The dual shocks of the COVID-19 and the oil price collapse: A spark or a setback for the circular economy?

Abstract

Is the COVID-19-induced unprecedented plunge in oil demand good news for the nascent circular economy in a material made from oil (i.e., the recycled plastics)? Since the plunge of oil prices, recycled plastics have become more expensive than virgin plastics, potentially encouraging manufacturers to shift away from the former to the latter. Our study primarily attempts to address whether recycled plastics will survive the tanked oil prices and COVID-19. To this end, we assess how the dual shocks of COVID-19 and the associated oil price collapse affect: (i) the dynamic co-movements between the international crude oil prices and the plastic and recycled plastic prices, and (ii) the responses of virgin plastics and recycled plastics in terms of diversification opportunities. Using different empirical methodologies (i.e., the event study methodology to assess changes in prices beyond expectations, the optimal hedge ratio, the portfolio weight, and copula-based approaches), the findings robustly suggest that with the rising uncertainty over COVID-19, the oil market and the performance of virgin plastic manufacturers are still significantly and positively connected, although a negative dependence with the recycled plastics is shown. With the onslaught of the coronavirus pandemic, the inclusion of virgin plastics in a portfolio composed of oil only improves the reward-to-risk ratios. These results have relevant implications for risk management and policy design.