Rising oil prices also good for petrochemical industry
Houstonians know well that higher crude prices benefit the city’s energy giants, boosting profit margins and, ultimately, paychecks.
For those companies, the last few months have looked especially bright as the industry shakes off the lingering effects of the energy bust. Oil prices have risen sharply this year, briefly topping $70 a barrel last month for the first time since 2014.
But what about U.S. petrochemical producers, the companies that quietly manufacture the base materials needed to keep the global economy humming?
Rising oil prices will benefit them, too, according to a recent report by the bond rating agency Moody’s Investors Service. The reason for that, though, is more complex.
Shale drilling in West Texas and elsewhere has unleashed a steady supply of low-cost natural gas that has fueled a resurgence in domestic petrochemicals manufacturing. Chemicals and plastics producers along the U.S. Gulf Coast have capitalized on the shale boom, using gas-derived liquids such as ethane as feedstocks.
The abundance of cheap feedstocks has given them an edge over competitors in Europe, the Middle East and Asia, where ethane is scarce. In those regions, petrochemicals producers often rely on naphtha, a pricier feedstock derived from crude oil.
Ethane is already substantially less expensive than naphtha, and that difference will only become more pronounced as oil prices rise.
For Houston-area chemicals makers including LyondellBasell and Chevron Phillips Chemical Co., that dynamic could provide an even greater cost advantage as they build or expand production facilities here. LyondellBasell, for example, is building a $700 million plant at its La Porte complex to produce polyethlyene, a common plastic derived from ethane.
Companies that produce chlor-alkali products, including Houston’s Westlake Chemical, also stand to benefit from low-cost natural gas. Chlor-alkali products, which include chlorine and caustic soda used in building products, packaging and other products, require large amounts of electricity to produce, so producers in the Gulf Coast region have an advantage over competitors that pay higher energy costs.
Oil prices have fluctuated in recent weeks after Saudi energy minister Khalid AlFalih said the Organization of the Petroleum Exporting Countries would consider raising output after capping it for more than a year.
But analysts don’t anticipate a severe drop in the market, at least for now. The Energy Department last month raised its forecast for U.S. prices, predicting they’ll average $64 a barrel for the next year.
Moody’s analysts, meanwhile, anticipate that natural gas-derived feedstocks will retain their cost advantage for at least the next decade.
That means the Gulf Coast, which has already attracted some $60 billion in petrochemical investments, might only become more attractive for plastics and chemicals producers.
Analysts anticipate that natural gas-derived feedstocks will retain their cost advantage.