The fossil fuel industry has not been doing well lately. Even before the Covid-19 pandemic hit, growth in global demand had slowed to 1 percent annually. Now, lockdowns and distancing to stop the spread of the coronavirus have decimated the industry. The International Energy Agency (IEA) recently released projections of rapid short-term decline in global demand, to the tune of 9 percent for oil, 8 percent for coal, and 5 percent for gas.
Depending on how long and severe the economic crisis proves to be, it will take years for demand to recover. Indeed, with electric vehicles cutting into oil demand by the end of the decade, it may never fully recover. Industry analysts like Carbon Tracker’s Kingsmill Bond are speculating that 2019 may turn out to be the peak of fossil fuel demand, and historically, in other industries, a peak in demand “tends to mark the beginning of a period of low prices and poor returns,” says Bond.
But the industry has a response to this dire forecast, and it can be summarized in one word: plastics.
Overall, plastics represent a fairly small sliver of oil demand. Annually, the world consumes around 4,500 million tonnes (mt) of oil but only around 1,000mt of petrochemicals (oil and natural gas used to make chemical products), and of that 1,000mt, only about 350mt are plastics. (A tonne is a metric ton, about 1.1 US tons.)
Nonetheless, plastics are commonly projected to be the biggest source of new demand for oil over coming decades — in some projections, the only real source. It is these projections that the industry is using to justify billions in new projects, as oil companies across the world shift investment toward petrochemicals.
And Big Oil is working its hardest to make the projections come true: The New York Times just ran an investigative piece revealing the industry’s plans to push more plastic, and plastic waste, into Kenya. Plastics are the thin reed upon which the industry is placing all its hopes.
But a new report, released this week by Carbon Tracker and SYSTEMIQ (a company that researches and pushes for changes in materials use), throws a big bucket of cold water on these hopes.
It argues that, far from a reliable source of growth, plastics are uniquely vulnerable to disruption. They are coming under increasing scrutiny and regulation across the world. Huge consumer product companies like Unilever are phasing them out. And the public is turning against them.
If existing solutions are fully implemented, growth in plastics could fall to zero. And if that happens, then there is no remaining source of net oil demand growth and 2019 will almost certainly prove to be the year of peak fossil fuels.
Let’s look at a few highlights from the report.
Plastics are supposed to drive most oil demand growth
The report breaks down the projections of two widely respected sources of energy data and analysis, BP and the IEA.
From 2020 to 2040, BP expects plastics to represent 95 percent of the net growth in demand for oil.
In the IEA projections, plastics are the biggest single source of demand growth, representing 45 percent of the total. Both BP and IEA have the plastics industry growing at about 2 percent annually in the coming year.
Oil majors are more bullish. They claim the plastics industry will maintain the rate of growth it has shown since 2010, i.e., 4 percent. (For instance, Exxon touted 4 percent at its May 2020 investor day.) That kind of growth would mean a doubling of demand in 18 to 24 years, “and this appears to be what the industry is tooling up for,” says the report. “The petrochemical industry already faces huge overcapacity, but is planning to spend a further $400 billion on 80mt of new capacity.”
Global and national oil companies are shifting investment into petrochemicals, from Saudi Arabia to China. But the industry’s rosy growth projections may not come to pass.
“In order to reach global demand growth of 4 percent, you’ve got to have 2 percent growth across the OECD, 4 percent growth in China, and 6 percent growth in the rest of the world,” says Bond, a lead author of the report. “I would suggest that all three of those are a bit of a stretch.”
Four reasons plastics may not grow as forecasted
Industry projections of growth in plastics take place in a bit of a dreamworld, ignoring several recent trends and changes. The report identifies four.
1. Rising carbon emissions are not cool in the age of the Paris agreement
Calculating the carbon footprint of plastics is a complicated business — it produces CO2 at every stage of its lifecycle, including disposal — but the best research, by SYSTEMIQ and others, suggests that it averages out to about 5 tonnes of CO2 per tonne of plastic (more if it’s burned, less if it’s landfilled). That’s roughly twice the CO2 produced by a tonne of oil.
If plastic demand were to grow as projected, annual emissions associated with plastic would double by mid-century, to around 3.5 gigatons. And if it did that, SYSTEMIQ calculates that it would use 19 percent of the entire remaining global carbon budget.
“To have one sector planning on doubling its carbon footprint while the rest of the world plans to phase out emissions,” says the report, “clearly makes no sense.” Policymakers aren’t going to let it happen.
2. Plastic produces external costs that are almost equal to its total market value
The plastics industry imposes all kinds of costs on society that it doesn’t have to pay (“externalities”): It emits carbon dioxide, it generates air pollution, it must be collected and sorted, and a great deal of it ends up in the ocean.
Adding up all those costs, drawing on the latest research, the report comes up with with a total externalities cost of between $800 and $1,400 per tonne, with “at least $1,000” used as a reasonable rule of thumb.
And this doesn’t include some of the costs the report couldn’t quantify, including microplastics (in seas, waters, and food) and “terrestrial leakage,” or plastic that ends up as rubbish on land.
With these costs in mind, the report looks at the subsidies and taxes facing the industry, to find out if any of these costs are incorporated. Long story short: they are not. The industry receives roughly $33 per tonne in subsidies ($12 billion cumulatively), which isn’t that much in the grand scheme of things, but it turns out to be more than the industry pays in taxes ($2 billion cumulatively, with optimistic assumptions).
