Chi-Chung ChenProfessor

Department of Applied Economics,

National Chung Hsing University

mayjune@nchu.edu.tw mayjunejulychen@gmail.com

The Economic Analysis of Kuokuang Petrochemical Project

(國光石化之經濟分析 )

Outline

The cost-Benefit analysis of Kuokuang Petrochemical (國光石化 )Project

The analysis of the contribution of petrochemical industrial to the economy

Conclusion

The Externality of Kuokuang Petrochemical ProjectThe cost of greenhouse gases emissionThe cost of health riskThe cost of agricultural and fishery

products securityThe cost of ecology and environmentThe cost of land subsidence

The Annual External Cost of Kuokuang Petrochemical Project

Public Goods Estimated External Cost Notes

Greenhouse Gases NT$19.2bn to NT$ 38.4bn

The following costs have not been considered: - carbon emission reduction- possible trade sanction if failing to reach the emission reduction target

Health Care

The cost of death is NT$ 6bnThe cost of medical diagnosis and hospitalization is NT$ 7.602bn to NT$ 25.467bn

Only consider the impact on cardiovascular and respiratory diseases.The following costs have not been considered: - impact on other diseases- the shortening of life expectancy

Agriculture & Fishery

Agriculture products: NT$ 4.3bnFishery products: NT$ 1.328bn

The following costs have not been considered: - the unemployment of fishery sector- the impact on tourism and seafood industries

Water ResourcesThe social cost for every centimeter of land subsidence in Changhua County is NT$ 5.95bn to NT$ 24.02bn

Only consider the cost of land subsidence.The reduction of agricultural productivity caused by the lack of irrigation has not been considered.

Ecology & Chinese White Dolphin

The annual rental fee for wetland is NT$ 6.6bn, for Chinese white dolphin is NT$ 6bn

The data is from the environmental impact assessment of Kuokuang Petrochemical Project

Total NT$ 56.9 billion to NT$ 112.1 billion per year

PS

The Benefit of Kuokuang Petrochemical Project

CS

Definition ： According to environmental economics (refer to the books by Dr. Daigee Shaw), the benefit of a investment project is the social welfare brought by the project which is shown in the following area.

P

Q

S

Do

Welfare

Calculation of Consumer Surplus (CS)

Demand FunctionAssume that the demand function has constant elasticity.

When Q approaches to zero, P approaches to infinity. In the calculation of the area below the demand curve, the integration is infinity. To solve this problem, we assume Pmin = 10P* and get Qmin from the demand function. We can integrate the approximate area below the demand curve by Pmin and Qmin.

The calculation is as the following:ddQ )(P c=) f(P= d

1d

**minmin

*

min

)( QPQdQPQPCS d

Q

Q

dd

Calculation of Consumer Surplus (CS) for Kuokuang Petrochemical Project After executing Kuokuang Petrochemical Project, the domestic supply

of ethene and arene will increase by 1.2 million tons and 1.5 million tons respectively. We can get the new equilibrium price and calculate the consumer surplus. The figure illustrates the change of consumer surplus. D is the domestic demand curve, S1 is the domestic supply curve in 2009, S2 is the domestic supply curve after the execution of Kuokuang Petrochemical Project, the shadow area is the change of consumer surplus caused by the project.

EtheneBefore Kuokuang Petrochemical Project:

The demand of ethene in 2009 was 4,004,500 tons, the price was NT$ 28,946.7/ton, and the demand elasticity was -0.84. We got c1 = 22,402,249,747, and the domestic ethene demand function is

The domestic ethene supply in 2009 was 3,851,900 tons, and the equilibrium price was NT$ 30317.0/ton.

Pmin = 10P* = 303,170.2 (NT$/ton) We can get Qmin = 556,768.9 tons, and therefore get the

consumer surplus.

84.0d )(P 72240224974= dQ

1663296301530317.0×3851900)(7471/22402249556768.9×303170.2 84/1003851900

556768.9 dd dQQCS

EtheneAfter executing Kuokuang Petrochemical Project:

Assume the domestic supply is expected to increase to 5,051,900 tons (increase by 1,200,000 tons). The new equilibrium price is NT$ 21,951.9/ton. We can therefore calculate the consumer surplus.

The increase of consumer surplus caused by the increase of ethene supply is approximate NT$ 5,973,238,469

0723028686221951.9×5051900)(7471/22402249556768.9×303170.2 84/1005051900

556768.9 dd dQQCS

The estimated consumer surplus of Kuokuang Petrochemical ProjectThe table shows the impact of Kuokuang Petrochemical Project

on consumer surplus. Assume the annual supply of ethene increases by 1.2 million tons and arene supply increases by 1.5 million tons. We can see the total increase of consumer surplus is NT$15,577,676,484 (about 15.6 billion）

CS before Kuokuang Petrochemical Project

CS after Kuokuang Petrochemical Project

Change of CS

Ethene 66,329,630,151 72,302,868,620 5,973,238,469

Benzene 43,696,284,739 47,052,883,915 3,356,599,176

Toluene 208,698,100,442 210,502,587,443 1,804,487,002

Xylene 47,527,768,440 51,971,120,277 4,443,351,837

Total 15,577,676,484

Data resource ： arranged by the research

Calculation of Producer Surplus for Kuokuang Petrochemical ProjectThe producer surplus is the revenue minus the area below the

supply curve. Because the supply curve is the marginal cost, the area below the supply curve is the total cost. The producer surplus of Kuokuang Petrochemical Project is the profit.

