A plummet in world crude oil prices is rattling Texas from the western oil patch to the glass towers in downtown Houston. But what does it mean closer to home for the refineries and petrochemical plants along the Gulf Coast?

That remains to be seen, experts said.

In a normal market environment, cheaper crude means cheaper feedstock, which means more production and higher profits. But the global coronavirus pandemic changes everything, energy sector economists said Thursday.

“The good thing with refiners is that the lower cost of inputs such as crude oil really helps them with profit,” said Ed Hirs, University of Houston Energy Fellow and professor of energy economics. “It lessens the cost of feedstock to make gasoline for diesel, for jet fuel and other products they produce.”

Crude prices by Thursday had dropped to about $32 a barrel from about $53 as recently as Feb. 17 and from a Dec. 30 peak price of more than $63, according to Business Insider. That’s a 50 percent drop since the beginning of the year and oil lost about a quarter of its value this week, according to a Bloomberg estimate.

But the profit picture for refineries is complicated this time by interruptions in demand for their products, Hirs said.

“The challenge is what appears to be a global recession, brought on not only by the U.S. trade war, which continues unabated, tight financial credit markets slowing growth around the globe and now the last straw, coronavirus,” Hirs said.

Energy companies already were seeing a demand decrease of about 800,000 barrels a day because of a very warm January. Now, with airlines canceling flights, travel bans and people decreasing gasoline use in response to the virus, the sector can expect global demand to drop another 500,000 barrels a day, Hirs said.

“Does it really hurt refiners? Not likely. It will be just a slowdown in sales, depending on how quickly we recover from the virus, both literally and figuratively,” Hirs said.

Federal Reserve Bank of Houston energy analyst Jesse Thompson agreed that the demand shock will limit benefits refineries might otherwise experience.

Plummeting crude oil prices also could have an indirect effect on demand for petrochemical products such as those made in Galveston County plants, elements separated out of natural gas and liquid natural gas to be used in manufacturing plastics, Thompson said.

The United States has experienced a huge petrochemical boom over the past few years because of very low prices for their feedstock, natural gas. But petrochemical companies in most of the rest of the world — Asia, Latin America, Europe and Africa — depend on crude oil as a feedstock for their products, Thompson said.

“When oil prices fall, that lowers the cost of our competitors abroad to make plastics,” he said. “We’re going into a low-margin environment and a highly uncertain environment.”

What that uncertainty will do to the decision-making process for these industries will be revealed in months and weeks to come, depending on how long crude oil prices remain low, Hirs and Thompson agreed.

Requests for comment to Valero Energy and Marathon Petroleum went unanswered.

“If this stays in place for a long period of time, it will be tough for all markets,” said Texas City Mayor Matt Doyle, an executive at Texas First Bank. “The only benefit will be cheap gas for consumers.

“You never know what the price of crude is going to do, either as a mayor or as a banker,” he said. “If I could figure it out, I’d be sitting on an island somewhere, relaxing.”

Kathryn Eastburn: 409-683-5257; kathryn.eastburn@galvnews.com.

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(3) comments

Tony Brown

Refineries tend to make their money on the "spread" between the price of their products and the cost of crude. The harder hit is on upstream crude oil producers, i.e. the folks with the oil wells. The key question for refiners is how far down the price of gasoline, diesel, etc. will go down in the coming weeks.

Tony Brown

Of course, I'm not living on an island somewhere, either...

Bailey Jones

And with the fracking spree over the past several years, many producers have taken on significant debt in order to expand, and may be forced into bankruptcy if the Saudi-Russian feud lasts too long. (And I think that's part of the Saudis' plan.)

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