IEEFA Gets Supply Chains All Wrong
A recent Institute for Energy Economics and Financial Analysis (IEEFA) report incorrectly blames plastics producers for an increase in plastic prices, a changing number that is much more complex than the final cost of a single plastic cup.
The reality of the situation is that energy prices are climbing, and the cost of fuel has a direct impact on consumer goods and services. The ripple effect is being felt at every level of the supply chain and all across the manufacturing sector, not just with plastics.
And if the proposed tax on natural gas currently being debated in Congress is passed, the cost of everyday products and crucial services will go even higher for American households.
Further, IEEFA’s recommendation that price regulations be installed for the plastics industry ignores supply and demand forces and risks hurting upstream and downstream markets.
Here’s a couple key facts to keep in mind when reading the report:
#1 Plastics prices are reliant on global energy supply and demand fluctuations
IEEFA’s claims fail to grasp the complexity of supply chains and the many market forces that change the price for a single consumer product, and ignore the ongoing impacts of the global pandemic. While plastic resin and therefore consumer product prices have increased in 2021, as IEEFA states, the cause of this has nothing to do with plastics producers.
It is important to understand that the cost of a plastic cup includes much more than just the price of plastic resin, which alone is constantly changing due to feedstock prices, not to mention other factors. Plastics materials are sourced from oil and gas, a highly regulated industry that largely operates based on international supply and demand. When demand outweighs supply, oil and gas prices fall, making resin cheaper. When the opposite happens, and demand outweighs supply, prices rise and products become more expensive. This is basic economics.
As the American Fuel & Petrochemical Manufacturers’ Chief Policy Analyst Susan Grissom explains, the shale revolution provided U.S. manufacturers “with a significant global competitive advantage,” with increased oil and natural gas production supporting “lower fuel and feedstock costs.” But these trends were derailed by the COVID-19 pandemic:
“Demand disappeared and energy producers scaled back. Now that economies are reopening, and the demand for goods and services is rebounding, the demand for energy all along the supply chain is increasing, driving up not only the cost of the feedstocks and fuels refineries and petrochemical manufacturers use, but also the cost of the energy used at every step of the supply chain.”
Rising plastic prices are merely due to a change in market dynamics: supply is now working to catch up with demand, and the production of oil and gas has not yet rebounded to pre-pandemic levels. Inflation, which has more than quadrupled since the beginning of the year, is also pushing prices higher for every day consumer goods. The IEEFA report disregards these market forces and instead chooses to focus on a sector that is merely readjusting to market changes.
#2 Supply chains are complex
As oil and gas prices rebound to pre-pandemic levels, the price of plastic resin has also increased. Additionally, demand for plastic resin has increased, pushing prices even higher as supply works to catch up. Industries that lay dormant in 2020, like construction and infrastructure development and automobile and aircraft manufacturing, have rebounded in 2021, further increasing demand for a lowered supply of plastic materials.
Further, current domestic policies—both those directly impacting manufacturing and the broader energy sector—have also played a role in increased supply chain costs, as Grissom explains:
“These types of lending restrictions—exacerbated by leasing restrictions for oil and natural gas extraction on federal lands—make it more difficult for U.S. producers to ramp up production, increasing our reliance on OPEC+ countries. Regulatory and policy hurdles, moreover, have undermined midstream infrastructure development, further threatening the efficient movement of feedstocks.”
This is why prices are increasing, not because plastic producers arbitrarily increased the cost of resin.
As IEEFA notes, plastics are vital to our everyday life and are ubiquitous across industries. As the globe continues to reopen and demand for all services returns to pre-pandemic levels, plastics inputs will become more expensive until supply rises and steadies. This is only temporary and suggesting a price control on a material that is used so heavily across industries could have detrimental consequences for many sectors.
Increased global fuel prices, ongoing impacts of the pandemic and domestic policies have all played a significant role in the rising cost of consumer goods, including plastics. Singling out plastics producers while ignoring the complex factors that have led to rising costs in order to push IEEFA’s “keep it in the ground” agenda is irresponsible at best and does nothing to offer real solutions for addressing this widespread challenge.