Soon Plastics, Not Fuel, Could Dictate The Price Of Oil

Ok, let’s not get off on the wrong foot by you thinking badly of me.

I might be using some poetic license in the title with soon. However, it is expected that countries and oil producers are beginning to prioritise the production of plastics and building refineries dedicated to petrochemicals, as opposed to producing oil products like petroleum or diesel that power our vehicles.

That’s because, to put it very bluntly, the demand for plastics is increasing whilst the demand for oil products like petrol and diesel is decreasing. Global demand for petrochemical feedstock i.e. the stuff that’s used to make plastic, sat at around 12 million barrels per day in 2017 and is forecast to rise to almost 18 million bpd by 2050.

That’s a huge rise. And it’s been rising for a while.

A recent report from the International Energy Agency has noted that the global demand for plastics has nearly doubled since 2000, in large part due to the mammoth levels of consumption by economies like the US and Europe. it’s estimated that economies like these currently use up to 20 times as much plastic per capita than developing economies like India and Indonesia.

However, that might not be the case for long. Economies including India and Indonesia are experiencing huge growth. And with a growing economy comes a growing middle class which means more disposable income. This means people want more ‘things’, products like water bottles, or children’s toys for example, which means more plastic.

Of course this does also means that more cars are being purchased which begs the question about a ramp up in fuel consumption for those cars. But it might not be as simple as that, as the common view that oil price = fuel price might not be as widely held as it once was.

Fuel & Oil Price

I’ve not gone mad here. Of course the fuel price is linked to the price of oil. Transport and fuel for that transport is still a huge driver of demand. At the moment. But it’s commonly believed that that demand will soon, or perhaps already has, peaked.

The common preconception environmentally is that oil makes fuel and fuel makes pollution. Cue huge crackdowns on emissions, increases in road tax for less efficient cars and governments generally trying to make people cut down on their individual fuel consumption. It’s worked, too.

This political pressure has also been felt by vehicle manufacturers, who have ensured that new cars hitting the road today are more efficient than they’ve ever been. We’re also seeing more hybrid and electric vehicles which supplement or replace fossil fuels to power them. Today it’s ludicrous to think that a huge new transport system would be powered by fossil fuels. But it would likely be built with plastic.

Whilst those crackdowns on emissions and fossil fuels have been going on for years, it’s only very recently that focus has begun to look at plastics and plastic consumption in a similar way. So, for the foreseeable future this lack of legislation combined with the skyrocketing economies in the East means that plastic is very much on an upward trajectory.

Peak Oil

Peak oil is a term that’s been used with increasing frequency in recent years, to mean that we’re reaching a point where the amount of oil we use will start to decline. And we probably will. It’s undeniable that the primary way in which oil is consumed around the world is through fuel, and as I’ve already mentioned, that’s in decline.

It’s also likely that the amount of oil we consume today won’t be replaced. Not even by plastic. Plastic will likely never be produced in volumes that mean we consume as much plastic or produce as much petrochemical feedstocks as we currently do fuel. But just because it won’t fill that deficit doesn’t mean the plastics industry won’t have huge global importance for years to come.

That’s because everyone wants to back a winning horse, or an industry that is on the up – regardless of its current size, or the size of its competitors.

The global investment in petrochemicals in set to hit $20B in 2018. That’s an increase of 15% from just over a year ago. With growth like that, governments are seeing investment in petrochemicals and plastics as that winning horse. Even today we’re seeing governments shifting their focus to this smaller, but booming market instead of pumping new money into the aging oil product or petroleum industry, largely considered to be in decline.

So, whilst we may be approaching peak oil, the decline might not be as stark or as sharp as we think, and that could be due to the global plastics and petrochemical industry propping up the price of oil and creating some demand with its growth. This means that as one of the few, if not only, growing industries that relies on crude oil, the next few years may see plastics and petrochemicals take on a more important role than ever in the global economy and plastic consumption have a much bigger impact on the price of a barrel of oil.