Petrochemical Industry Regains Its Mojo

When the domestic petrochemical industry was created in the
1950s, the U.S. became the first large-scale producer of olefins (ethylene, propylene) from natural gas liquids (ethane, propane) extracted from natural gas. Availability of natural gas at 25 cents per  million Btu on the Gulf Coast (!) and the development of suitable technology by  companies such as Exxon, Shell, Dow and Union Carbide made the U.S. a  dominant manufacturer of ethylene- and propylene-based petrochemicals. These not only fulfilled the burgeoning post-war domestic demand for plastics, synthetic rubber, solvents, and other consumer-oriented goods, but also allowed the U.S. to become a large exporter of these materials..

Credit: ChevronPhillips Chemical

By the 1990-2000 time frame, several things had  changed. The technology for making these products had become widely available to Middle East and other low cost foreign producers, whose natural gas was  available at effectively historical inexpensive Gulf Coast prices. Meanwhile, gas prices on the Gulf Coast had been rising to as much as 7-10 dollars per million Btu, as demand had surged rapidly, with utilities, industry, commercial and residential customers changing to this cleaner fuel. U.S. producers had, as a result, switched much of their petrochemical production to crude oil (rather than natural gas-) based feedstocks (e.g. naphtha), similar to producers in many other parts of the world. With feedstock costs at parity with most other producers , the U.S. had lost its traditonal competitive advantage.

However, the situation has again changed. Large new domestic supplies of natural gas, partly the result of using horizontal drilling and  “fracking” techniques for liberating vast quantities of gas from shale  formations, have pushed down the domestic price of gas. U.S. natural gas prices are now very  attractive relative to now high cost crude oil on a heating value basis, so petrochemical producers have largely switched back to using natural gas- based feedstocks. Meanwhile, most of  the world’s petrochemical plants (e.g. Europe, Japan) continue to use crude  oil-based feedstocks, even with crude oil prices remaining high, because that is  their only option.  All of this has made U.S. producers very competitive again, as shown on a global “cost curve” developed by Chemical Market Associates, Inc. (CMAI), a respected Houston-based consulting firm and published on its website.

The graph represents an estimate of ethylene manufacturing costs in a number of producing regions for the years 2003 and 2009. (Key: MDE Middle East; NAM North America; SAM South America; SEA Southeast Asia; NEA China, Taiwan and Japan; WEP Western Europe.) While in 2003 North American producers were close to the high end of the cost curve, by 2009, using largely natural gas, they had regained their traditional competitive advantage over all of their global competitors except for those in Western Canada and the Middle East.

The relatively attractive cost position of domestic producers has now also provided substantial  opportunities for the export of products like polyethylene, polypropylene,  ethylene glycol, etc. While the overall U.S. balance of trade with other countries has been highly negative for a long time, its chemical balance of trade is greatly helped by exports of petrochemicals. Up to recently, with U.S. petrochemical producers struggling to meet the threat of foreign imports from low cost producers, it was hard to imagine that any more crackers would be built in this country. Now, there are plans to build a new shale gas-based cracker to make ethylene and propylene in the Middle West, the first new cracker built here for a number of years. Here is a perfect example of how the U.S. is regaining its manufacturing mojo.

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2 Responses to Petrochemical Industry Regains Its Mojo

  1. Dr. Thomas Kevin Swift, Chief Economist ACC says:

    See also a presentation entitled “Shale Gas and the Manufacturing Renaissance” that is accessible on the web.

  2. Dr. Harold Witcoff says:

    It was good of you to send me insight into your new endeavor, And the llink took me right to the articles. They were of great interest. I feel a bit rusty these days, but some things loom large not the least of which is Shale gas. It promises the US the possibility of maintaining its position as the world’s greatest exporter of C2 and C3 derivatives. But are Shale gas and Shale oil , for that matter, here to stay? This. it seems to me. is the petrochemical industy’s most important consideration. Then there are things like the pipeline from the Athabasca Tar Sands to New Orleans. But perhaps this one has been beaten on enough.

    But certainly of interest is Saudi’s assertion that it will enter into the manufacture of the downstream derivatives of olefins. Saudi is fearful that its supply of C2 and C3 olefins will be depleted and that they will not be able to obtain these from their neighbors who seem to be building naphtha crackers. And there are many more such topics as you well know.
    eBut I wonder if you follow the work of a think tank callled The Earth Policy Institue. Its leader, Lester Brown, has written several books and issues “Earth Policy Releases”. Brown is concerned with the survival of the world and offers excellllent statistics. I made good use of all this in my course. As I said you are probably aware of this, but just in case – his releases can be reached at [earthpolicynews@earthpolicy.org]

    Thank you, Peter, for introducing me to your latest efforts, which I shall follow eagerly.

    Harold Witcoff

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