Cleaning up the world’s plastic waste will be a monumental effort – one that we believe will have major implications for petrochemical companies and the long-term demand for oil.
In many ways plastics are a perfect material. They are light, cheap, and very durable. It is no surprise that demand for plastics has grown over the past 50 years by a multiple of 20. Some forecasters expect demand growth to continue – possibly doubling again over the next 20 years. Our recently published research calls that assumption into question.
The BBC documentary Blue Planet II brought home to many of us the scale of the problem of where that plastic ends up. Today the equivalent of one large rubbish truck full of plastic is dumped into the ocean every day. Those eight million tonnes a year are only a small part of the story.
We believe nearly one in three tonnes of plastic packaging end up ‘escaping’ into the wider environment. The industry response is to incinerate the plastic waste, using it to produce electricity. Given the global pressures around decarbonisation, we think this is unsustainable.
When we factor in the cost to the environment of simply producing the plastic in the first place, incinerating plastic waste might in turn be a more carbon-intensive source of electricity than burning coal!
Public perception on plastic is shifting fast, and, as usual, policy makers are responding and that means implications for investors.
Some ask, can’t we just clean all this up and keep going? We think not – the costs are simply unaffordable
The global petrochemical industry will certainly be affected by the plastic clean-up effort. In a world that will demand greater energy efficiency, there is likely to be a growing market for a number of speciality chemical products. But, we think the unavoidable truth is that when it comes to demand for the basic petrochemical building blocks – the feedstock that is used to produce plastics – demand is unlikely to grow as fast as many might have expected. There is a growing risk of too much plastic being produced to satisfy reduced demand if this feedback loop reacts quickly.
There are also implications for oil markets. The amount of hydrocarbon liquids used to produce single-use plastics today is relatively small, probably around 4% of total demand. But when we widen the lens and look at future projections, that number is assumed by many to continue to grow – often quite rapidly. This becomes a very big issue in the ‘later’ years of many forecasts. Some major forecasters acknowledge that the later years of their forecasts are very sensitive to changes in this assumption.
A good analogy is to think of this issue as an old-fashioned tug-of-war
By the late 2020s or early 2030s, many of the factors we know about – like electric vehicles – are assumed to be destroying a reasonable amount of oil demand. By this point, one side of our tug-of-war is pulling quite hard in the ‘shrink’ direction. But at the same time, demand for petrochemicals is assumed to be growing just as fast. It is the net effect of these two that produces a long stable ‘plateau’ for oil in many forecasts. It is this plateau we think is challenged by the plastic problem. If at some point in the next decade demand for single-use plastics starts to flatline and then shrink, one side on that tug-of-war is going to be looking a bit light. We think around 2.5 million barrels of oil demand might be at risk from this effect – one other forecaster has suggested the number is two million. Peak oil demand might well arrive sooner than many think as a consequence of this effect, and the decline could be a lot more precipitous.
The number one risk we think investors need to be worried about is what happens if the industry were to overinvest into this period of peak demand. If the industry as a whole acts rationally and cautiously, the right oil and gas companies may well have a future in front of them as very attractive, cash-generative businesses. Some may shrink and some may act as consolidators. Either strategy has the potential to be a very attractive investment if pursued properly. But this outcome is far from a sure thing. If the industry as a whole underestimates the risks we have outlined here, alongside all of the other structural threats to oil demand in the future, then investing profitably in the oil and gas industry could prove very challenging.
For a sector accustomed to getting headlines for its stellar growth and equity returns, the past few weeks have felt a bit different for technology companies. It's time to take stock, think about what we’ve learnt and revisit our bullish macro case for the sector. In short, however, I still like tech.