Winners and Losers in a Low-Oil-Price Regimen February 2015
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A direct correlation exists between global economic growth and commodity oil prices. And given the current softening in the global economy, oil prices have tumbled more than 50% since mid-2014 to $48/barrel now.
In his 18 December 2014 Forbes column, Bill Conerly notes that economists have continued lowering their projections for global economic growth in the next few years. So oil demand is likely to remain weak in response, for up to 24 or even 36 months.
Globally, we have been consuming more oil than we have been pumping or discovering since the 1980s. So—given a diminishing and finite resource—the market value for oil will inevitably rise with time. But for the next few years at least, Conerly suggests $60/barrel as a price ceiling. Bob Dudley, head of BP, also expects depressed oil prices for up to three years. In the financial sector, Swiss UBS has lowered crude-price forecasts through 2016, to well below 2014 levels.
About 5% of global oil production is in use in plastics manufacturing. And a $10/barrel fall in oil price correlates to a $0.04/pound fall in commodity polyethylene prices. At the same time, more discretionary consumer spending can occur as a result of lower fuel and oil-derived-product costs. Cheap oil means cheap—and more plentiful—plastics.
- Chemicals and plastics producers. Huntsman forecasts improving margins and demand and a stronger balance sheet through 2015. Resin and chemical producers and traders, molders, and compounders will also benefit.
- Commodity plastics. Raw material costs account for about 75% of production costs. Cheap oil will spark new uses and market growth.
- Engineering polymers. Strategic new markets will be easier to enter. Competitive advantage will come from rapid completion of development projects.
- End-user industries. The plastics-packaging industry is a likely winner, consuming large volumes of polypropylene and polyethylene. Many other end users will also benefit.
- Recyclers. Anticipate falling demand for recyclates. Even financially stable operations will struggle. New, risky, or economically suspect initiatives will be vulnerable. Plastics-to-oil programs will also face difficult times.
- Biodegradable and biobased plastics. Many of the financial motives provided by high oil prices will now test industry commitments to sustainability—especially where retooling costs to transfer to a newer, greener technology are significant. Specialist companies will feel the pinch. Internal-development programs may slow or stall.
Aircraft and automotive lightweighting programs face an uncertain path. Though industry goals are to reduce fuel consumption, it is not clear that consumers will care as much if their direct costs are falling anyway. Short-term cost reductions in these programs may help to keep them alive until oil prices rise again.
Soft oil prices also precipitate reduced oil-exploration programs, which analysts believe could drive a fierce price spike in four to five years. Should that outcome materialize, all the above commentary will reverse as equilibrium is reestablished.