Four days into the oil price war that was ignited last week, when Saudi Arabia said it would flood the market with oil at a time of decreased demand due to the spreading coronavirus, it’s increasingly clear that prices won’t be going up again any time soon—and that has serious ramifications for Louisiana’s petrochemical industry.
“The ramifications are huge,” LSU Center for Energy Studies director David Dismukes says. “I don’t think people fully appreciate this. They don’t realize how long this could go on.”
Though neither Louisiana’s economy nor state budget are as heavily dependent on oil exploration and production as they once were, the state’s petrochemical industry has been booming for several years now, buoyed by cheap natural gas that serves as a feedstock for expanding refineries.
But with slowing demand due to what is now a global pandemic and a glut of cheap oil on the market, large, vertically integrated companies like Shell and Exxon will likely cut back on the expansions and investments Louisiana had been counting on.
“We will start seeing a number of the companies that will have to be cutting back on expansion plans,” Dismukes says. “This guarantees nothing new will come online here before 2024. Even if things were to turn around, it will take time before companies are willing to make and get commitments to spend.”
Even before the dramatic turn of events in the past two weeks, Asian growth was starting to slow, which was decreasing demand for LNG, Dismukes says. Now, with projections this week estimating China’s economy will contract over the next two months, Louisiana’s abundance of low-cost natural gas won’t mean anything.
“Even if they do have low fuel stock costs, they have nowhere to sell their products so it doesn’t matter,” he says.
While Dismukes says it’s inevitable industrial expansion projects will slow, it’s important not to cannibalize the additional capacity that has been developed here over the past few years.
“You want that to be highly utilized,” he says. “Not only do we need to worry about tomorrow’s investment. We need to worry about the investment made yesterday and getting a return on it.”