The Hidden Consequence of the Oil Price Crash to Pharmacy
On April 20th, 2020, the price per barrel of oil went below zero. Well, not really as these were futures contracts expiring that had to be sold by those who did not have storage capabilities. Regardless, the financial world was shocked as Saudi Arabia continued its onslaught on oil output during a time when oil demand dropped dramatically due to COVID-19. As a result of all of this and some other extenuating circumstances, the actual price per barrel of oil remains low. As the OPEC+ members jostle about production cuts, the rest of the world has to deal with the ramifications of the tumbling of crude prices. While most people may enjoy a drop in their travel and transport costs, others may find themselves without employment. But what does all of this have to do with pharmacy?
First and foremost, the pharmaceutical and healthcare industry relies heavily on petroleum and its products much as any other industry on the market. Everything from the manufacturing of pharmaceuticals and medical supplies; transport of goods, personnel and patients; the use of plastics; and fuel for utilities within each of these complexes, is reliant on the substance. The total amalgamated use of petroleum every year in healthcare is quite significant. To paint you a broad picture, a study showed US health care sector emissions represented approximately 8% of the country’s total greenhouse gas emissions in 2007 alone. The figure below shows the distribution of oil usage by sector in 2017 across 36 nations (OECD). Nearly 65% of usage is transport and petrochemical, the two sectors which make up petroleum usage in the healthcare industry. Although it is difficult to calculate the exact amount of petroleum usage in pharmacy as these pharmacometrics simply do not exist, as you will see we can surmise that the change in production, supply, demand, and ultimately price deeply affects healthcare.
Transport is the principle usage of petroleum in the healthcare industry. Whether it’s the shipping of pharmaceuticals and medicinal supplies, movement of staff, or even local delivery of drugs to patients, the majority of transport relies on petroleum. To understand the reliance on transport, let’s map out the journey of how a bottle of medication gets into a patients hands. First raw materials needs to be transported to the manufacturing plant. The combination of active ingredients and excipients often rely on different supply chains for delivery for each item. Once a medication has been produced, it needs to be delivered to a distribution company, and from there to a pharmacy. Either the patient themselves needs to make a trip to the pharmacy, or the pharmacy will deliver it. Let’s not forget the fuel used by all staff from the entire supply chain for the commute to their place of work, as well as the fuel used to power utilities at each point in the process. The cost of all of this fuel is not free, it is factored in when commodities are purchased from one company to another. A lower price of gasoline alone brings the cost down for almost all members who are involved in the operation. If we include services such as ambulatory care, medical supply transport, and hospitals, the petroleum usage balloons significantly as well.
Plastics are a quintessential part of the pharmaceutical supply chain in order to deliver cost-effective and sterile medications to patients. Plastics are predominantly manufactured from petrochemicals, and of course as the price of oil falls, the initial costs at the start of the supply chains drops with it. Products such as plastic bottles and the manufacture of precursor molecules as well non-medicinal ingredients rely on petroleum. In fact, approximately 99% of pharmaceutical feedstocks and reagents are obtained via petrochemicals. Historically, it can be seen that plastic prices were highly dependent on oil when looking retrospectively at the 1973 oil embargo. Essentially, countries without adequate oil or plastic feedback supply stockpiles (e.g. United Kingdom) faced a shortage and thus higher cost outlooks. Although medical plastics represent an extremely small fraction of the global petroleum usage, the seemingly insignificant amount accounts for supplies that are integral for medical life support. The aformentioned article also noted the correlation between a reduced petroleum supply (especially during the 1970’s embargo) and an increase in plastic costs. Following these rises in plastic valuations, health care commodities and healthcare overall increased in costs after some months in lag time. As the price of oil has never dropped this dramatically in it’s history (-305.97%), it can be estimated that in this case, the opposite will be true.
The impact of such a significant drop in oil prices further affects the economies of oil-producing nations. The cost of producing a barrel of oil in places such as Albertan oil sands or U.S. shale is higher than the current price is selling for. The figure below shows how expensive it can be for these countries to withdraw oil compared to other areas.
As Saudi Arabian oil floods the global market, many companies have had to fetter their operations as they cannot afford to extract crude oil in the current market climate. This in turn has a ripple effect to the economies who dependant on oil for their primary source of income. The massive price drop has caused the loss of employment, which subsequently affects the spending of the populace affected, and ultimately shrinks the gross domestic product (GDP) of the afflicted countries. The U.S. carries the world’s largest GDP north of 19 trillion USD, and when that economy shrinks, it affects the entire global market. For those people who take prescription medications, a 2019 study showed that patients with low income are subject to larger excess risks by non-adherence. The cohort study determined the link between lower socioeconomic status and increased mortality and higher cardiovascular disease risk. Although cheaper oil ultimately results in decreased costs for the pharmaceutical industry, the health impact can be significant for those who are negatively impacted financially.
Overall, the negative oil price shock will have different implications to different people. For the most part the end patient will likely see little impact, if any, unless they are directly connected to the petroleum industry, living in an area tied to the industry, or invested in certain economic markets. The running costs of the healthcare machine already will have been observing a decrease, and will continue to do so for some time. Manufacturers will also see a drop in production costs after some lag time, however these savings are rarely passed onto the patient. The link between the pharmaceutical/healthcare industry and oil is undeniably an interesting connection to explore as it is not often studied, however it is just as important as any other.
“”We usually find oil in new places with old ideas. Sometimes, also, we find oil in an old place with a new idea, but we seldom find much oil in an old place with an old idea. Several times in the past we have thought that we were running out of oil, whereas actually we were only running out of ideas.”
