items.
The initiatives come in response to skyrocketing rates of plastic consumption. Global plastic production doubled between 1995 and 2015 to over 400 million tonnes per year, according to Bank of America Merrill Lynch. There is a positive correlation between income and plastic consumption, so the use of plastic is expected to continue to grow as the global population increases and as emerging markets growth wealthier. About a third of all plastic is used for packaging, creating products that also have the shortest lifespan out of all sectors of plastic demand. Not coincidentally, these single-use products, such as bottles and films, are a major source of pollution in oceans and waterways.
Only about 14 percent of plastic packaging is recycled, according to BofAML. The rest is diverted into landfills, incinerated or littered. “Policy makers in more than fifty countries have already taken actions to control plastics. Corporations are also trying to reduce their plastic footprints,” BofAML wrote in a note titled “Oil’s future paved with plastic.”
However, the spread of these policies and corporate decisions “are likely to have only a marginal impact. While a clear risk to our view, we do not see enough support for recycling and alternatives for now to significantly move the needle on petrochemical oil demand.”
Plastic is already cheap, and surging shale oil and gas production in the U.S. will keep input costs low. That ultimately makes it difficult to find alternatives. “Lower feedstock costs, and ultimately less expensive virgin plastic, could challenge recycling economics and encourage increased use of virgin plastic,” BofAML wrote.
Plastics soiled with food are often not recyclable. And the practice of reducing the weight of plastic, known as “lightweighting,” can undercut the economics of recycling.
“There is currently a considerable cost gap that bio-based processes need to close in order to be competitive, and it is hard to see this happening without technological advances or breakthroughs,” the IEA wrote last year. Compounding the problem is that there are still hurdles to higher rates of recycling. Plastic products are “heterogeneous,” and require “laborious and costly collection,” BofAML analyst wrote. Plastics soiled with food are often not recyclable. And the practice of reducing the weight of plastic, known as “lightweighting,” can undercut the economics of recycling.
In short, there are significant challenges in curbing plastic consumption, which ultimately means demand for oil and natural gas liquids in the petrochemical sector will remain elevated. Crude oil demand tails off in the 2030s, but demand for NGLs in the petrochemical sector continues to grow “as plastic usage continues to rise,” BofAML concluded.