Oil & Gas 360 Publishers Note: This is part 1 from Kevin Olson at RarePetro on the Petrochemicals. The Post-COVID demand is an interesting topic for almost every market segment. Construction, manufacturing, transportation, air travel, and real estate will all have demand impacts for oil and natural gas. Nice article from Kevin and worth the time to review.
Abstract
The coronavirus pandemic has ushered in a new age and as the world begins to adjust to the new normal, demand for commodities like oil and natural gas has and will continue to change. While individuals may not be traveling via airplane or driving their cars as much as before the pandemic, there are many goods and materials created from hydrocarbons that will continue to be a necessary staple for the reestablishment of a healthy global economy. Part one of our four part series on Post-COVID oil demand will investigate the change in global oil demand for petrochemicals and construction materials.
Introduction
The global pandemic shut down entire countries for months. As economies begin to reopen and society begins to restart, the world will usher in a new age – a post pandemic normal. There are many questions that will need answers. How will schools adopt to ensure student safety? Will remote working/learning become standard? When will professional sports resume? What happens if there is a resurgence in cases? Is another lockdown coming? The list is a mile long. But the question most relevant to the energy industry is: what will oil demand look like as the world transitions to this new normal? As the world starts to navigate this path, the news team at RARE PETRO will be releasing a four part series investigating global demand for oil and gas in a post-COVID society. The first installment will explore how demand for hydrocarbon based petrochemicals and construction materials will likely change in the future.
The coronavirus has caused a drop in global demand for crude consumption. Demand recovery will occur at different rates through various sectors of the economy. Data shows world crude oil demand in the first quarter of 2020 declined by the largest volume in history—even exceeding the declines during the 2009 financial crisis [9]. Economic uncertainty has caused hydrocarbons used for petrochemicals and construction materials to fall to recent lows as well. As economic recovery resumes, the demand for these products should also rise. There are many types of petrochemicals and crude based construction materials that will continue to be a necessary staple for the reestablishment of a healthy global economy.
Petrochemical Definition and Uses
Found across a vast range of modern products, petrochemicals are part of the fabric of our society. Petrochemicals, chemicals derived from petroleum or natural gas, play a major part in today’s economy and are an essential part of the chemical industry as demand for synthetic materials continues to grow. Petrochemicals are used to manufacture thousands of different products that people use daily, including plastics, medicines and medical equipment, cosmetics, clothing, furniture, appliances, electronics, tires, solar panels, and even wind turbines [1]. The use of plastics in modern life is extremely widespread, and most products used today are either made entirely of plastics or have plastic components. These plastics are made from a variety of petrochemicals and provide consumers with a variety of goods from single-use saran wrap to components in cars [1]. One major petrochemical created from natural gas is ethylene, used to create the polymer polyethylene – one of the most important plastics in manufacturing and the most widely used plastic in the world [1]. When polyethylene is combined with naphtha generated from crude oil, a denser polyethylene plastic is created. From grocery bags, shampoo bottles, and children’s toys to higher density bullet proof vests that protect the police and military, society relies heavily on this polymer derived from hydrocarbons [8].
Petrochemical products are everywhere and are integral to modern societies. They are even found in many parts of the modern energy system including solar panels, wind turbine blades, batteries, thermal insulation for buildings, and electric vehicle parts [2]. While numerous resources in the modern energy system are considered to be renewable, they are created from oil and natural gas products. In fact, 99% of all plastics are created from oil and natural gas [1]. Many products are manufactured using naphtha feedstock (a crude oil product) that is combined with ethylene to create higher density polyethylene [8]. Naphtha created during the distillation process is heavier than gasoline, and is one of the most important petrochemicals because it is used to produce solvents and higher density plastics. For example a grocery bag can be created from ethylene while dense plastic used for patio furniture comes from naphtha. Without plastics and petrochemicals, developed societies would be unable to function properly.
Petrochemical Post-COVID Demand
Demand for petrochemicals is surging and will continue to grow well into the future. This is because feedstock used for petrochemicals accounts for 12% of global oil demand, a share that is expected to grow driven by increasing demand for plastics, fertilisers and other products [2]. There is huge potential for a rise in petrochemical use worldwide because advanced economies like the United States and Europe currently use up to 20 times as much plastic and up to 10 times as much fertilizer per capita than developing economies such as India and Indonesia [2]. As developing economies advance, their consumption of petrochemicals will skyrocket ensuring additional increased demand into the future, regardless of current demand loss from the global pandemic.
As seen in Figure 1, demand for plastics – the most familiar group of petrochemical products – has outpaced that of all other bulk materials (steel, cement, and aluminium), and has nearly doubled since 2000 [2]. As a result, petrochemicals are rapidly becoming a leading driver of global oil demand. The growth in demand for these products means petrochemicals are set to account for over a third of the oil demand growth by 2030 and nearly half by 2050, ahead of trucks, aviation and shipping [2]. The surge in demand for these materials is undeniable and will continue to grow as the need for plastics and other petrochemical products is not diminishing. The pandemic may have created a paradigm shift in how people go about their lives, but it has not changed the products and materials needed in everyday life. It has arguably made petrochemical products created from oil and natural gas a bigger necessity.
