The Petrochemicals Shock That's Already Rippling Through Plastics

SPEAKER_2 (0:02)

Bloomberg Audio Studios, podcasts, radio, news.

Tracy Alloway (0:18)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:22)

And I'm Joe Weisenthal.

Tracy Alloway (0:24)

Joe, I have a prop for today.

Joe Weisenthal (0:27)

Prop episode.

Tracy Alloway (0:28)

A visual learning aid for a podcast. I'm gonna hold this up. What is this?

Joe Weisenthal (0:34)

It looks like a magenta marker.

Tracy Alloway (0:35)

Magenta?

Joe Weisenthal (0:36)

Yeah.

Tracy Alloway (0:37)

It's pink, it's hot pink.

Joe Weisenthal (0:38)

What's magenta?

Tracy Alloway (0:39)

It's like purplish pink. Really? Okay, color is beside the point. It is indeed a highlighter, but more importantly, it is a result of a complex petrochemicals supply chain.

Joe Weisenthal (0:51)

You're right, magenta is more purplish. I don't know why I always thought it was a little bit more pinkish. But yes, you're correct, you're correct. You're totally correct.

Tracy Alloway (0:58)

I didn't intend your major takeaway from this conversation to be the difference between pink and magenta. No, I feel a little stupid. Okay.

Joe Weisenthal (1:03)

But yes, you're right. And without advanced chemicals of all sorts and oil and all that, you would never have the plastic shell of the marker and maybe even some aspects of what gives it color when you draw on something.

Tracy Alloway (1:16)

All right. So what is this plastic casing actually made of? This is a pop quiz.

Joe Weisenthal (1:20)

That I definitely have no idea.

SPEAKER_2 (1:22)

Okay.

Tracy Alloway (1:22)

It starts from crude oil.

Joe Weisenthal (1:24)

Yeah. Okay. Yeah.

Tracy Alloway (1:26)

So crude oil distilled into?

Joe Weisenthal (1:30)

Keep going.

Tracy Alloway (1:30)

Naphtha.

Joe Weisenthal (1:31)

Naphtha, right. Naphtha.

Tracy Alloway (1:33)

And then naphtha is, this is a hint, cracked into ethylene or propylene?

Joe Weisenthal (1:40)

Yeah.

Tracy Alloway (1:40)

We've actually done a plastics episode before.

Joe Weisenthal (1:42)

I know. I know. Yeah. Okay.

Tracy Alloway (1:44)

And then it gets polymerized.

Joe Weisenthal (1:46)

Yeah, of course.

Tracy Alloway (1:47)

Into polyethylene.

Joe Weisenthal (1:49)

Right.

Tracy Alloway (1:50)

And polypropylene. And then it gets chopped up into tiny little plastic pellets, which are, I know you know this one. What are they called? The little plastic pellet. One of my favorite words.

Joe Weisenthal (2:01)

Go on.

Tracy Alloway (2:02)

Nurtles.

Joe Weisenthal (2:03)

Nurtles. I remember all of this from that episode that we did, Nurtles.

Tracy Alloway (2:06)

The building blocks of highlighters and lots of other plastic products would be Nurtles. Okay, so the reason we bring this up is obviously, there's a situation in Iran. The Strait of Hormuz is still closed. We're recording this on March 24th. And we're starting to see a lot of the disruptions in the oil market start to, I guess, ripple out into other petrochemicals.

Joe Weisenthal (2:30)

Right. And someone asked this on Twitter the other day and they were like, Joe, is the higher price of oil gonna impact the price of plastics? And I was like, I would be very surprised if it didn't. I mean, I don't really know for sure, but it would be very weird. It would be hard for me to imagine a scenario in which the key input doesn't. The thing that I am very curious about, and you described this sort of sequential chain of industrial processes from the oil to the nurdles. And of course, when we did the episode, one of the things that we've talked about is that there is a gap between the price of some of these end products and the implied price of crude oil. So crude oil, I don't know exactly where it is right now at this moment that we're recording it, but it shot up. But these end products have shot up even more, and our guest Rory Johnson had a really good explanation, which is that the refineries do not want to shut down. And so they're rationing, they're slowing their input, their input because it is very costly to shut down and ever restart should they ever run out, which is a prospect given that we're seeing a volumetric decline in the amount of oil available in the world.

What I'm curious about, which I don't know the answer, is whether this applies to all of the different processing steps along the way, which is, is there this sort of even greater price impact because the entities that do all these sequential industrial processes are slowing down because the shutdown and restart process is costly for them as well.

Tracy Alloway (3:59)

Well, I would say the added complication with a lot of petrochemicals is we are, in fact, seeing some closures already. So, in Asia, we've had a few crackers, as they're called, Asian crackers, start to shut down their production and basically declare force majeure. And so, we are seeing fewer petrochemicals get made in places like Japan and South Korea. I think the question we're kind of inching towards is whether or not this is just going to be a question of price, you know, prices for plastics go up or an actual supply shortage in the sense that maybe you just can't get certain types of plastics or packaging. And one other thing I would just add, I think in the post-COVID environment, an underappreciated driver of inflation at that time was the cost of packaging.