IHS WPC: Economic and energy outlooks improving

01:09 AM | March 20, 2013 | Robert Westervelt

Stronger global economic conditions and moderating oil prices are improving global growth prospects.

The outlook for 2013 is brightening in part because of the dangers the global economy has avoided, said Nariman Behravesh, IHS chief economist, in a speech Wednesday at IHS Chemical’s 2013 World Petrochemicals Conference, at Houston. “A lot of bad things that could have happened in 2012 did not,” Behravesh said. “We did not go over fiscal cliff in the United States, the Eurozone did not meltdown or break up, and China did not have a hard landing.” 

Global GDP growth should stabilize at 2.6% in 2013, Behravesh said. Gradual improvement should push global GDP to an annualized rate of 3.5% by the end of the year. US and Asian economies are leading the way, he added.

The dynamics for an accelerating US recovery are falling into place, he said. “The balance of forces affecting US consumer spending has turned positive,” Behravesh said. “Housing markets are finally showing signs of life and can be expected to keep improving over the next year.”

The underlying GDP growth rate in the US economy is currently around 1.5% and set to rise to 2.5–3% by year end, he added. US federal budget cuts forced by the ongoing sequester could shave 0.5 percentage point from growth if it remains for the full year, he said. Behravesh expects a limited compromise to be worked out later this year, limiting the impact.

The sequester impact will be concentrated on certain sectors and the Washington area. The sectors that will take the brunt of the impact are aerospace and defense, communications, and transportation, Behravesh added. “[Regional] impacts are quite small outside of Greater Washington,” he added. “Economic dynamics are very good,” Behravesh said. “There are a lot of bright spots in the United States. Despite dysfunction in Washington, the private-sector economy is doing well.”

The surge in unconventional oil and gas supplies is providing some of the strongest economic benefit, Behravesh added. Competitive energy and feedstock supplies are creating jobs, providing economic stimulus, attracting foreign investment, encouraging onshoring in manufacturing, reducing trade imbalances, and cutting carbon emissions, he said.

China’s economy also continues to improve, a favorable development for the global economy and chemical makers. China GDP growth rate fell from 10.5% in 2010 to 7.8% last year, the lowest level since 1999, Behravesh said. “Modest stimulus seems to have been effective in limiting the depth and duration of the domestic demand downturn in China,” Behravesh adds. Further stimulus efforts and a rebound in export growth thanks to stronger economies in the United States and Asia is providing support for China. “This will translate into growth of 8.2% for China in 2013 and 8.5% by 2015,” he added.

Supply conditions in oil markets are easing, which should cause crude prices to fall over the next few years. The unconventional oil and gas boom has increased energy supplies, boosting spare capacity available within OPEC to handle disruptions, Bill Sanderson, IHS v.p./downstream energy research and consulting, told WPC attendees. “We see a world of moderating conditions for oil prices as OPEC spare capacity is not needed to meet demand,” Sanderson said. “We see oil going from $110/bbl to $90/bbl over the next couple years,” Sanderson said.

Sanderson also says that West Texas Institute’s discount to Brent prices will narrow this year. New pipelines and infrastructure will allow crude oil to flow more freely from inland US production sites to coastal markets. “We see WTI returning to its normal [level],” Sanderson said. “We expect that to happen late this year or early next year.”

The outlook for gas-based feedstock prices remains favorable for chemical makers. North American liquidefied petroleum gas (LPG) production continues to expand rapidly, and North America will challenge Mideast producers in Saudi Arabia, Qatar, and the United Arab Emirates as the leading global LPG exporter. LPG feedstock availability for chemicals will increase LPG growth rates for nonchemical industrial as well as residential and commercial use remains modest. “LPG consumption as a chemical feedstock will expand to clear the market,” Sanderson said. “Growing supply and trade will make LPG an attractively priced chemical feedstock in international markets.”

The United States will continue to see some of the strongest feedstock cost advantages, Sanderson added. North American natural gas prices will remain low relative to petroleum and gas prices in other markets, Sanderson said. “Expanding natural gas liquids (NGL) supplies and low natural gas prices will continue to make NGLs attractive in North America,” Sanderson added.