18 April 2008 11:16 [Source: ICIS news]
By John Richardson
SINGAPORE (ICIS news)--The consensus view is that the world will return to normal in 2012, justifying another wave of big capacity to satisfy voracious demand growth in emerging markets.
This view was very much in evidence at the recent National Petrochemical and Refiners Association (NPRA) meeting in ?xml:namespace>
Senior executives at the International Petrochemical Conference (IPC) were talking about where and when to add more capacity with much of the talk focused on methanol-to-olefins (MTO) technologies and better integration between refineries and petrochemicals.
Perhaps the world economy will recover from its current problems fairly quickly and the looming supply overhang will be comfortably absorbed by 2012.
Hundreds of millions more people in emerging markets might also become consumers of products made from chemicals, resulting in the next up cycle delivering the kind of profitability we saw in 2003-2007.
But if you’re planning scenarios, it might at least be worth taking these possibilities into account:
* Estimates of the petrochemical supply overhang being absorbed by the early part of the next decade prove to be wrong because they was based on global growth remaining at a minimum of 3% per year. The IMF's warning in April 2008 that there was a 25% chance of growth of less than 3% in 2008-09 - amounting to a global recession - comes true. Global ethylene (C2) operating rates are driven to historic lows. The
* Inflation slows the pace at which millions more people in developing nations ramp up their consumption. High food prices persist. IMF managing director Dominique Strauss-Kahn warned in April 2008 that “the food crisis poses questions about the survivability of democracy and political regimes… (and) sometimes these questions lead to war”. His warning comes true.
This is frightening stuff. A colleague, who saw a draft of this article, suggested I come off the fence and say what I think. To be honest, I don’t know and so I am going to go away, talk to more people and do so some more research. Watch this space.
But I am leaning strongly towards the view that high, and even higher, crude prices are here to stay - perhaps the biggest single-biggest threat to a V-shaped economic recovery.
This is not a sign of the resilience of the
Gasoline, diesel and other fuel prices are heavily subsidised in
The supply side gets ever more scary. Lukoil vice-president Leonid Fedun was widely quoted in the media earlier this week as saying that last year’s Russian oil production of 10m bbl/day was the highest he would see in his “lifetime”. The International Energy Agency had estimated last July that Russian crude output would rise to 10.5m bbl/day in 2012.
Non-Opec supply is in decline - for example,
There are doubts over how much extra output Opec can achieve to match the shortfall between supply and demand.
Supply is also threatened by booming
AF Alhajji, energy economist and Associate Professor at
Another short-term risk is this year’s hurricane season in the US Gulf. Meteorologists at
This might make harder-to-extract reserves look more viable – for instance, the
But what effect will the credit crisis have on the availability of funding for exploring these reserves, which also include deep-sea conventional crude?
There is a lot of disagreement over how much the ramp-up in crude is the result of fundamentals and how much is down to speculation.
Funds have poured into crude in response to the weaker dollar and the fall in equity markets and the speculators are generally accepted to have played an important role in pushing crude to record highs this week.
Estimates of the “trader’s premium” on the price of a barrel of crude are between $20/bbl and $45/bbl.
Similarly, calculations about where crude prices would have to be in the long term to justify these hard-to-justify reserves range from $60/bbl to $80/bbl.
If, for arguments sake, you take $45 off $113.21/bbl (the June Brent price on Thursday) you get $68.21/bbl.
Nobody really knows what the trader’s premium is and therefore what would happen to pricing if funds suddenly poured out of crude.
So in an economic environment that is perhaps more uncertain than at any time since the 1970s oil crisis or even the Great Depression, why take the risk?
And finally, how can anyone be certain that growth in
An argument used to justify predictions of ever-surging demand for chemicals is that
The further west you go, the lower are per capita incomes - resulting in huge infrastructure spending by the government and a drive to get lower-value industry to relocate westwards. The government is determined to narrow the income gap between coastal and inland
But can the environment sustain growth at the kind of levels we have seen in
Could water shortages and air pollution lead to the economy coming off the rails?
Western and northern
How can people continue moving to the existing big towns and cities, and how can
Air pollution, no matter how efficient the technologies, is bound to get much worse as industry spreads westwards. Can
This is all worth thinking about - and, as we’ve already said, even building into scenarios.
But the danger of following such a set of beliefs is that you get left behind in the great petrochemicals game of building more and more capacity in order to maintain economies of scale and grow market share in developing economies.
Who would want to be a CEO?
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