The economics of the oil and natural gas industries are notoriously volatile. After a relatively long period of stable energy pricing, gas prices plummeted in late 2014 and are expected to stay “low” for at least the next few years. Hundreds of industries were affected, but how much do oil and natural gas prices impact the chemical manufacturing sector?
In a word? Immensely.
Energy as a Price-Setting Determinant
For commodity chemicals, production costs are the principal driver of market rate. When energy costs change, chemical producers must adjust their pricing to accommodate higher or lower backend costs, all of which trickles down to the end-consumer. This can mean a couple of things:
Changes in Demand:
When spending patterns for individual consumers change, so do their material requirements. From less money for R&D to an unwillingness to overspend on a long term supply, chemical purchasers’ behavior changes drastically when market rates are volatile.
Changes in Use:
Downstream, chemical purchasers are also more likely to use substitutions when their preferred product is prohibitively expensive. Conversely, they’re more likely to overproduce and ramp up production when prices are low.
Natural Gas Output Increases Capacity
Excess inventory of natural gas due to increased mining of U.S. shale deposits has led to a drastic drop in natural gas prices. It’s estimated that these lower natural gas costs could allow U.S. manufacturers to lower their costs by over $11 billion annually, particularly in the chemicals industry where both raw materials and energy costs are lowered.
Because the U.S. is, for now, the only nation that’s been able to commercialize natural gas production via shale deposits, its chemicals industry is poised to become a global leader in supplying feedstocks and energy to other countries. The lowered cost of raw materials may lead some U.S. manufacturers to reverse-offshore their operations and return to U.S.-based chemical suppliers.
Use of Wet Natural Gas
Natural gas liquids are a natural byproduct of natural gas processing. The adoption of “fracking” and horizontal drilling has made these wet natural gasses more widely available. Since 2009, the use of liquid natural gasses as a feedstock for the chemicals industry has risen dramatically to over 500 million barrels a year, and overall natural gas usage for chemicals is up over 10%.
The increased use of natural gas liquids (NGLs) is also impacting the scale of some chemical manufacturing operations. Because NGLs don’t have to be processed at a centralized petroleum refinery, the supply chain ramifications of their distributions are many.
As a whole, natural gas pricing has been a boon for the U.S. chemical industry. Technological developments are making the process easier and more efficient every year, and the manufacturing industry benefits.
Noah Chemicals is proud to be a U.S. chemical supplier, based in San Antonio, Texas. We specialize in rare, hard-to-find commercial chemicals but can assist you with any chemical needs you might have. Contact our sales department today about a special request or question.
