With the plunge in oil prices already complicating many planned industrial projects in Louisiana, another factor is rearing its head — the rising value of the dollar.
That’s a problem because many of the chemical and petrochemical plants target overseas markets, where demand is slowing. The surging dollar isn’t helping because it makes U.S. products more expensive.
“It seems to me that you’re going to start seeing the word ‘delay’ a bit until all the dust sort of clears, especially on the price of oil,” economist Loren Scott said. “The value of the dollar is just one more thing that’s being thrown in there that is causing folks who haven’t started up their plants yet to hesitate a bit, to think about it again.”
Over the past five years, plentiful and cheap supplies of natural gas created an enormous cost advantage for U.S. manufacturers. The cost to produce chemicals such as ethylene — the major feedstock for plastics plants — from natural gas is a fraction of the cost to get ethylene from oil.
The result? Since 2010, more than 200 U.S. chemical projects costing more than $135 billion have been announced, according to the American Chemistry Council, the industry trade association. Forty-eight of those projects, valued at $34 billion, are in Louisiana. Most of those are in the Baton Rouge-New Orleans Mississippi River corridor.
The projects promise thousands of permanent and construction jobs and a surge of economic benefits for surrounding communities.
Many of those plants and expansions are targeting foreign markets.
The problem is that the global economic picture has changed.
A more than 50 percent collapse in oil prices since June has eaten into domestic chemical makers’ cost advantage. Slowing European and Asian economies have reduced demand for U.S. chemicals.
In the past year, the dollar has risen about 20 percent against the euro and the Japanese yen. Most economists expect the dollar to maintain its strength.
David Dismukes, executive director of the LSU Center for Energy Studies, said the rise in the dollar’s value was not a surprise. But adding that variable further complicates the economic equation.
Chemical companies haven’t made any big announcements about delaying projects. However, a different kind of facility, Sasol’s $14 billion natural gas-to-liquids plant, was put on hold last month.
The lack of delays suggests chemical companies consider oil’s collapse and the economic slowdown overseas temporary, Dismukes said.
“But you know everybody’s sitting down and resharpening a pencil and going through these, looking at how their profitability outlook has changed,” Dismukes said.
The markets, investors and the chemical industry are having a hard time processing all the information, he said.
For example, when oil services company Baker Hughes reported another significant decline in the U.S. drilling rig count a week ago, “talking heads” on various cable channels said oil production also would drop, he said. Even though the commentators were wrong, investors, buoyed by the idea of declining supplies, helped boost oil prices by 8 percent.
Every day, there’s a knee-jerk reaction in the stock market that’s not based on any real information, Dismukes said. That sort of uncertainty makes it tough for the companies pouring billions of dollars into new projects and highlights how risky the business can be.
The oil price collapse and the surging dollar also are an unpleasant reminder of the 1980s. An oil price collapse then devastated oil and gas drilling activity. Natural gas prices nearly tripled, while the dollar’s value jumped more than 80 percent. The severity of the combination hammered Louisiana’s chemical industry, which lost more than 25 percent of its jobs.
The current conditions are nowhere near as dire.
John Felmy, chief economist for the American Petroleum Institute, said the strong dollar affects Louisiana exports, and that could affect the state’s economy.
But the competitive advantage from affordable natural gas remains strong, Felmy said. The United States has the second-lowest feedstock costs in the world.
While the oil price drop has narrowed that advantage, the gap was so wide to begin with that there likely will be little impact on domestic manufacturers, Felmy said. Of course, that prediction depends on how low oil goes and how high the dollar rises.
The oil-to-natural gas price ratio has fallen from around 26:1 to 15:1 since June. The ratio would have to fall to roughly 7:1 to reach the breakeven point, according to the American Chemistry Council.
However, Scott said, the oil-to-gas price ratio doesn’t have to reach parity for U.S. chemical makers to lose the upper hand.
It’s important, he said, to remember that the natural gas advantage has been so great that it overwhelmed Europe and Asia’s benefits of lower costs for labor, transportation and taxes. Those factors mean oil-based feedstock prices don’t have to reach parity with natural gas to eliminate domestic manufacturers’ edge.
“If you just look at the oil side, our problem is that this nice competitive gap that we have is starting to be eaten away. If you layer on top of that now an increase in the value of the dollar, then it’s eating it away even more,” Scott said.
Manufacturers are now trying to factor in “one of the most volatile, difficult-to-forecast things” in the economy: the price of oil, Scott said. And that raises a host of other questions, including: Will oil stay down? Is it going to pop back up? If it does, how high will it go?
Small wonder then, that some companies may ease off the accelerator, Scott said.
“They’re saying, ‘Let’s don’t necessarily stop. Let’s delay a minute until we see where this thing’s going,’ ” he said.
Follow Ted Griggs on Twitter, @tedgriggsbr.