Wednesday, January 24, 2018

Some Comments on the US Ethane Supply Surplus

A 2017 US Energy Information Administration webpage (click here) indicates that the US production of ethane is expected to be approximately 1.7 million barrels per day (m b/d) by the end of 2018.   However, the ethane US domestic consumption is expected to be approximately 1.4 m b/d, leaving a 300,000 b/d surplus of ethane.

The same webpage shows an increase in ethane production of approximately 80% (from 1.0 m b/d to 1.8 m b/d) during the period 2013 to 2018.   This production increase surge has been driven by lower US prices for ethane (due to fracking and other technical developments associated with shale gas availability).   The lower ethane prices have greatly increased ethane demand for producing ethylene.

The ethane supply – demand balance seems to be working well over the last several years in maintaining current low prices of ethane compared to its price in other countries.  But, as demand is increased due to new US ethylene-producing plants coming on line and other countries seeking imports of US ethane because of its lower price, can ethane production maintain sufficient supply to exceed the demand and keep ethane prices low?   Huge investments have been made based on continued excess ethane supplies and low prices for ethane.  At what point would ethane prices have to rise to make these investments a lot less attractive?  A ICIS article has a discussion related to this question (click here).

Thursday, January 18, 2018

Does Institutional Economics Affect Fossil Energy Company Outcomes?

The institutional economic theory emphasizes the role that institutions play on economic outcomes.  Institutions can be: social norms; pollical interactions; government agencies; non-government organizations; rules, regulations, and the law; and more.  

Another economic theory is neoclassical economic theory.  In this theory, economic outcomes are determined (in contrast to institutional economic theory) by supply and demand of products, the desires of consumers to want products, and the perspective that the consumer uses rational thinking in deciding whether to purchase products.   Rational thinking implies that the consumer makes a choice on whether to buy a product, based strictly on whether it is in the consumer’s best interest to do so.   In this theory, there seems to be little, if any, role for institutions to play in determining economic outcomes.

Knowing whether institutional economic theory influence the economic performance outcomes of companies is of interest to me as an analyst evaluating companies’ economic performances.  I am especially interested in materials and energy-related companies.

Do differences exist in institutional impacts on fossil fuel companies that operate primarily in the European Union (EU) compared to the institutional impacts on fossil fuel companies that operate primarily in the United States (US)?   If so, based on the intuitional economic theory, one would expect that these institutional impacts would cause different economic outcomes for the companies in each area.

To test this expectation, I have compared the profit rate (net profit divided by total asset value) of 10 primarily EU fossil fuel companies to 10 primarily US fossil fuel companies.  The following table shows the average profit rate for each of the EU and US companies over the last 3 years (net profit and total asset value data taken from the companies’ annual reports) and the average of the 10 companies in each area:

european union fossil fuel companies
profit rate (net profit/ total assets)
united states fossil fuel companies
profit rate (net profit/ total assets)
pkn orlen
as a %
as a %

The table shows that the average profit rate for the 10 EU companies (-1.4%) to be much better (even though still negative) than for the US companies (-7.5%).  The EU companies have about a 6% better profit rate than the US companies.  This data does not show that institutional impacts account for the differences in these economic performances, but such a difference allows for the possibility.

Another test is determining the fossil fuel use per person for the EU and the US.  EU and US fossil fuel use and population data were obtained from EU and US government websites (click here and here to go to the EU websites) (click here and here to go to the US websites).  Using a fossil fuel use of 1.22 million tons oil equivalent (mtoe) and 508 million EU population gives a fossil fuel use per person of 2.4 toe.   Using a 2.03 mtoe fossil fuel use and a 318.6 million population for the US gives 6.4 toe per person.  If only the neoclassical economic theory governed energy fuel-type choices by individuals in the EU and US, I believe you would expect the toe/person values to be much closer.  That they are not suggest other economic considerations, such as the institutional economic theory, are at work.

In conclusion, both economic outcomes for EU and US fossil fuel companies and the EU and US fossil fuel per person data, given above, suggest that institutions impact the outcomes and that the institutional economic theory has validity and should be considered when evaluating companies.