Construction Materials – Road Construction and Roofing Definition
The materials to build roads for transportation across the nation as well as the fabrication of homes is only possible with products created from the oil and gas industry. In fact, almost all products used in road construction and roofing are byproducts of crude oil. From asphalt and tar to shingles and caulking, construction materials made from residual/residue crude left over after the refining process are the backbone of many construction materials. During the refining process, lighter and more volatile hydrocarbon chains are utilized to make products like naphtha and gasoline while the heavier chains and residue are used to create asphalt (a natural byproduct of crude oil), tar, and other construction materials used in road building and roofing. Asphalt is one of the world’s oldest engineering materials, having been used since the beginning of modern civilization. Without the materials needed to build and maintain roads or protect buildings, economic and societal progress would rapidly begin to slow.
Construction Materials Post-COVID Demand
Demand for construction materials, which make up a much smaller percentage of crude oil demand than petrochemicals, will not change much in the new age. Roads will need to be built and maintained, and buildings will continue to need new roofs. The global pandemic will not have a large impact on this area of crude oil demand.
Table 1 shows the shipment volumes of various roofing materials from North American roofing companies and their suppliers. Asphalt shingle demand for roofing was down slightly in the first quarter of 2020 “due to lockdown orders that prevented the installation and maintenance of [domestic] shingling for commercial and residential buildings” [6]. As seen in Table 1 above, numbers were down during Q1 compared to last year but the outlook for the remainder of 2020 remains strong. According to the Asphalt Roofing Manufacturing Association, projected demand for this year will maintain their levels from 2019 which itself grew 1% from the prior year [6].
A similar scenario will be experienced for road construction and materials as the global pandemic will have little effect on the need to build and maintain roads. Asphalt roads, one of the most popular types of construction ever since its inception in the early 1920s, produce relatively little noise, are relatively low cost compared to other materials, are relatively easy to repair and maintain, but are only designed to last about 20 years [7]. While most major highways began their construction in the late 1950’s after the Federal-Aid Highway Act passed in June 1956, the 41,000-mile network of interstate highways has about reached its lifespan [3]. As a result, new construction and road maintenance will continue to be a necessity well into the future. In fact, as seen in Figure 2, road and highway construction in the U.S. has experienced a steady increase over time seen by an average industry growth from 2015–2020 of 1.1% and gradual increase in system length [4]. While these values do not increase dramatically over the years, it is safe to say the slow but steady demand growth for construction materials will continue at the historic growth rate in this sector despite the global pandemic upending so many other forms of oil and gas demand.
Conclusion
The coronavirus pandemic has ushered in a new age and as the world begins to adjust to the new normal, demand for commodities like oil and natural gas will also begin to change. The need for office space will most likely be reduced as working from home becomes more routinely accepted. Consumer preference towards high density gatherings like movie theaters may begin to phase out to streaming services in light of social distancing, but the need for plastics, fertilisers and other petrochemical products will continue to grow on an aggregate as well as a per capita basis regardless of implications from the pandemic. The world will still need synthetic clothing to wear daily, digital devices to remain in touch with those far away, tires to drive from place to place, medical equipment to help the sick, and a multitude of other goods made possible by petrochemicals. As the global population increases, aggregate demand for these petrochemicals will continue to grow. In addition, many items that have become a necessity during the global pandemic, like hand sanitizer, face coverings, and laundry detergent, will sustain its increase on a per capita basis. The result is a compounded demand growth ensuring the need for products produced from petrochemicals will not stop, and regardless of social distancing and lockdowns, demand will continue to grow well into the future.
Additionally, the world will continue to build roads in order to reach new places, especially in developing areas. Older roadways that may be seeing more travel due to decreased air transport will subsequently need to be maintained to ensure passenger safety. Once passengers get to their destinations, they will need a roof over their heads to protect them from the elements. World population will also continue to expand, resulting in the need for more residences. Thus, construction materials are another necessity that will not disappear moving forward. Excessive growth of construction materials made from crude oil will not be experienced at an equivalent rate to the continued growth of petrochemical demand, but the demand for these materials will recover and grow past pre-pandemic levels.
While the world grapples with a new post-COVID society and what that means in daily life, the tools and materials needed to ensure a proper functioning society will continue to be a necessity. Table 2 shows the industrial materials discussed, an estimate for demand change during the pandemic, and a projected demand change into the future. The projections are based on logical assumptions for changes in society that may increase or decrease industrial supply needs. Many of these tools and materials are byproducts of oil and natural gas, and as a result overall aggregate demand for the two sectors will continue to grow on a global scale into the future. Life may change after the pandemic, but the energy used to manufacture and build daily staples to meet the quality of life expected in society will only continue to expand.
References
[1] https://energyeducation.ca/encyclopedia/Petrochemical#cite_note-2
[2] https://www.iea.org/reports/the-future-of-petrochemicals
[3] https://www.history.com/topics/us-states/interstate-highway-system
[4] https://www.ibisworld.com/united-states/market-research-reports/road-highway-construction-industry/
[7] https://globalroadtechnology.com/5-types-road-construction-and-surfaces/
