(Bloomberg Opinion) -- Back in 1999, one of the most talked-about scenes in one of the most talked-about movies involved a dancing plastic bag. It was surely a more innocent time. Still, two decades on from American Beauty and its bag-shaped pretensions, this is an opportune moment to reiterate that it’s just trash.
China has unveiled plans to curb the use of non-degradable plastic bags in supermarkets and malls across major cities as well as food-delivery services. The problem with plastic isn’t plastic, much of which is useful and likely irreplaceable. Rather, it’s that we produce a lot of low-value but long-lasting plastic — especially packaging — that overwhelms our waste-management capabilities (or inclinations, for that matter) and winds up polluting the planet. Plastic bags blowing about in a fall breeze aren’t, as the movie contends, a metaphor for the hidden wonders of suburbia; they’re an expression of failure.
As my colleague David Fickling writes, growing demand for petrochemicals is an article of faith in the oil and gas business, and one that gets a lot more airing these days to offset the disquieting narrative of electric vehicles stalling out gasoline consumption. In its most recent Energy Outlook, BP Plc identified “non-combusted” demand for oil as the single-biggest source of projected growth through 2040, with single-use plastics accounting for almost 40% of that 5.5 million barrels a day.
Under an alternative future in which governments phase out single-use plastics aggressively and ban them altogether by 2040, BP’s outlook has global oil demand peaking in the late 2020s. That seemed like a far-off jetpack era back when we were watching dancing bags but now looms with humdrum imminence. This matters a lot because the oil industry plans to invest north of $34 billion a year in petrochemicals through 2024, according to estimates from Sanford C. Bernstein — equivalent to building the entire fixed asset base of a supermajor, Chevron Corp.
China’s latest plan isn’t anywhere near a worldwide moratorium on Ziplocs. Yet it presents a risk that goes beyond this or that forecast for oil demand.
It just so happens that a day or two after Beijing’s announcement, the Bank for International Settlements released a new report called “The Green Swan.” This lays out risks posed to the global financial system by climate change and the limitations of current models in quantifying potential impacts. One point raised is that while economists traditionally support carbon pricing to mitigate climate change, “given the size of the challenge ahead, carbon prices may need to skyrocket in a very short time span towards much higher levels than currently prevail.” In other words, we left it too long, so we now need to make carbon prohibitively expensive.
Analogous to that is the act of just prohibiting stuff — which is where China’s new regulations come in. Those aren’t carbon-related per se, but the mechanism is the same. In theory, a mixture of price signals, recycling programs and consumer education could moderate the problem of plastic pollution. In practice, less than a fifth of plastic is recycled, a finding sometimes framed as a growth-driver for the industry. The relatively low value of the product, use of mixed plastics and general consumer confusion over what goes into what recycling bucket are big obstacles to getting that figure higher.
Faced with that, more national and local governments are choosing to effectively set the “price” for certain plastics at some level tending to infinity by just banning them. In that sense, the difficulties of recycling may be less a bull argument for plastics and more a precursor to drastic measures.
The resort to policies of interdiction, rather than market-led solutions, is itself a green swan: fiat dislocation that is hard to model. It doesn’t take a global ban on single-use plastics to present a problem to an oil industry that has (a) made petrochemicals a central part of its growth story and (b) begun deploying billions already in projects ranging from Saudi Arabian Oil Co.’s Asian joint ventures to Exxon Mobil Corp.’s shale-linked crackers on the Gulf coast.
“To stop plastic use entirely will be hard, but to kill demand growth will require solutions for only 3% of global demand each year,” writes Kingsmill Bond, energy strategist at Carbon Tracker and co-author of a forthcoming report on the future of plastic demand. An ethylene plant running at 60% of capacity wouldn’t be stranded per se, but it wouldn’t be a must-own either.
The cloud of uncertainty gathering over future oil demand raises the industry’s cost of capital, manifested in demands for higher cash payouts. BlackRock Inc.’s Larry Fink made much the same point in last week’s climate letter (including the potential for green swans, though he didn’t use that phrase). Today’s teenagers don’t sit around filming pollution; they head to Davos and lambast tycoons about it. In this sense, China’s bag ban may be less important for its specific impact on oil volumes and more for its general impact on expectations of growth and thereby sentiment and risk premiums for oil-related assets. Much as I hate to admit it, sometimes a bag is more than just a bag.
To contact the author of this story: Liam Denning at email@example.com
To contact the editor responsible for this story: Mark Gongloff at firstname.lastname@example.org
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.
For more articles like this, please visit us at bloomberg.com/opinion
Subscribe now to stay ahead with the most trusted business news source.
©2020 Bloomberg L.P.