We're dipping into the mailbag this week to answer a listener question: How strong is the U.S. at producing non-transportation oil products, and how important is this slice of the pie in relation to America's domestic oil output?
In this video segment, Sean O'Reilly, Taylor Muckerman, and Tyler Crowe discuss how much of the oil market is made up of non-fuel products, which companies are focusing on this space the most, how the U.S. stacks up to other countries in this regard, and how investors might get into this niche.
A transcript follows the video.
This podcast was recorded on Jan. 28, 2016.
Sean O'Reilly: Our mailbag question of the day comes from Joseph Corvelli, who writes to Sean, Tyler, and Taylor -- say that five times fast. He says: "I have an oil question. Given that the U.S. has advantages you've all discussed in the past regarding our possession of advanced oil refineries and high-quality oil in the ground, I wonder if you might add some color to the nation's relative strengths in one or other end markets for oil-based products. What does the U.S. pie look like sliced up into other various other oil product families? Do non-fuel uses of oil color our domestic and new export market potential? We tend to reflexively think fuel products are the most important drivers of the domestic oil product, but plastics and other products may be even more important for faster-growing domestic oil uses. How important are these other uses for crude? Yours Foolishly, J.C."
Taylor Muckerman: Can you repeat the question?
O'Reilly: Yeah, I can ... no. Honestly, you know what, I'm going to just boil it down for you. It's kind of like that scene in The Graduate when Dustin Hoffman gets told that he should get into plastics.
Muckerman: Fair enough.
O'Reilly: Is that the future? Is that a big deal? [laughs]
Muckerman: It's still going on. It's been a good run for Dustin Hoffman if he did get into that market. I don't know what his future held in the movie --
O'Reilly: Didn't George Bailey's friend get into plastics in WWII or whenever in It's a Wonderful Life? Like, "Oh, George, put all your money in plastics!"
Tyler Crowe: You're really throwing it back to something that none of us are familiar with.
O'Reilly: I like old movies, I'm sorry. No, these are two American classics! I apologize for nothing!
Muckerman: I watched The Graduate over New Year's on my flight back from Portugal.
O'Reilly: And you probably saw It's a Wonderful Life at Christmas.
Muckerman: No, I did not see that.
O'Reilly: You didn't?
Muckerman: No, only The Graduate.
O'Reilly: Why do you hate America?
Muckeman: So, plastics! In the international scheme of things, oil does impact plastics, because you can ... naphtha turns into ethylene, somehow, I guess, in the whole formulation ...
O'Reilly: Somehow [laughs]. With alchemy.
Muckerman: But in America, we're producing ethylene at near-record rates for us thanks to natural gas booming. So, 2014, you saw the U.S. have a tremendous advantage when oil was over $100 a barrel. So on a global platform, we're not quite as competitive anymore, because oil prices are in the $30-a-barrel range, so naphtha is not cheaper to produce in parity with ethylene here. But long-term, we have this natural gas supply that we could use for decades. So you see companies like Dow Chemical (NYSE:DOW) pouring billions of dollars into facilities down in the Gulf region to take advantage of this, and I think that's going to probably continue. The money right now is being spent, so these plants aren't necessarily coming online, but we're producing at over ... what was it, I had it right here ... record levels of ethylene in America. The aggregates number doesn't necessarily matter. It's at a record. So, I think, long-term, that's going to be a competitive advantage. Right now, oil prices came back, so it's not necessarily ... but this is a long-term thing.
O'Reilly: Right. Tyler, you were saying something interesting upstairs when we were talking about the show.
Crowe: It's on the same idea, with the fact that with such cheap natural gas ... even at $30, surprisingly, we --
O'Reilly: Wasn't it $13 like five years ago?
Crowe: $13 what?
O'Reilly: $13 per BTU for natural gas. It had the peak in 2008 or something.
Crowe: That was quite a while ago, before the shale boom took off. But really, what Taylor is getting at is that oil and gas spread price. I believe that, at right around 8 to 9 times the price of gas, if you multiply the price of gas about 8 or 9 times, that's about the equivalent when you're looking at naphtha and ethylene production. So, even today, there's a slight margin. It's certainly not as great as it used to be, like you said, at $100. But going back to Joseph's question, do we have any opportunities of using oil in that regard? If you look at the way oil is used in the United States and almost everywhere else, the portion of the pie of oil that is used outside of transportation is rather small, more than 70% of all oil goes into --
Crowe: -- transportation. So, if you're looking to make a play, I guess you could say, in the non-transpiration aspect of oil, it's a very hard niche to invest in.
O'Reilly: Just buy Dow Chemical at that point, right?
Muckerman: They're actually trying to move away --
Crowe: They're moving into natural gas anyway. If you look at all of these companies ... and if you want to really think about how to get into that realm of plastics, or the non-transportation aspects of petroleum and hydrocarbons, look at the investments right now. The investments are all in natural gas in the United States, as a feed stock. And if that's the way you want to make a play on it --
O'Reilly: We're the Saudi Arabia of natural gas; haven't you heard?
Muckerman: Oh, yeah, Dow's trying to make from, like, 70% of their ethylene coming from the U.S. to about 80% to 85% of it coming from the U.S. over the next few years.
Crowe: Yeah, CP Chem, which is a joint venture between Phillips 66 and Chevron, mutlibillion-dollar ethylene facilities down in the Gulf Coast, ExxonMobil is looking to more than double their production down there. There's companies left and right going down to the Gulf and setting up shop with these massive chemical manufacturing facilities.