Spend Matters welcomes this guest article by Rajiv Joarder of Mintec.
Now that the US has surpassed Saudi Arabia as the top crude oil and natural gas producer, it can produce cheaper plastic and bring better economic prospects to the nation. How so? Well, it’s ethane that’s the key ingredient.
Ethane can be derived from both natural gas and crude oil. From ethane you get ethylene, which is the basic building block of many plastics, such as polyethylene (PE), polyethylene terephthalate (PET), polyvinyl chloride (PVC) and polystyrene (PS). PE is used in a wide range of industries including packaging, building and construction, electronic goods and the automotive industry. There are around 80m tonnes of PE produced globally each year, and the major producers being Western Europe, the Middle East, North America and China.
Globally, ethane is derived from crude oil. However in the US, and Australia, it is extracted from natural gas through a process called hydraulic fracturing, aka fracking. Historically, the cost of natural gas extraction in the US was so uncompetitive that chemical manufacturers shut down US operations. Extracting through fracking is a lot cheaper, giving the US an advantage over its competitors. Just to give you an idea of how cheap it is, the price of ethylene extracted from natural gas is around a third of that extracted from crude oil (though other by products available).
As a result, the price differential of US-made plastic goods over similar goods from China has narrowed and is now only about 6% more expensive than the rest of the world. This has led some PE producers to reopen production lines in the US. In addition, big name chemical manufacturers have started to invest locally. For instance, Dow Chemical is investing $6 billion to expand its manufacturing facilities by 40% in Texas and Louisiana.
So, the boom in fracking is not only helping the US with a long term supply of cheaper energy and plastic, but it is also bringing back thousands of jobs to the US and local manufacturing has become competitive again, attracting both local and foreign investments. With the abundant supply of ethane through an economic extraction process, the global supply of plastic is likely to increase thus keeping the prices low.