The Role of the Petrochemical Sector in the COVID-19 Pandemic

The Role of the Petrochemical Sector in the COVID-19 Pandemic 1
Malik Selemankhel
The Role of the Petrochemical
Sector in the COVID-19 Pandemic
Instant Insight
June 1, 2020 KS–2020-II16
Data Insights
The Role of the Petrochemical Sector in the COVID-19 Pandemic 2
About KAPSARC
Legal Notice
The King Abdullah Petroleum Studies and Research Center (KAPSARC) is a
non-profit global institution dedicated to independent research into energy economics,
policy, technology and the environment across all types of energy. KAPSARC’s
mandate is to advance the understanding of energy challenges and opportunities
facing the world today and tomorrow, through unbiased, independent, and high-caliber
research for the benefit of society. KAPSARC is located in Riyadh, Saudi Arabia.
© Copyright 2020 King Abdullah Petroleum Studies and Research Center (“KAPSARC”).
This Document (and any information, data or materials contained therein) (the
“Document”) shall not be used without the proper attribution to KAPSARC. The
Document shall not be reproduced, in whole or in part, without the written permission
of KAPSARC. KAPSARC makes no warranty, representation or undertaking whether
expressed or implied, nor does it assume any legal liability, whether direct or indirect, or
responsibility for the accuracy, completeness, or usefulness of any information that is
contained in the Document. Nothing in the Document constitutes or shall be implied to
constitute advice, recommendation or option. The views and opinions expressed in this
publication are those of the authors and do not necessarily reflect the official views or
position of KAPSARC.
The Role of the Petrochemical Sector in the COVID-19 Pandemic 3
Introduction: The great slowdown
Our super-connected world enabled the COVID-19 virus to quickly evolve into a pandemic, bringing
the world to a standstill. Millions of people have been infected by the virus, and billions are impacted
by lockdown measures to contain it and the consequent global economic slowdown. The world
was unprepared for the virus, and the materials needed to fight and contain it have become scarce
commodities. The United States (U.S.) went on a war footing, directing its manufacturing sector
to produce medical supplies such as ventilators and personal protection equipment (PPE). Some
countries began hoarding food and medicine. The global lockdowns to contain the spread of the
virus grounded many passenger flights, halted non-essential road transport and closed businesses.
This resulted in global economic stagnation, introducing an exogenous shock to the global economy.
The OPEC+ decision to increase production introduced a supply shock in an environment of low
oil demand, creating historically high inventory levels and low oil prices. The WTI crude oil futures
contract for May 2020 settled in negative territory, an unprecedented event in the history of the
market. Global oil consumption fell by more than 20 million barrels per day (MMb/d) due to the
lockdown measures, and refining throughput fell by more than 7 MMb/d.
According to the International Monetary Fund (IMF), global real gross domestic product (GDP) growth is
expected to shrink by 3% in 2020. In contrast, western hemisphere GDP could shrink by more than 6%
(Figure 2). Most commodity prices fell, with the biggest decrease seen in oil prices.
Figure 1. All sectors of the economy are impacted by COVID-19.
Source: IMF (2020).
17.65
0.4 -4.62 -8.94 -17.83
-18.05 -19.57
-11.98 -15.53 -20.69 -22.99 -24.18 -26.4
-0.44 -7.08 -19.14 -20.69 -24.56 -32.68
-58.51 -26.94 -28.27 -16.02 -9.29
3.05
-26.5
-70 -60 -50 -40 -30 -20 -10 0 10 20
Arabica coffee
Wheat
Soybeans
Corn
Palm oil
Cocoa
Cotton
Iron ore
Aluminum
Lead
Copper
Tin
Zinc
Gold
Cobalt
Nickel
Palladium
Silver
Platinum
Brent
NG, EU
LNG, NE Asia
NG, US
Coal, AU
Uranium
S&P 500
Agriculture
Base
Metals
Precious
Metals Energy
percent %
Commodities
The Role of the Petrochemical Sector in the COVID-19 Pandemic 4
Figure 2. Impact of the COVID-19 pandemic on real GDP growth.
Source: IMF (2020).
The silver lining: How the oil sector is at the forefront of the
fight against COVID-19
As the world tries to contain the virus spread, the oil industry, among other frontline sectors, is providing
essential materials to keep populations safe. The petrochemical sector normally uses more than 13
MMb/d of crude oil as a feedstock, converts it into important materials such as resins for the plastics
industry, and chemicals for the health, pharmaceutical and food sectors. The importance people are
giving to their short-term health and hygiene over long-term sustainability has become apparent amid
the pandemic. Concerns over safety and cross-contamination have caused single-use plastic bans to
be repealed in many U.S. states and in the corporate sector. This has created more demand for bottled
water, packaging and single-use plastics. Demand for ethylene and propylene polymers used in the
production of plastic water bottles, packaging, single-use plastics and PPE is expected to increase
significantly until a viable treatment for COVID-19 is found. Demand for filtration equipment, for example,
such as face masks, has grown by over 700% during the pandemic. According to the World Health
Organization (WHO), over 166 million items of PPE are required to be produced per month to fight the
COVID-19 pandemic. According to the World Economic Forum’s Global Risks Report, infectious diseases
will be the highest global risks in terms of impact over the next 10 years. It anticipates the economic
impact of flu pandemics over the coming decades will cause significant damage to the global population
and global economy. The petrochemical sector will continue to be a vital player in providing the products
necessary to combat infectious diseases. Fighting the pandemic would have been much harder, and
would have caused higher mortality rates and more damage to the global economy if petrochemical
products did not exist.
