Petrochemical industry has five years to prepare for bust
Big booms and bracing busts are defining features of the oil and gas business, but rarely do experts give us a five-year warning to get ahead of the cycle.
The petrochemical industry is the latest to fall victim to irrational exuberance by overbuilding capacity, particularly in Texas, according to a smart story by my colleague Marissa Luck. The recent construction boom along the Gulf Coast will create a glut of plastic and chemicals in 2023 and keep the market oversupplied until 2030, holding down prices and profits.
This boom and bust cycle started
Above: Synthetic resin pellets are used to manufacture various products.
like most: with enthusiastic drillers overproducing. Hydraulic fracturing and horizontal drilling made it possible to extract trillions of cubic feet of natural gas and billions of barrels of oil that most people thought could never be recovered economically.
The coming bust will extend to the natural gas and crude oil markets, experts predict. Even though natural gas and crude oil are the building blocks of modern life, turning them into plastics will not be as strong a business as some people hope.
Plastics are made from a choice of two ingredients: either ethane derived from natural gas, or naphtha distilled from crude oil. In many countries, naphtha is the primary feedstock to create plastic resin, but in the U.S., where natural gas is cheap, ethane is the economical choice.
Fracking collapsed natural gas prices from $13 for a million British thermal units to less than $3. This gave U.S. petrochemical companies a huge advantage over foreign producers, but only if they could build new capacity and expand market share.
The industry spent $120 billion on new facilities in Texas alone over the last five years, much of it focused on producing high-density polyethylene, a commonly used raw plastic. By 2022, North American polyethylene capacity will be 73 percent higher than it was in 2016.
Low natural gas prices also made it economical to liquefy it and ship it around the world. Foreign petrochemical companies also have access to cheap ethane and crude oil and are building new capacity.
At least 108 petrochemical plants are scheduled to come online in Asia and the Middle East by 2023 to produce polypropyl