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Cost Modeling

Egyptian Crisis Could Inflate Prices for Countless Products, Hindering US Economic Recovery

18 August 2013

While the effect of the escalating unrest in Egypt is obvious at the gas pump, the crisis potentially could have a less obvious impact on the cost of countless everyday consumer products that are made from crude oil—potentially impeding the U.S. economic recovery, according to IHS.

Petrochemicals derived from oil are used to manufacture a broad array of products taken for granted in the modern world, from pharmaceuticals, to plastic bottles, to trash bags. The unrest in Egypt already has driven up prices for oil and some associated petrochemicals. And based on an analysis of historic trends, a sustained increase in oil costs could result in a surge in petrochemical expenses, inflating prices for a slew of items.

History shows that sustained inflation in oil prices can have a rippling effect upon the cost of petrochemicals.

Back in 2008 when oil prices remained above $100 per barrel from April through September ethylene prices also rose in tandem, as presented in the attached figure. The average price for ethylene, a widely used petrochemical building block, climbed to $0.79 per pound in July 2008, up 26 percent from $0.63 in February of the same year.

When oil prices crested above the $100 threshold in March through May of 2011, ethylene prices increased 18 percent.

Oil prices once again cracked through the $100-per-barrel level in July, reaching an average of $104.70. They are expected to go up again, to $106.67, this month before easing as the end of the summer driving season reduces seasonal demand.

However, if the civil unrest in Egypt continues or worsens, oil prices could remain high and drive up the cost of ethylene and other base petrochemicals within 30 to 60 days.

“If oil remains above the century mark for much longer, prices for all kinds of common products made using petrochemicals can start to rise as well,” said Howard Rappaport, senior director, chemicals, IHS Supply Chain Pricing & Purchasing. “Combined with the growing cost for energy, a petrochemical price surge could delay and/or slow the recovery in the U.S. economy as the cost to produce many household products becomes more expensive. This economic drag would come at an inopportune time, just as manufacturers are gearing up production to meet expected holiday demand in the third and fourth quarters.”

Bracing for supply chain disruptions

Beyond ethylene, pricing for several other key petrochemicals are affected by high oil prices, including benzene, styrene, propylene and butadiene. The supply chain for these materials spans from crude oil producers, to petrochemical makers, to derivatives manufacturers, to finished goods, to retail outlets, to consumers. These petrochemicals serve as the intermediate building blocks for numerous plastics and other chemical derivatives.

“With such large, globally diverse supply chains covering many regions, industries and manufacturing processes, disruptions that cause availability interruptions or price spikes can have unexpected impacts on various industries and business processes,” Rappaport said. “Events like the ongoing Egyptian unrest or the June fire at the Williams Geismar chemical plant in Louisiana, or a hurricane in the US Gulf Coast can occur at any time. In such crises, the companies that survive and thrive will be the ones that have the best supply chain management, as well as a superior understanding and awareness of how world events can affect each node of their business. Such knowledge can give companies the capability to predict the impact of problems, mitigate risks, and maintain resilience in the face of crises.”

The violence in Egypt illustrates how global events can have unforeseen impacts on petrochemical supply chains.

Although Egypt is not a major oil producer or exporter, the unrest in the nation is indirectly affecting global energy and petrochemical prices. Instability in a key country or region can have an unforeseen and lasting impact on oil prices and futures trading.. The unrest in Egypt potentially could cause wider-scale upheaval in the Middle East, including countries that are major oil producers.

Reacting to the increased risk in the region, energy traders are already driving up prices.

The potential upwelling in prices comes at the time when petrochemicals are in high demand for use in consumer electronics products, such as plastic enclosures for televisions, smartphones and media tablets as well as automotive parts, packaging and a host of other goods.



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