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The international oil industry is resting its expectations for future expansion heavily on a business line that, until the last few years, was considered a sideshow: petrochemicals. But petchem and bulk plastics producers are already grappling with seemingly intractable oversupply issues and growing environmental challenges. Even more heavily reliant on China than most other oil products, naphtha and other petchem feedstocks have seen demand growth thrown into even deeper doubt by the likely slowdown in international trade over the coming years as the anti-globalization policies of US President Donald Trump reverberate through increasingly splintered national economies. It’s possible that a few Western or Mideastern state companies will come up with a winning petchem strategy, but it’s very hard to see a plastic leg providing dependable support for the industry overall.
In mid-August, what’s come to be known as the “like-minded group” of big crude oil exporting countries Saudi Arabia, Russia and Iran — with tacit support from China and, on the sidelines, the US — blocked for a second time progress toward a UN plastics pollution treaty that would impose a mandatory ceiling or other limits on plastics production. A big majority of the 180 or so countries involved in the UN negotiations, including the EU and South Korea, support a mandatory cap. The “like-minded” oil exporters have backed reliance on technological solutions aimed at waste management and/or recycling that would not interfere directly with volume growth in petchem output and plastics use.
It’s hardly surprising that the industry is willing to go to great lengths to avoid constraints on petchem expansion. Gasoline and diesel demand growth from the transport sector, which constitutes roughly half of global oil consumption overall, is grinding to a halt, as China and countries that still trade heavily with it continue to electrify not only passenger cars, but increasingly, buses and heavy trucks.
What does that leave as potential areas for oil-demand-growth beyond the next couple of years? Chemicals and oil refining itself are the next largest categories of oil use after transport, as the International Energy Agency (IEA) parses it. The IEA’s next big demand category after chemicals is “buildings” and other sectors that are susceptible to demand losses related to electrification — think heat pumps — and rapidly spreading efficiency measures. Some forecasts also show growth in fuel use for aviation, but that sector’s failure as yet to get back up to demand levels of 2019 casts doubt on its ability to drive oil consumption totals very far or fast.
No Caps Needed
Even if oil exporters succeed in blocking UN-mandated production caps, how realistic it is to expect plastics use — and therefore bulk petchem demand — to accelerate in the years to come, as the more bullish oil-demand forecasts posit? Greater use of plastics in electric vehicles and in conventional cars striving to meet tightening mileage or emissions limits is often cited as one likely driver of growth in this sector. But if transport electrification is going to bring notably higher plastics demand, why aren’t we already seeing signs of an upturn when half the personal vehicles sold in China and nearly one-quarter of those sold in the EU are already electric or plug-in hybrid?
Instead, despite the rapid strides in transport electrification in China, Europe and elsewhere, a glut of base and many specialty petchems is in its fifth year with no relief in sight for profit-starved producers until 2027 at the earliest, by most analysts’ reckoning. With economic growth disruption from Trump’s trade upheavals starting to filter down through national economies, the government in Seoul is pushing South Korea’s substantial petchem industry to agree on closures that would add up to roughly one-quarter of national naphtha-cracking capacity.
Such persistent overcapacity is portrayed by some as normal in what has long been a cyclical chemical industry. Others blame Chinese over-investment, reflecting Beijing’s determination to be self-sufficient in the basic petchem building blocks for its enormous manufacturing sector. Capacity reductions like those being pushed in South Korea could improve margins faster than projected and clear the way for future growth, some suggest.
But as the UN talks indicated, the petchem sector is also facing increasing consumer resistance to heavy plastics packaging, leading to less copious plastics use by shippers as enormous and powerful as Amazon, and countries worldwide passing or considering bans on plastic bags, straws and the like.
The lessened reliance on long-distance shipping implied by Trump’s drive to revive domestic US manufacturing is likely to constrain plastics-heavy packaging further. Chinese and other large exporters of consumer products have increasingly turned to heavier, larger packaging as a way to minimize complexity and breakage in a supply chain that moves enormous volumes of often fragile goods back and forth across ocean and land. Many US domestic companies are likely to avoid this time-efficient but resource-wasteful approach, especially if customers complain — as they increasingly are.
Recycling — Really?
China essentially announced defeat in 2017 in the biggest drive for plastics’ recycling ever attempted. Having taken in most of the plastic waste from the US, Europe and elsewhere for nearly two decades in hopes of developing a viable alternative source of plastics feedstock, Beijing called a halt to imports of most categories of plastics waste beginning the following year. Little was done to prepare for the deadline, and it created havoc in US and European waste disposal industries that remains to this day in many places.
The experience also made visible to the public the fact that little of what some pollution-conscious people were carefully sorting into different waste streams for recycling was actually being reused. Up to 90% is still buried or burned, according to OECD findings. No wonder there’s little appetite in the UN talks for the idea that recycling or other modes of sophisticated waste processing holds the answer to the increasing high-profile buildup in the environment of microplastics and other toxic biproducts of petchems.
In fact, one of the arguments for capping plastics production from virgin petchems is that it’s the only way to make recycling economically viable, by driving up prices for marginal plastics supply.
The point here isn’t to argue environmental externalities, though. It’s to say that petchems are not a realistic — certainly not a reliable — substitute growth engine for what has long been the core demand sector and source of most reliable downstream profits for oil companies: road transportation. A few companies may succeed in boosting profits and even sales volumes in petchems over time. Saudi Aramco is betting heavily on naphtha-based petchems, including through partnerships with Chinese companies that could win it a valuable presence inside an increasingly plastics-self-sufficient China. Exxon Mobil has headed into downstream specialty products that might bolster its margins as long as it keeps first-adaptor status in those fields.
But plastics isn’t a silver bullet that’s going to save the oil industry overall from its inevitable confrontation with peak demand, or at best for the industry, a demand plateau.
Sarah Miller is a former editor of Petroleum Intelligence Weekly, World Gas Intelligence and Energy Compass. The views expressed in this article are those of the author.