-10
-5
0
5
10
15
20
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
China United States Asia Pacific Europe Middle East World
The Role of the Petrochemical Sector in the COVID-19 Pandemic 5
Figure 3. Demand for oil as a petrochemical feedstock.
Source: IEA (2018), “The Future of Petrochemicals.” All rights reserved.
Note: RTS = Reference Technology Scenario; CTS = Clean Technology Scenario.
Facts about the petrochemical sector
• About 4% of global oil production is used to make plastics, and about 2% is used to make textiles,
without accounting for energy use during the manufacturing process.
• Approximately 99% of pharmaceutical feedstocks and reagents are derived from petrochemicals.
• Over 98% of PPE items are derived from petrochemicals (polypropylene and polyethylene, among
others).
• Plastic used in packaging is the largest segment of global plastic demand.
Petrochemical sector growth vs. oil demand as a feedstock
The petrochemical sector has an estimated market size of over $400 billion. It is directly responsible for
supplying materials to almost all sectors of the economy (Figure 6). The demand for petrochemical products
is expected to grow at the same rate as population and GDP growth, especially in developing countries.
Since 1962 global GDP has steadily increased at the same rate as plastics production/consumption. With
production elasticity greater than zero, plastics production/consumption can be viewed as an indicator of
economic growth, due to the high correlation between GDP and the plastics sector’s growth. Figure 4 shows
that any change in the production of plastics is followed by a change in GDP. According to the International
Energy Agency (IEA), demand for high-value chemicals (HVCs) will grow by between 40%-60% (about 1
billion tonnes) by 2050, mainly driven by demand for plastics. The demand for oil as a petrochemical
Feedstock oil demand
30%
25%
20%
15%
10%
5%
0%
24
20
18
12
8
4
0
Proportion of total oil demand
RTS CTS
2017 2020 2025 2030 2035 2040 2045 2050 2017 2020 2025 2030 2035 2040 2045 2050
Feedstock oil demand (mb/d)
The Role of the Petrochemical Sector in the COVID-19 Pandemic 6
feedstock will grow by over 20% by 2050, even accounting for better fuel efficiency, enhanced recycling,
and the electrification of passenger vehicles (IEA 2018). The demand for oil as a petrochemical feedstock
currently accounts for 13% of total oil demand. With the current state and pace of technological innovation,
energy efficiency and other value chain optimization efforts in the petrochemical sector, the demand for
oil as a chemical feedstock will remain strong. Populations and per capita GDP are expected to grow in
developing regions such as the Asia Pacific, the Middle East, Africa, and South and Central America. The
consumption of plastics and other petrochemicals in these regions is expected to grow proportionally.
Packaging plastic, the largest segment of global plastic demand, is worth about $244 billion and has a
compounded annual growth rate of 4%.
In 2018, industrialized developed countries were the largest importer of HVCs, used to make plastics and
other resins (UN 2020). The GDP of developing countries in the Asia Pacific, the Middle East and Africa
continues to accelerate. As such, the consumption of products derived from petrochemicals is expected
to grow significantly in these regions. This is expected to compensate for the slowdown in demand in
developed regions, such as Europe and North America, in the long term.
Figure 4. Plastics consumption/production follows GDP.
Sources: IMF (2020); UN (2020).
0
5
10
15
20
25
30
35
40
45
50
0
10
20
30
40
50
60
70
80
Year
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
Global plastics production GDP Global per capita plastic consumption
GDP growth rate (trillion US$ per year)
Plastics production/consumption
growth rate (MMt/year)
The Role of the Petrochemical Sector in the COVID-19 Pandemic 7
Figure 5. Top importers of liquefied high-value chemicals.
Source: UN (2020).
Figure 6. Interrelationships between the petrochemical sector and major sectors of the economy.
Source: IEA (2018), “The Future of Petrochemicals.” All rights reserved.
26%
24%
11%
18%
21%
Belgium Germany Netherlands United States China
Petrochemicals
Packaging
36%
Consumer
Products
10%
Electrical
4%
Textiles
15%
Construction
16%
Automotive
7%
The Role of the Petrochemical Sector in the COVID-19 Pandemic 8
COVID-19 and beyond: The growth trend of the
petrochemical sector
The COVID-19 pandemic has disrupted all sectors of the global economy, many of which are highly linked
to the petrochemical sector. As such, reduced economic activity will severely impact the sector in the short
term. As Figure 4 shows, plastics production can be regarded as a leading indicator of economic recession.
In 2008, a reduction in plastics production was followed by global GDP contraction. However, lower crude
oil prices should, to some degree, offset the petrochemical sector’s reduced sales, but not fully. For
instance, Dow Chemicals reported 11% lower sales in the first quarter (Q1) of 2020 compared with Q1 2019.
However, its costs were 10% lower in Q1 2020 than in Q1 2019 due to lower feedstock costs (Chemicals
2020).
Increased precautionary measures related to product handling, PPE, and social distancing will continue
for the next few years until a viable treatment for COVID-19 is found. As a result, post-pandemic demand
is expected to grow more than would have been the case under normal circumstances. As we move to a
transformed future due to the pandemic, we can appreciate the role petrochemicals play in serving society
by providing the products individuals need to stay safe and healthy, while facilitating socially responsible
economic growth.
References
Dow Chemicals. 2020. 1Q 2019 Earnings.
International Energy Agency (IEA). 2018. “The Future of Petrochemicals.”
International Monetary Fund (IMF). 2020. “World Economic Outlook.”
United Nations (UN). 2020. UN Comtrade Database. Accessed April 23, 2020. https://comtrade.un.org/data/
The Role of the Petrochemical Sector in the COVID-19 Pandemic 9
www.kapsarc.org