Wednesday, April 8, 2015

Low oil prices adversely affect recycling efforts. How does that happen?

Plastic bottles that hold our favorite soft drink or choice of bottled water contain an input called Polyethylene Terephthalate, or "PET".

One of the inputs used to make PET is crude oil.  However, once PET is created it can be reclaimed through the recycling of plastic bottles and used over and over and over again...

Producers of plastic bottles have a choice between using newly produced "virgin" PET or recycled PET made from plastics recovered from re-cycling programs across the US.

When crude oil prices are high, virgin PET is more expensive to produce and recycled PET has a competitive price advantage.

The recent plunge in crude oil prices has eliminated that advantage, and then some:

Recycling Becomes a Tougher Sell as Oil Prices Drop The fall in oil prices has dragged down the price of virgin plastic, erasing recyclers’ advantage
"...At the start of this year, new polyethylene terephthalate, a type of plastic widely known as PET and used to make soft-drink and water bottles, cost 83 cents a pound, according to data compiled by industry publication Plastics News. That was 15% higher than the cost of recycled PET. 
As of late March, the cost of new PET had fallen to 67 cents a pound, or 7% less than the recycled form, which costs 72 cents a pound...."---(Wall Street Journal)
Here is a graphic from the article that illustrates the change in price over time.  When the BLUE line is above the RED line, it is more cost effective to use recycled PET.


This turn of events in the crude oil markets has had a negative affect on the recycling industry.
"...Prices are “very important to stimulate good recycling rates among our communities,” saysCarey Hamilton, executive director of the Indiana Recycling Coalition.
Especially hurt are the middlemen of the recycling supply chain, who buy used bottles, cans, paper and other items and then use machinery to sort, bale and sell the recyclables. Prices middlemen get when reselling some types of plastic have plummeted by as much as half in just a few months, says Allan Zozzaro, a partner at Zozzaro Atlantic Coast Processing LLC in Passaic, N.J. “It’s putting a real strain on all recycling companies,” he says..."---WSJ
This example is a nice one to use in class to illustrate the microeconomic concepts of Substitute Goods in production, "Substitution Effect" vs "Substitutes", the difference between Quantity Demanded (or Quautity Supplied) and Demand (or Supply), and the power that prices hold over the allocation of societal resources.

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