All told, then, a tonne of plastic imposes about $1,000 in unpaid external costs, which is about $1 per kilogram, or $350 billion a year. “The average cost of a tonne of plastic is $1,000 – $1,500,” the report says, “so the subsidy from the rest of society to the plastics industry is only a little less than the total sales value of the industry.”
Those “unpaid” external costs are being paid today, of course — they don’t vanish. It’s just that they are overwhelmingly being paid by poor people and people living in poor countries, the ones living next to toxic incinerators, gathering plastic waste, and living with the most concentrated air and water pollution.
Imposing costs on poor people so that wealthy plastics companies can profit is a human rights abuse.
3. The plastics industry is extraordinarily wasteful
The report summarizes four aspects of the industry’s wasteful ways.
First, the best research indicates that about 36 percent of all plastic produced is for single-use applications. Second, 40 percent of plastic waste is mismanaged — “5% ends up in ocean leakage, 22% in open burning, and 14% in terrestrial leakage,” the report says. Third, recycling rates in the industry are abysmally low; 20 percent of plastics are sent for recycling, but only about 5 percent actually end up substituting for virgin plastic. (Compare that to 60-80 percent recycling rates in steel, aluminum, and paper.)
And fourth, there have been virtually no guidelines or regulations on the design of plastic products, so just about anything goes. The result has been a tide of disposable, nonrecyclable plastic junk.
The industry has mostly responded to these kinds of criticisms with misdirection and propaganda rather than improving its products (which, to be fair, has traditionally worked pretty well for it).
“This is not an industry which has focused at all on efficiency or maximising utility,” the report says. “It is a bloated behemoth, ripe for disruption.”
And the public is ready to disrupt it.
4. The public is waking up to the enormous costs of plastic
Broadly speaking, the public and lawmakers are becoming more concerned and active on climate change, and “it is simply delusional for investors in the plastics sector to believe that the sector will be immune from attempts to resolve this issue,” the report says.
The public is also upset about plastic waste, especially in oceans. An IPSOS polls in 2019 found that between 70 and 80 percent of the public wants to reduce plastics and force industry to go along, including a ban on single-use plastics.
This kind of sentiment is driving regulators to crack down, as in the EU, which introduced a €800/ton tax on unrecycled plastic waste as part of its green stimulus package.
Evidence shows that demand for plastic is largely saturated in OECD countries, which means the bulk of the alleged demand growth is supposed to come from China and other emerging markets, but there, too, steps are being taken to curtail plastic use and disposal. China recently banned a range of single-use plastic items; many other countries are expected to follow suit.
In summary, the plastics industry is bloated and wasteful, it imposes enormous social and ecological costs, and people are sick of it. That is not a recipe for robust growth.
There are solutions at hand for reducing growth in plastic
As policymakers get serious about plastics, there are a number of existing solutions ready to go, which are cheaper than the status quo. Those solutions were itemized and costed out by SYSTEMIQ in a report called “Breaking the Plastic Wave,” released earlier this year.
Overall, bending the plastics curve looks like this:
Maximizing the three most scalable and cost-effective solutions — reducing demand through design, reuse, and new delivery models; substituting other products like compostables or paper; and better recycling — together constitutes what SYSTEMIQ calls the System Change Scenario (SCS).
Under SCS, total global plastic demand plateaus in 2020 and peaks in 2030.
(These projections were done before Covid-19, so as in many other areas, it’s possible that the peak has been pulled forward. Wood Mackenzie projects a 4 percent drop in plastics demand in 2020, though it also says the virus “has paused the shift away from single-use plastics.”)
Notably, SCS is also cheaper for industry than business as usual. Investment in new technologies goes up, but investment in virgin production and conversion are sharply reduced.
SCS would also reduce the amount of money governments spend on plastics (mainly on waste) and create more jobs than business as usual.
If you are interested in the details — how to better design plastic products, make them last longer, make then more recyclable, and ensure they are properly disposed of — the SYSTEMIQ report goes deep in the weeds. Suffice it to say, solutions to the profusion of cheap plastic and plastic waste are available. They would save money relative to the status quo. They would reduce pollution and create jobs.
And together, they would ensure that global demand for plastics peaks and begins declining within a decade, which would in turn ensure that global demand for oil does the same.
Policymakers just have to step up.
The politics of plastics are not favorable for Big Oil
Pouring money into plastics is a desperate gamble for Big Oil. Social pressure, technological innovations, and economic trends are all closing in on its main product, so it’s trying to make a lateral move into another bloated, polluting industry.
The petrochemicals industry is already burdened with overcapacity, even as it pours billions into capacity expansions. If the anticipated 4 percent growth does not miraculously manifest out of the coronavirus-hobbled global economy in the next few years — and there are many reasons to believe it won’t — the cumulative overcapacity will be crippling, enough to suppress prices and investment returns for years.
By the time the industry crawls out of the hole, it will find a different world, with electric vehicles and heat pumps eating away at its core market.
“I’m not suggesting that we will lose the cyclicality of oil,” says Bond, “I’m sure we’ll have higher prices again at some stage in the future. But it is cyclicality around a falling mean.”
Plastics are probably not going to save the oil and gas industry. It is more likely that the peak point in humanity’s centuries-long, planet-shaping fossil fuel binge is already in the rearview mirror, and that “cyclicality around a falling mean” will be the core truth of fossil fuels for the remainder of the century.
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