The effects of Hurricane Harvey are unprecedented, and that description applies to markets as well. For example, the devastating storm has knocked out the production of ethylene in Texas, which accounts for approximately 61 percent of worldwide production of this critical chemical. What makes ethylene so important?

To begin, it is a central component of polyethylene, the most common plastic substance. It goes into plastic jugs, bottles, and bags. As an ingredient in vinyl, it supports PVC pipes. Plastic automotive parts, the soles of high-performance sneakers, chewing gum, and synthetic rubber tires all require ethylene. In addition, in the form of ethylene glycol, it makes antifreeze and de-icing agents work for automobiles and aircraft. When transformed into polyether, it allows manufacturers to make clothing.

Thus, a shortage of ethylene means serious worries for a vast range of manufacturers, as well as the customers who depend on the products they produce. Without de-icing agents for example, airlines cannot fly safely in freezing temperatures.

On the other side of the supply chain, the shut-down of these ethylene producers has meant that their demand for natural gas and butane, some of the raw materials that go in to the process for producing ethylene, has dropped precipitously. Although ethylene occurs naturally, human-imposed processes ensure a sufficient supply for its various uses.

The logistics of this supply chain also have been affected, though the extent of this impact remains unclear. Train tracks in the Houston area, at the time of this writing, remain underwater, and the damage is likely to be substantial. Furthermore, the ethylene producers, most of which have not been able to return to their factories yet, do not know how much of their equipment has been damaged. Thus, there is no clear indication of when production might restart, even after the floods recede.

In monetary terms, the global chemical industry is worth an estimated $3.5 trillion, and ethylene production accounts for a substantial portion of that value. In 2016, worldwide production reached 146 million tons, and demand already had been on an increasing trend. Without Houston’s plants, this supply will be greatly constrained, leading the markets for ethylene and polyethylene to show price jumps already.

Discussion Questions:

1. What are the likely long-term effects of these pressures on the ethylene supply chain?
2. How are these supply constraints going to affect consumer markets and their prices?

Source: Jack Kaskey, “Harvey Has Made the World’s Most Important Chemical a Rare Commodity,” Bloomberg Business, September 1, 2017