Will plastics be the largest driver of future oil demand? Probably not, says new report

The oil industry, however, is unconvinced, according to The Future’s Not in Plastics, a new report from Carbon Tracker and Systemiq released today. With petrochemical investments aimed at expanding supply for virgin plastics use by a quarter, at a cost of at least $400 billion in the next 5 years, the oil industry is staking its future on plastics, the authors write.

“While most commentators have noted that petrochemicals are a major driver of expected oil demand growth, we can go one stage further and demonstrate that it is specifically plastics within petrochemicals that drive the expected growth in oil demand,” they note.

BP, for example, in its 2019 BP Energy Outlook, forecasts (pre-COVID) that plastics will make up 95% of expected net oil demand growth to 2040. Plastics are also the largest component of expected oil demand growth - accounting for 45% of the total - in the scenario of the International Energy Association.

The Future’s Not in Plastics, compiled by independent financial think tank Carbon Tracker and Systemiq, a systems change company, presents an alternative view. The petrochemical industry is already facing record low plastic feedstock prices as a result of overcapacity. With pressure mounting to rein back the use of plastics, virgin plastic demand growth could shrink from 4% a year to under 1%, with demand peaking in 2027, say the authors.

They write that ‘five years ago, the oil forecasting industry had four pillars of oil demand growth: cars, trucks, planes, and petrochemicals. As electric vehicles have grown in popularity, so the forecasters stopped expecting growth to come from the car sector. COVID has significantly damaged airline demand for oil, and it is uncertain when if ever it will return to its 2019 levels. The success of electric vehicles in cars has meant that some forecasters now expect trucking demand for oil to peak in the near term. That leaves the oil sector, as we have seen, dangerously dependent on plastics’.

“Remove the plastic pillar holding up the future of the oil industry, and the whole narrative of rising oil demand collapses,” Kingsmill Bond, Carbon Tracker Energy Strategist and report lead author, said.

The report discusses various challenges facing the plastics industry, all of which are making a business as usual an unlikely scenario for the future. A projected doubling of carbon emissions from plastics production if the current growth rate continues; environmental  - marine and land - pollution; health concerns; clean-up costs; public opinion, legislative and fiscal measures; and the transition towards a more circular economy: these are all factors contributing to changes in the way plastics are perceived and used.

Moreover say the authors, there is increasing evidence that demand for plastics has peaked in the OECD.

Next to a stagnation in demand in developed markets, a leapfrog effect is seen in emerging markets, where market leaders are looking for alternative solutions to plastic.

Policymakers in Europe and China are already taking steps to clamp down on plastics waste and have a wide range of tools they can use, from regulation and bans to taxes, targets and recycling infrastructure.

In addition, technology solutions are already available to enable a massive reduction in plastic usage at lower cost than business as usual. These solutions, which were detailed in the recently published report from Systemiq and the Pew Charitable Trusts entitled Breaking the Plastic Wave, include reuse, with better design and regulation of product, substitutions such as paper, and a large increase in recycling. That report, too, called for an ‘integrated approach with new ways to deliver the benefits of today’s plastic is required’ and presented an economically viable System Change Scenario to do so.

As Yoni Shiran, who leads Systemiq’s Plastic’s Platform and a co-author, points out:“There are huge benefits in the change from the current linear system to a more circular one. You can have all the functionality of plastics but at half the capital cost, half the amount of feedstock, 700,000 additional jobs and 80% less plastic pollution.”

This reduction will require substantial shifts in all economic sectors, significant new investments, and major policy changes from governments.

Meanwhile, what about those companies active in the oil and petrochemical sector, who have identified plastics as a key vector of growth, and have massively increased capacity as a result?

This report states that there are “three immediate and obvious implications for the plastic sector if that growth does not materialise: overcapacity; low prices; and stranded assets.”

It continues: ‘As the world shifts from the linear model to the circular model, it creates huge amounts of opportunity right across the value chain – from consumer facing business which can develop reuse strategies, to recycling businesses which can challenge the petrochemical giants.’

Yet is also emphasises that ‘nevertheless, it is notable that there are many companies whose fortunes will be impacted by this story’.

The message is clear: don’t count on plastics to save the oil industry.