If oil production is up, why is there a plastic shortage?

on April 2, 2013

An article posted on NBC news on March 25th discusses the boom in new oil and natural gas being produced in the US.  This energy boom is creating jobs and making US less dependent on foreign oil.  Just a few years ago, US energy independence was considered a “pipedream”.  However many experts believe that this could be a reality.

Much of the increase in US oil production is because of advances in drilling and exploration technology.  Domestic oil reserves that were once too expensive to exploit with past technology can be economically extracted today.

So one might ask:  “Since plastic is derived from oil, why is the cost of plastic going up when the cost of oil is going down?”

First of all, the actual price of oil is not going down that much, even with a huge increase in US production.  The reason is that US production increases are still very small when compared to global demands.

Second of all, while plastic ultimately comes from oil, the supply chain is far more complex than even fuel, which by the way is at near record highs.   In general over the last 20 years, costs of plastic have trended with cost of oil.  But there have been times when the correlation broke down.   If one looks at long term trends the prices track fairly consistent with each other.  But in the short term, other economic factors can play a larger role.

Another economic factor that comes into play is processing the oil to fabricate the plastic resins.   If the plants that produce the polyethylene and polypropylene resins are at capacity, then the plastic resin prices will go up.  This is precisely what happens in the latest plastic costs.   Last fall, one of the major producing plants in the US was down for several weeks due to maintenance issues.    At the same time, there was a large increase in consumption from China which compounded the supply issue.    So currently the capacity situation at the plastic resin plants is dictating the pricing.

Another reality of supply and demand is that shortages will create an artificially larger demand.   When customers are experiencing a supply shortage, the natural reaction is to increase order sizes.   This psychology can permeate through the entire supply chain.    Some of the gasoline shortages over the past few decades are prime examples, as panic buying led to exaggerating the supply shortage.

Packnet has seen plastic prices go up several times over the last few months and perhaps we are seeing some “over buying” in the supply chain compound the shortages and prices.   Over time, this issue tends to get resolved, but short term issues can last many months.   Packnet negotiates long term contracts with its suppliers, but in most cases these contracts allow adjustments due to raw material prices.