The Chemical Industry And Oil-price shocks

Chemical companies must develop organizational agility to prepare for imminent shocks and take quick action to capture the value and reduce threats.

FREMONT, CA: Many producers were underprepared for the extent and speed of the influence on their businesses. The varying nature of oil supply and demand is expected to heighten volatility and increase the likelihood of oil-price shocks. Chemical companies must develop organizational agility to prepare for imminent shocks and take quick action to capture the value and reduce threats.

Effects of oil-price shocks on the chemical industry

Oil-price shocks are more than another management problem that chemical executives have to fight with. Crude oil and petrochemicals are inseparably linked, with oil-price shocks usually causing three impacts on the chemical industry.

• Cost structure. Crude oil is a main cost driver in the petrochemical industry as many of the key chemical building blocks (for instance, aromatics, ethylene, and propylene) for the industry’s products are instantly produced from oil or its derivatives (for illustration, naphtha and liquefied petroleum gas). Moreover, some chemicals, like chlorine, are produced through greatly energy-intensive manufacturing routes and have a strong link to oil prices. Variations in oil prices have an instant and significant influence on the cost structures of these chemicals.

• Price-setting mechanisms. For most commodity chemicals, the production expenses of the marginal producer are the chief drivers of market prices. Oil-price shocks impact marginal producers’ production economics and commodity-chemical price levels. This price varies, affecting specialty-chemical producers downstream, which generally use commodity chemicals as inputs. However, the extent of the impact is less and with a significant time lag. Moreover, the price changes can allow some downstream chemical producers to find replacement opportunities as the relative prices of specific chemical intermediates change (for instance, the price of polypropylene could fall below high-density polyethylene during an oil-price decline).

• Demand patterns. Abrupt variations in oil prices may modify spending patterns for specific consumers who observe their disposable incomes extend or contract. In the medium term, the modern oil-price environment starts to inform consumers’ and companies’ investment decisions (like buying a house or building a plant). As oil prices drop, initial spending concentrates on consumables (for instance, food). If minimum oil prices persist, investment in durables and fixed assets increases, and associated spending on chemicals utilized to make the durables and fixed assets increases. Certainly, if oil prices go back up, the opposite happens. It is essential to identify that demand changes are generally more gradual and have a more muted influence on the industry than the cost- and price-related influences of oil shocks described above.