Hey Peak Oil! Chew On These Ethylene Crackers!

The price of oil has fluctuated near the $100 a barrel range for months now, while the equivalent amount of natural gas has sold around the $25 mark. Technologies which can turn natural gas products into valuable subtitutes for petroleum are likely to make a lot of money on this price relationship. And that is exactly what Shell Oil and Dow Chemical are counting on, as they build their new and expensive ethylene cracking plants in the US.

Ethylene crackers help facilitate the turning of heavier components of natural gas into ethylene, which can be used to make plastics and other high value products. Geoffrey Styles has more:

Deciding to build an ethylene cracker, a facility that turns the heavier components of natural gas into one of the basic building blocks of the petrochemical and plastics industry, in such a location is a big vote of confidence. It suggests that Shell has concluded that the current uncertainties facing shale gas development are very likely be resolved without undermining shale's capacity to produce large quantities of gas at relatively low cost, and that shale developers will find ways to resolve concerns about fracking, methane emissions, and other issues both with the affected communities and with state and national regulators.

These projects also suggest at least two other things. First, as the Reuters article noted, they represent sizable wagers on the relationship between the global price of oil and the US price of natural gas. I've commented before on the extraordinary divergence between the two, with oil bouncing around the $100 per barrel mark and US natural gas selling for the energy equivalent of $25 per barrel. A company would be unlikely to make a long-term investment like this if it thought gas and oil were likely to move back into parity any time soon. Even if gas prices eventually recover to around $6 per million BTU, as suggested by current long-dated gas futures, that's still the equivalent of less than $40/bbl--an oil price we haven't seen since the worst stretch of the global recession and financial crisis in early 2009.

And that leads to the last implication I draw from this news: these investments are bets on the health of the US economy. If the economy were headed for a protracted period of slow or no growth, adding petrochemical capacity here would be too risky, rather than putting it in the Middle East, where gas is even cheaper and the growing markets in Asia are much closer. That doesn't' mean that our problems of high unemployment, high indebtedness, and gaping federal, state and local budget deficits aren't extremely challenging, but it provides at least one modestly positive sign among the many ominous ones that are routinely amplified by the basic nature of the news media business. _Geoffrey Styles_via_EnergyTribune

I would not be too hopeful for the near term health of the US economy, based upon these developments. The more likely implication to draw from Shell's and Dow's gamble is that the big money expects US President Obama to be defeated in his re-election campaign of 2012, due to the disastrous effect his policies have had on the American economy, American energy supplies, and American society as a whole.

More on ethylene cracking furnaces:

Within the ethylene plant, the pyrolysis or ethylene cracking furnaces are the key elements for the production of basic materials such as ethylene, propylene, butadiene for the plastics industry. Depending on usage and the required product distribution, Linde Pyrocrack technology can achieve optimum running times with high yields and high selectivity.

The base materials [feedstocks] used are saturated hydrocarbons, mainly ethane, propane, butane, LNG, naphtha and gas oil. The conversion of saturated to unsaturated hydrocarbons takes place in cracking pipes at inlet temperatures of 500 – 680°C and outlet temperatures of 775 – 875°C in a pressure range of 1.5 – 5 bar. To increase the ethylene/propylene yield and to minimise coke formation through accidental crack reactions, this conversion takes place in the presence of water vapour. _Ethylene Cracking Furnaces