Sir David Attenborough’s Blue Planet II series, which the BBC aired in October, has been credited with changing the general public’s attitude towards the huge volume of plastic being dumped in the oceans. Outcry over scenes such as that of a baby albatross killed by a toothpick fed to it by its mother led the government to consider banning single-use plastics, with environment secretary Michael Gove saying he was “haunted” by the images broadcast in the programme.
While this anecdotal evidence is deeply unpleasant, the figures behind it are even more disturbing. Only a fraction of the millions of tonnes of plastics produced every year is recycled. And, although the majority is destined for either landfill or incineration, nearly one-third of all plastic packaging is lost from the global disposal system, ‘leaking’ into the oceans.
Conservative estimates are that at least eight million tonnes of plastic enter the oceans each year, equivalent to the contents of one large rubbish truck being dumped every minute. The cumulative effect of all of this ‘leakage’ is that for every five tonnes of fish, there is one tonne of plastic in the oceans. If demand for the material continues to grow at its historical rate, the weight of plastic will match that of the fish.
While this is obviously worrying, most people who come to FE Trustnet do so to broaden their knowledge of investments and, judging by readership stats, only a small proportion of these have any interest in so-called ethical funds.
However, Nick Stansbury, a fund manager on LGIM’s global equity team, believes growing public awareness about the damage caused by plastic will have a severe impact on one of the most important sectors for UK income investors – oil & gas.
Data from Neptune shows that 85 per cent of IA UK Equity Income funds hold either BP or Shell in their top-10, while 66.28 per cent of funds in the sector rely on these two oil majors for more than 10 per cent of their yield.
Petrochemicals – used in the manufacture of plastics – currently account for just 6 per cent of total oil demand and a major global agency allocated just five out of many hundreds of pages to the subject in its long-term outlook report on energy demand.
However, Stansbury pointed out that as long-term demand for oil used in transportation and power starts to slow down in favour of renewables, petrochemical demand is expected to become an important part of total oil-demand growth.
“For example, in the latest BP Energy Outlook, by 2035 petrochemical demand growth makes up 40 per cent of all end-use demand growth for oil,” he explained.
Petrochemical demand growth as a share of all oil demand growth
“Given the sensitivity of these forecasts to many small changes in assumptions, such as how many electric vehicles are sold in the intervening period, what happens to petrochemical demand globally matters a lot more than just those five pages of analysis would suggest.”
“There are three routes to producing plastic feedstocks: natural gas liquids, coal and the most expensive, which is naphtha-fed, a by-product of oil. Naphtha is the most expensive, so we think that any demand-destruction hits oil first.”
To work out how serious the threat of growing environmental awareness is to the petrochemicals industry, Stansbury investigated whether there is a way to solve the problem of plastic pollution that doesn’t involve reducing usage of the material.
Many people in the industry suggest the answer may lie in greater use of incineration – burning single-use plastics for energy in highly efficient conversion units.
However, Stansbury pointed out the trouble with this approach is that it is extremely carbon-intensive when the production of the plastic is also included.
“Our estimates show that energy produced by incinerating plastics is more carbon-intensive than burning hard coal,” he explained.
“Given the scale of the global outcry over limiting carbon emissions as well as plastic usage, incineration is unlikely to be the answer.”
Next, he looked at the cost of cleaning up the oceans – needless to say, this would be enormous. Environmental consultancy Trucost has estimated a figure of $13bn for oceans alone. Cleaning up the world’s beaches would cost many further billions of dollars.
With governments reluctant to commit such large amounts of capital on an ongoing basis, this leaves them with three options – more reuse, recycling and substitution of other materials.
Stansbury admitted it is difficult to gauge how these three trends could affect long-term oil demand. However, he said that comparing forecasters’ predictions against the percentage of plastic packaging recycled in different countries can help to point him in the right direction.
For example, while less than 10 per cent of all plastics globally are recycled, in some countries that number is far higher: as far back as 2005, the figure for plastic bottles in Switzerland stood at nearly 80 per cent.
Stansbury said that while fair comparison of recycling rates between countries remains difficult, a recent study by Eunomia has shown a wide disparity in global recycling rates across even the top-10 recyclers.
“If by 2025 the world were able to achieve a recycling rate of 50 per cent of single-use plastics, and conservatively assume no improvement in reuse, substitution or thrifting, then 2.5 million barrels of oil equivalent of daily demand from petrochemicals would be at risk on a gross basis,” he said.
To put this in perspective, the major outcome of the recent meeting of the Organisation of the Petroleum Exporting Countries (OPEC) was to increase oil production by just one million barrels per day.
“If we cut it a different way, it starts to look more dramatic. We think that brings peak demand forward by five years,” Stansbury said.
He continued: “Oil demand growth has played an important stabilising role historically in rebalancing markets when they become oversupplied.
“However, investors should recognise the risk that long-term oil-demand growth cannot be relied upon as plastic and oil consumption is dramatically reduced.
“We cannot pinpoint when peak oil demand will arrive, but we are sure it will happen. The destabilising effect on oil markets will be profound and we believe that investors, and oil companies, need to start taking those risks more seriously.”