Engaging Energy

I briefly mentioned the interplay between the plastic industry and the demand for oil, well the Financial Times recently did a piece on petrochemical prices that has shed a lot of light on the subject for me. Unfortunately the piece is behind a paywall, but you may be able to get to it with a free trial subscription.

The main thrust of the matter is that the major petrochemicals that plastics are made from (naptha, benzene, ethylene and propylene) are under massive and rising demand pressure from Asia. So much so that the FT reports that an index of their prices has risen by 150% in the last year, now don’t get too excited. Just before that year started the same index as reporting an all-time low as demand stagnated during the recession. The story of surging demand is also told by this Indian site in a bit more detail.

My point is this; running oil refineries is an expensive, energy intensive, dirty (in terms of emissions) and sometimes economically uncertain business. The price volatility of the raw natural resources (including water) is multiplied by the energy intensive nature of its processing and carbon emissions pricing. Also the demand for the products is dependent on macro-economics that, to a large part, are tied to crude oil prices as well. It seems to me that the price risks that ‘oil as fuel’ users face are minor when compared to those that ‘oil as feedstock’ users face.

The demand imbalances that cause supply price shocks, like the one we are seeing now, are temporary and transient as we can see from this paper from the Middle Eastern Economic Survey, so long as they are not coupled with oil price rises. However, since most mid to long term forecasts show oil price rising steadily we can reasonably expect the price of petrochemicals to rise as a function of the raw material price rises, possibly a multiple of oil price rises.

Lets have a little context;
China currently imports around 21m tonnes of oil per month or 200m tonnes for 2009 (and rising fast). Some estimates see global peak consumption of around 100m barrels per day, thats roughly 5,000m tonnes per year, against today’s 85m barrels per day (4,250m tonnes per year).

Lets compare that to our main petrochemicals;
naptha – 215m tonnes per year
benzene – 10m tonnes per year
ethylene – 25m tonnes per year
propylene – 15m tonnes per year
That’s a total of 265m tonnes of the products per year or, in broad terms, a similar amount of oil to that which China will be using in 2010-2011. I pose the question – what happens to global oil prices if you take China out of the equation ?

So here’s where bio-plastics and biomass derived chemical feedstocks come in. China and India are the two main marginal consumers, they swing oil prices by their increases in consumption. Take ‘a’ China out of that equation and my strong guess is that your oil price volatility drops by a significant amount.
So by replacing petrochemicals with bio-mass derived petrochemicals you can actually have a disproportionate effect on energy price security, because you have taken the price and volatility multiplier that is refining out of the equation.
Of course you still need the energy and the water, but your raw material would be forestry products or agricultural byproducts. These are generally grown in climates where water isn’t a major issue, but you would need to be a little careful over both water supplies and food production.

Anyone fancy setting up a bio-petro-chemical production facility in the Canadian forests (to supply North America) or the Russian Tiga (to supply Chindia) ?

Update
Looks like someone beat us to it for Eastern Canada