The revenues of the No. 6 Naphtha Cracking Project of Formosa Petrochemical Corporation (台塑六輕 ) in 2008 and 2009 are NT$ 96.41 billion and NT$ 69.73 billion respectively. The profits in 2008 and 2009 are NT$ 14.46 billion and NT$ 47.97 billion respectivrly.

The expected revenue of Kuokuang Petrochemical Project is NT$ 560 billion, about 67% of the No. 6 Naphtha Cracking Project. Therefore the producer surplus is NT$ 20.9 billion.

The Annual Benefit and Cost of Kuokuang Petrochemical Project

By this research report

Benefit NT$ 36.5 billion

External CostNT$ 56.9 billion

to NT$ 112.1 billion

The benefit of Kuokuang Petrochemical Project is much lower than its cost.

The Analysis of the Possible Economic Contribution of Petrochemical Industries

The Analysis of the Possible Economic Contribution of Petrochemical Industries (1/3)

The petrochemical industries do not contribute

much to GDP

According to Directorate-General of Budget, Accounting and Statistics, the whole domestic petrochemical industries

contribute less than 4% of GDP.

Revenue is not the economic value added of

GDP

The statement by the media that the revenue of petrochemical industries is over 10% of GDP is not correct. GDP is the economic value added, not the revenue. The economic value added by the No. 6 Naphtha Cracking Project is only 0.39% of GDP. Therefore, the contribution of Kuokuang Petrochemical Project will be less than 0.4% of GDP.

The external cost of Kuokuang Petrochemical

Project is high.

Environmental Protection Administration has revised the expected external cost of greenhouse gases, health risk, agricultural and fishery products, ecology and Chinese white dolphin caused by Kuokuang Petrochemical Project upwards to NT$ 50bn. The cost calculated by the opponent groups is NT$ 58.8bn to NT$ 114bn. The externality of Kuokuang Petrochemical Project in Changhua is too high to be undertaken.

The Analysis of the Possible Economic Contribution of Petrochemical Industries (2/3)

The total employees of the upstream and midstream petrochemical industries are 33,000, only 0.3% of the total domestic employees. The number of employees will increase at most 20,000 by Kuokuang Petrochemical Project. (According to General Manager Tsao of Kuokuang Petrochemical Technology Company) However, the project will generate at least 10,000 of unemployment in agriculture and fishery sectors. After No. 6 Naphtha Cracking Project, the number of employees in agriculture and fishery sectors in Yunlin has decreased from 38,000 to 28,000.

The petrochemical industries have low contribute to employment

Does Taiwan need the upstream petrochemical industries?

According to the data of No. 6 Naphtha Cracking Project in 2008 and 2009, 60% of gasoline, 90% of diesel fuel and 5% of ethene were exported. That means the products of upstream petrochemical industries are mainly for export but not domestic demand.

The ethene self-sufficiency rate fallacy

Ministry of Economic Affair claims that the Kuokuang Petrochemical Project is for increasing the ethene self-sufficiency rate. The problem is what the benefit is from increasing ethene self-sufficiency rate. ethene is refined from imported petroleum. When the petroleum self-sufficiency rate is almost zero, it is meaningless to increase ethene self-sufficiency rate. It is misleading to emphasize the ethene self-sufficiency rate

The Analysis of the Possible Economic Contribution of Petrochemical Industries (3/3)

The ethene product of upstream petrochemical industries has few industrial relations with other domestic industries.

The ethene produced by Kuokuang Petrochemical Project is for the midstream materials of synthetic rubber, plastic, synthetic fibers and synthetic resins. According to the data from Directorate General of Customs, the exported value of those midstream products was NT$ 400bn in 2000, and it had tripled to NT$ 1200bn by 2008. That means the upstream production of ethene is for the export of midstream products. However, the petrochemical industry with more economic value added is in the downstream, which has few industrial relations with the products of Kuokuang Petrochemical Project.

The development of green energy industries brings more industrial relation effects than upstream petrochemical industries. It also increases the energy self-sufficiency rate and the employment. (The green energy exposition held by Ministry of Economic Affair in late August provided more than 15,000 job opportunities.)

The alternative of Kuokuang Petrochemical Project

The Diagram of Exported Petrochemical Products

The percentage of export in all production (%)

The Percentage of Petrochemical Industries in Total GDP

Year

Petrochemical Industries GDP (million NT$)Petroleum and Coal Products

Chemical Materials

Chemical Products

Rubber Products

Plastic Products

GDP of Petrochemical

Industries

The percentage of Petrochemical

Industries in total GDP

1999 135627 139263 40919 27873 116722 460404 4.77%

2000 136396 164498 40729 29225 94733 465581 4.57%

2001 161647 172917 38441 27890 100057 500952 5.04%

2002 164466 187513 39220 29652 101898 522749 5.02%

2003 181909 195862 40094 28035 96532 542432 5.07%

2004 209591 267059 42015 30672 95560 644897 5.67%

2005 227117 271866 41598 30621 82456 653658 5.57%

2006 162121 188594 46832 28573 66903 493023 4.03%

2007 220488 243474 42666 28513 59610 594751 4.61%

2008 116786 174313 42543 26347 60750 420739 3.33%

2009 178988 226555 44592 26190 60241 536566 4.30%

Data Resource: Macroeconomic database of Directorate-General of Budget, Accounting and Statistics

Conclusions From the economic aspect to analysis the Kuokuang

Petrochemical Project in Changhua, we can draw the following conclusions:

1. It is needless to extend the domestic productivity of ethene. If its market is in overseas, we should encourage the firms to setup the refinery close to the overseas market.

2. According to the cost-benefit analysis of Kuokuang Petrochemical Project, the total cost is higher than the benefit. In addition, this project will lead social unfair. Therefore, the project should not be executed.