The milk jug in your refrigerator, the grocery bag, the pipe under your sink: a lot of that plastic likely started on the Gulf Coast. Chemical plants here take ethane, a gas that comes out of the ground with natural gas, and turn it into ethylene, the building block of polyethylene, the most common plastic in the world.
Here is the puzzle. Plants here mostly buy their raw material at prices that follow natural gas more than oil. But the price they can sell plastic for around the world often moves with the price of oil. That gap between what they pay and what they can charge is one of the most important numbers in the local economy, and almost nobody outside the industry talks about it.
Two ways to make ethylene
Ethylene is made in a "cracker," a furnace that heats a hydrocarbon feed very hot, very fast, so the molecules break apart. You can feed a cracker different things.
- Ethane, from natural gas. This is the main feed for U.S. crackers. It is simple: crack ethane and most of what comes out is ethylene.
- Naphtha, a liquid made from crude oil. Many crackers in Europe and Asia run on naphtha. Its price rises and falls with crude.
Since the shale boom, the United States has produced far more natural gas, and with it far more ethane, than before. Ethane became cheap compared with oil-based naphtha. That is a big reason so many new crackers and plastic plants were built or started up along the Gulf Coast in the 2010s.
Why the world price follows oil
Plastic pellets are traded around the world. A buyer in Asia or Europe can buy from a Texas plant or from a plant down the road. So, broadly, there is a world price.
Economists will tell you that, in a market like this, the price often settles near, though not always at, the cost of the producers who are most expensive but still needed to meet demand. For ethylene and polyethylene, those higher-cost producers are often naphtha crackers. When oil goes up, their costs go up, and the price they need to charge goes up. Everyone else, including the ethane crackers on the Gulf Coast, can sell near that price too.
This is a simplification. Shipping costs, trade rules, new plants coming online and weak demand all push prices around. The link is looser when new plants flood the market. But the basic pattern is why plastic prices tend to follow oil even when much of the plastic is made from gas.
The margin in the middle
Put the two halves together.
When oil is high and natural gas is cheap, Gulf Coast plants pay low prices for ethane and sell plastic at prices set partly by expensive naphtha. The gap is wide. Margins tend to be good, and companies tend to run hard, plan expansions and hire contractors.
When oil gets cheaper compared with gas, the naphtha plants' costs fall. The world price of plastic falls with them. The Gulf Coast advantage shrinks. Margins thin out, and spending gets more careful.
That is why oil news can be good news for a chemical plant, even though it is bad news at the pump. It is the same "feeling oil twice" that refining towns know, from a different angle.
The floor under ethane
There is one more piece. Ethane does not have to be pulled out of natural gas. If it is not worth separating, gas processors can leave much of it in the gas stream and sell it as fuel. The industry calls this ethane rejection.
That puts a rough floor under ethane prices, at least in normal conditions: ethane is usually worth about what it would fetch burned as natural gas, and in practice it has often sold at a premium. So ethane prices are tied to gas prices from below. When chemical plants want more ethane than is being separated, they have to pay more to pull it out, and its price rises above that floor.
Mont Belvieu, just northeast of Baytown, is where much of this trading happens. Its storage caverns and pipelines make it the pricing point for natural gas liquids in the United States.
Why it matters to a family in Baytown
You will never see the price of polyethylene on a sign. But you will see it in other ways:
- In whether a plant announces an expansion or delays one.
- In how busy the turnaround season is, and how long contractors stay.
- In the industrial district payments that make up a large part of the City of Baytown's budget.
- In whether the new hire in your family gets a call back.
None of this is in anyone's control locally. Oil prices are set by world events, gas prices by weather and production, plastic prices by global demand. But understanding the gap helps make sense of the news. When oil jumps and gas stays calm, the plants on the bay often have a better stretch ahead. When oil gets cheaper compared with gas, it is time to be careful.
Related on HERE
- Why the world buys from Baytown
- A town that feels oil twice
- The salt under Mont Belvieu
- The chemistry of a rose
Sources
- U.S. Energy Information Administration, "Hydrocarbon gas liquids explained" (uses of ethane; ethylene; ethane rejection).
- U.S. Energy Information Administration, Today in Energy articles on U.S. ethane-based petrochemical capacity and ethane rejection.
- Standard economics of commodity pricing (price near the cost of the marginal producer).