Perc Pineda, PhD
Chief Economist, Plastics Industry Association
Concerns over a potential re-escalation of the geopolitical conflict involving Iran, despite an agreement on a framework for a ceasefire, have renewed uncertainty in global energy markets. For the plastics industry, movements in crude oil prices provide a useful gauge of these developments because crude oil is the world’s most widely traded energy commodity and its price reflects global supply, demand, and geopolitical risks. As a result, economists often use crude oil prices as a proxy for broader global energy market conditions. However, this proxy has important limitations. Crude oil prices do not capture all energy price movements. Natural gas prices, for example, can diverge significantly from oil prices, as demonstrated during the U.S. shale boom when abundant domestic gas supplies kept prices relatively low despite elevated oil prices. Likewise, electricity prices depend heavily on regional generation mixes, transmission constraints, and regulatory policies, while coal markets are driven by their own supply and demand fundamentals. Regional differences also matter, as evidenced by the sharp spike in European natural gas prices in 2022 that far exceeded the increase in crude oil prices.
The Plastics Industry’s Exposure to Energy Markets
For the plastics industry, the relevance of crude oil prices varies by sector. In plastic materials and resin manufacturing, natural gas—particularly ethane—is often the more important cost driver in the United States because it is the primary feedstock for ethylene production. Nevertheless, crude oil remains influential through its effect on global naphtha prices and international petrochemical markets. In plastic products manufacturing, crude oil serves as a more comprehensive indicator because resin prices, transportation costs, and broader energy expenses are all affected by oil price movements. For analyses of global market conditions, Brent crude is generally the preferred benchmark over West Texas Intermediate (WTI) because it more accurately reflects international supply and demand dynamics.
Although crude oil prices declined after signs of de-escalation emerged, including the announcement of a ceasefire framework between the United States and Iran, some residual effects of higher energy prices are expected to persist. Recently, the WTI has once again increased from its recent lows of upper $60s a barrel in early July to $75.1 a barrel as time of writing this article. Brent has also seen an increase from the low $70s a barrel to $80 a barrel over the same period. As crude oil prices fluctuate, manufacturers that rely on plastic packaging are closely watching for potential impacts on input costs.
Lessons from Previous Price Spikes
If history is any guide, recent movements in producer prices provide insight into how geopolitical disruptions can affect the plastics industry. Based on the U.S. Bureau of Labor Statistics’ Producer Price Index (PPI) by Commodity, the index for plastic materials and resins increased 6.0% in April and another 14.4% in May, month-over-month. By comparison, the PPI for plastic packaging products rose 0.8% in April and 1.5% in May, while the index for plastic bottles increased 1.0% and 1.7%, respectively—slightly outpacing the broader plastic packaging products category. Although year-over-year gains appeared much larger—19.5% for plastic materials and resins, 2.7% for plastic packaging products, and 4.1% for plastic bottles—these increases were amplified by relatively low price levels in the corresponding months of the previous year.
Plastics processors with longer-term resin supply contracts were likely less affected by these price increases than firms purchasing on the spot market. More importantly, concerns that resin prices could surge by more than 50% year-over-year, as they did in 2021, appear less warranted under current conditions. The extraordinary price increases in 2021 were driven not only by higher energy prices but also by severe, broad-based supply chain disruptions. Those pressures were further compounded by adverse weather conditions in Texas, which disrupted resin production and sustained upward price pressures into the following year. At its peak, the Federal Reserve Bank of New York’s Global Supply Chain Pressure Index reached approximately 5.5 standard deviations above its historical average, indicating supply chain disruptions of unprecedented magnitude. By comparison, the index stood at about 1.8 standard deviations above its historical average in April of this year. Moreover, because much of U.S. plastic materials and resin production relies on natural gas and natural gas liquids rather than crude oil, changes in crude oil prices do not translate dollar-for-dollar into resin production costs.
While developments in the Middle East will continue to influence global energy markets, the implications for the U.S. plastics industry are likely to be more measured than those experienced during the supply chain disruptions of 2021. Today’s supply chains are considerably more resilient, and domestic resin production continues to benefit from abundant natural gas and natural gas liquids. As always, the extent to which energy market volatility affects plastics prices will depend not only on developments in global energy markets, but also on the duration of geopolitical tensions, the resilience of global supply chains, and demand conditions across manufacturing and the broader economy.
