For years uncertainty over the future price of oil has given petrochemical producers a major headache. Prices have not been stable for almost a decade making predictions for rates of return on investment almost impossible. But to make matters worse, the price fluctuations are now beginning to affect the Chemicals‘ industry.
Since the summer, oil prices have been falling, from over $100 a barrel to a less than $60 today (January 2015 prices). This is due to oversupply in the global market. Everyday, the world uses 93.2 billion barrels of oil, but the world is currently pumping out 93.9 billion barrels.
This oversupply is a result of OPEC’s (Organization of the Petroleum Exporting Countries) refusal to cut production. Whilst analysts are not certain why this is happening, one theory is that Saudia Arabia is hoping to force higher-cost players, such as North America and Northern Europe, out of the market.
If oil prices are high, then investment in deep sea drilling or the tapping of smaller oilfields makes good business sense. If oil prices are low then naturally capital investors think twice about starting new projects.
The knock-on affect for chemical producers is that many chemicals, particularly in the U.S. are manufactured from natural gas, whilst their competitors in Asia and Europe use petroleum based raw materials.
A few years ago, when oil prices were at a peak, the U.S. had a huge production cost advantage over their competitors. As the price difference between gas and oil closes, so does the competitive advantage. The latest price drops means that the edge is now half of what it was just twelve months ago, according to Stephen Zinger, head of Chemicals in the Americas for Wood MacKenzie. If the price of oil continues it slide to as low as $40 a barrel, then the advantage would be lost completely.
Tom Klozer, founder of the Oil Price Information Service believes that oil prices will soon stabilize as the Northern Hemisphere winter begins. However, unless drastic changes are made to restrict production, oversupply may grow to as much as 1.5 billion barrels a day, forcing oil prices lower still, possibly to the $40 threshold by the middle of next year.
Such a price will have far-reaching effects to many chemical prices, so it is worthwhile keeping an eye on the oil price, as it might affect you more than just at the petrol pump.
