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Investors Mislead US On Oil Versus Natural Gas

Economics, Oil & Gas, Olefins, Polyolefins, US
By John Richardson on 22-Feb-2016


By John Richardson

DID you raise the right concerns during board meetings before the end of great oil-price bull run? If you didn’t, this is not intended as a criticism because it would quite likely have been career suicide to tell your CEO that something might go wrong.

What’s important now, though, is not to fall into the trap of thinking that what you see in today’s chart is just a temporary phenomenon.What was instead temporary was the period when oil prices soared way above the cost of US natural gas.

Why didn’t you or your CEO ask the right questions? Because there was a general sense of euphoria that “this time would be different”. Too many people thought that oil prices simply had to stay at $100/bbl because of long term supply and demand fundamentals. They thought that demand would remain permanently ahead of supply because of the rise of the middle classes in emerging markets.

What happened was essentially that investment community-led euphoria dominated everyone else’s thinking, including the thinking of oil and US petrochemicals companies. Investors were pouring into crude oil, and other commodities only because they needed an alternative “store of value” to compensate for a weak US dollar and low interest rates. They didn’t understand energy markets and, quite frankly, were not bothered about gaining this understanding.

Now the US petrochemicals business has been left with vast oversupply in polyethylene and the erosion of its competitive advantage over naphtha cracking.

So much for history. How can you help your board of directors out of this situation? First and foremost, you must, as I said, get to grips with the fact that your mislead on long term energy market fundamentals.

You must also be very careful of this kind of complacent thinking:

  • Supply is always built ahead of demand and demand always quickly catches up. The industry fundamentals of feedstock advantage and building ever-bigger petrochemicals and polymers plants haven’t therefore suddenly changed.
  • As a result, we must not be distracted by what always end up being temporary disruptions in this endless growth story. If we do then we risk not building capacity quick enough, and end up with inferior economies of scale and lose market share.
  • Just look at the last two global macroeconomic crises as good examples. The dot com bubble burst in 2000 and yet the global economy didn’t stop – it was just very briefly interrupted. And even the much more serious global financial crisis in 2008 didn’t spell the end of the world. Far from it. Growth carried on, especially in China.

What you have to realise very quickly, is that today’s energy markets reflect the biggest shift in the global economy since 1989. The fundamentals of this industry have thus changed – for good.