Posted in: Ideas in Finance

You Might Watch the Oil Price, But Do You Check the Price of Sulphur?

While you’re watching the oil price or, more likely, the diesel or petrol price, there’s a lot of interesting action going on in markets for all the other things that we get from refining a barrel of oil. Most people don’t realise just how many products are derived from oil. Even if we never burned another litre of it for fuel for cars, boats, jets, and ships, we would still need to pump and refine a lot of oil. How much? Well, we use about 100 million barrels a day. And about 85% of the oil that we pump is used for energy. So, we would still need at least 15 million barrels a day for all the other things.

Given that we do burn most of it for energy, the 15 million barrels a day or thereabouts that we use to make other things could dry up (or become very expensive) quite quickly in an energy crisis. If the trouble in the Middle East spreads or escalates into a major oil shock (more than it already has) the implications will be felt far beyond the petrol pump. Those other products that are produced as part of the oil refining process include things like plastics, petroleum jelly, compounds that are used in pharmaceuticals, including paracetamol tablets, cosmetics, soaps, chewing gum bases, rubber, polyester for clothes, asphalt and tar, and on and on. A full list makes for interesting reading.

Out of a barrel of oil, therefore, a lot of different products are made, not just fuels. And not all oil is the same. Oil from different parts of the world has different qualities, meaning that you cannot easily substitute, say, oil from Texas for oil from, say, Russia. In general, a refinery will produce a range of products for a whole array of customers and markets. Shortages and price increases in crude oil will flow all the way through the supply chains. One of the products that has received some attention in recent months is fertiliser. Nitrogen fertilisers are derived from natural gas. Since some important natural gas and fertiliser plants are located in the middle of the current warzone, disruptions and price increases have already been felt worldwide.

But here’s an interesting example of unexpected connections. While crude oil is not directly needed for nitrogen fertilisers, it is indirectly but significantly needed for phosphate fertilisers. Phosphate fertilisers come from mined phosphate rock. However, you can’t directly process phosphate rock without first treating it with sulphuric acid. And where does sulphuric acid come from? Sulphur. And where does sulphur come from? Crude oil of the sour variety, which can be up to (but is usually less) around 5% sulphur. Short story long, you need a lot of oil to get the required amount of sulphur. And sulphur is also used to make many other things, besides sulphuric acid, and sulphuric acid is used to do other things besides treat phosphate rock.

Here’s the punchline. What’s the price of sulphur at the moment? Sulphur is at a record high price. It has risen to around $1,000 a liquid tonne. That’s 3 times the price at the beginning of the year and heading higher. Watching the oil price means you might be missing a much bigger picture. It’s important to understand just how many products derive from oil refining. It also makes one wonder if it might not make business (and national security) sense for Australia to explore its refining capabilities. It became fairly common knowledge this year that Australia has just two refineries. In the year 2000, Australia had eight refineries. The six were shut down for various reasons. But maybe those reasons no longer hold. It would be worth investigating.

You Might Watch the Oil Price, But Do You Check the Price of Sulphur?

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