NPRA ’11: Japan quake, Middle East turmoil to impact energy, trade

29 March 2011 18:55  [Source: ICIS news]

JapanSAN ANTONIO, Texas (ICIS)--The disaster in Japan and rapidly unfolding political upheaval in the Middle East will have significant and perhaps profound influence on US energy supplies and policies, along with near-term trade impact, a top chemicals sector analyst said on Tuesday.

Gary Adams, president of Chemical Market Associates Inc (CMAI), told industry executives at the International Petrochemical Conference (IPC) that events in the Middle East and the Japan earthquake and tsunami have raised still more concern among consumers worldwide, and those consumer uncertainties will impact manufacturing.

“In the last several months, there have been several risks to continued economic growth, clouds on the horizon,” he said. “Debt levels are high, excess government stimulation but not sustaining growth, Europe’s financial struggles continue, unemployment is still elevated, jobs are the focus worldwide, and inflation is rising.”

“On top of all that, we have reverberations from the earthquake and tsunami in Japan and the beginnings of change in north Africa and the Middle East,” he said, adding: “It stands to reason that consumers would now be more cautious.”

In the Middle East, Adams noted that the region accounts for 34% of global oil supply, and while the outcome of developing political changes in various countries there cannot be predicted, he said that “the implications for long-term oil prices range from negligible to severe”.

He noted that world oil prices were already trending up on the global recovery before the first eruption of political change in Tunisia on 17 December last year.

While there was little initial impact on oil prices by that uprising, they did jump $10/bbl when turmoil and revolution began in Egypt on 25 January, driven by worries over possible closing of the Suez Canal.

The 15 February outbreak of revolution in Libya has added still more impetus to the price of crude, with the US benchmark West Texas Intermediate (WTI) crude at around $107/bbl as of Tuesday.

Depending on how the political processes unfold in the Middle East, Adams said it could result in more access to the region’s energy resources - or a shutdown of some oil and gas assets.

“At $115/bbl for WTI, the economic expansion would be slowed by a few tenths of a percent,” Adams said.  “If oil is at $135/bbl, it would slow growth and stop the US recovery and trigger a mild recession in Europe.”

At levels above $135/bbl, Adams said, there would be renewed recession in the US and a pullback in economic activity in emerging countries, such as China.

Those unsettling developments in the Middle East, along with Japan’s quake-related nuclear power crisis, will increase incentives for more development of US domestic energy resources, he said.

“As a consequence of the Japan nuclear plant issues, there has been a change in the pace and acceptance of nuclear energy in this country, and perhaps for a lifetime,” Adams said.

“What does this mean for petrochemicals?  We will have to use more fossil fuels for electric power than we might have,” he added.

The US petrochemicals industry and downstream chemical producers rely heavily on natural gas as both a feedstock and power fuel. Any increased domestic demand for natural gas can present risks to both gas supply and pricing for chemical companies.

He said that in the long term, there would be no material effect on Japan’s economy from the earthquake and tsunami. In the short term, he said, Japan’s rebuilding work would count as a positive contribution to the nation’s and the global GDP.

However, he said there would be near-term disruptions to global operations that would impact US petrochemical producers as various shortages work their way back up supply chain. He noted that some automotive production has been halted because of a lack of key components from Japan.

“Over the next six months our lean, just-in-time supply system will feel the effect.  It will change the way we operate.  It won’t be such a lean supply chain,” Adams said, adding: “We haven’t seen the full impact yet.”

In all, he said, “the Japan disaster has limited but focused impact on global petrochemicals”.

And, barring an oil price shock resulting from Middle East developments, he said, “Growth has resumed and should continue” although “consumer headwinds are rising today due to speculation about oil supplies fuelled by Mideast tensions”.

Adams spoke on the closing day of the 36th annual IPC, which was sponsored by the National Petrochemical & Refiners Association (NPRA).

Paul Hodges studies key influencers shaping the chemical industry in Chemicals and the Economy

By: Joe Kamalick
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