The Regulation That Could Push Oil To $200

Authored by Nick Cunningham via Oilprice.com,

Oil prices could spike as high as $200 per barrel over the next 18 months, which would cause an “economic crash of horrible proportions,” according to a new report.

A research paper from economist and oil market watcher Philip K. Verleger predicts there could be a shortage of low-sulfur diesel fuel in 2020 as a result of regulations from the International Maritime Organization (IMO) aimed at cutting sulfur emissions. The regulations, due to take effect at the start of 2020, lowers the allowed concentration of sulfur in maritime fuels from 3.5 percent to just 0.5 percent.

Those rules have already sparked a scramble for low-sulfur options. But the current global refining capacity may not be able to churn out enough low-sulfur fuels to allow a smooth transition from high-sulfur fuels by the world’s shipping fleet.

The shipping industry accounts for about 5 percent of total global oil demand, and most ships burn heavy fuel oil that is high in sulfur. Switching over 5 percent of total demand to low-sulfur diesel and gasoil – a distillate similar to diesel – is a massive shift.

Ship-owners will have a few options: install expensive scrubbers to remove sulfur, switch to low-sulfur fuels such as diesel or gasoil, or switch over to LNG. Scrubbers and LNG are generally thought to be the most expensive options, requiring capital outlays to overhaul entire fleets.

That will put the onus on low-sulfur fuels. But the problem is that not all crude oil is the same – heavier and sour varieties hold more sulfur and are unable to produce lower sulfur diesel without extra processing. And not all refineries are equipped to handle that processing.

Up until now, the maritime industry has been burning the residual fuel oil left over after the refining process. Fuel oil is the bottom of the barrel – it’s the cheapest, most viscous and dirtiest part of the barrel.

By 2020, diesel production will need to rise by at least seven percent, according to Philip K. Verleger, on top of the three percent increase needed for road transport and other uses. All of it will need to be low-sulfur. “It is not clear that the greater volumes can be produced,” Verleger wrote in his paper. “Instead…very large price hikes may be required to suppress non-maritime use.”

On top of that, the banishment of fuel oil from the maritime sector will lead to a crash in high-sulfur fuel oil prices. Power plants onshore that burn oil might switch over to high-sulfur fuels because of the steep crash in prices. “Ironically, the maritime fuel switch may do nothing to improve the global commons given that the pollution sources can just be moved from the high seas to land,” Verleger concludes.

But the big problem will be the shortage of diesel and gasoil because “as many as half of world refineries cannot produce fuel that meets the new regulation.”

He predicts a rerun of the historic price spike in 2007-2008, which was in part the result of a shortage of low-sulfur oils. Refiners found themselves in a bidding war for low-sulfur oil, pushing oil prices to well over $100 per barrel. “This situation will reoccur in 2020,” Verleger wrote, except that the price spike could be even more dramatic because “the fuel shift is greater and the refining industry is less prepared.”

Verleger does not mince words.

As the rules take effect in 2020, oil prices will spike to $160 per barrel or higher. “Economic activity will slow and, in some places, grind to a halt. Food costs will climb as farmers, unable to pay for fuel, reduce plantings. Deliveries of goods and materials to factories and stores will slow or stop,” he argues. “Vehicle sales will plummet, especially those of gas-guzzling sport utility vehicles (SUVs). One or more major U.S. automakers will face bankruptcy, even closure. Housing foreclosures will surge in the United States, Europe, and other parts of the world. Millions will join the ranks of the unemployed as they did in 2008.”

However, a report from Columbia University’s Center on Global Energy Policy from earlier this year disputes this conclusion. Shippers switching over to low-sulfur fuels puts “the burden of innovation onto the refining industry,” the report says, “but it will likely prove a lesser challenge for refiners than is commonly understood.” That is because the fuels will be “fuel hybrids, the production of which will entail as much blending as actual refining.” Ultimately, the report concludes, “speculation about a product supply crunch underestimates the industry’s flexibility,” and ignores the potential for a reconfiguration of demand and the emergence of new types of blended fuel hybrids.

There is quite a lot of space between those two conclusions. We have 18 months before we find out which is more accurate.

Comments

SoDamnMad Wed, 07/25/2018 - 03:37 Permalink

Who is the International Maritime Organization and who elected them to set regulations for around the world.  I know it is a big concern in the Port of Los Angeles that ships actually produce more of LA smog than all the trucks and cars but then again when you go out to sea. Couldn't Musk develop a battery powered shit that used the solar cells by day and the batteries at night (sarc)? 

rtb61 boattrash Wed, 07/25/2018 - 09:06 Permalink

Here is the penalty for failing to comply with the regulation, "Sanctions are established by individual Parties to MARPOL, as flag and port States. There is no established fine or sanction set by IMO, it is down to the individual State Party." so basically nothing, dependent upon the ships flag.

So the entire story a crock, why, of course to try to drive up the price of oil, undoubtedly paid for by some fossil fuel corporation.

You can imagine the flock of countries who will have a 2 cent penalty for no complying, hah hah.

In reply to by boattrash

Stuck on Zero rtb61 Wed, 07/25/2018 - 09:30 Permalink

One single container ship has been found to create more air pollution than all the cars in Britain. Somehow, all the car owners in Britain had to have costly pollution controls but the ship owners got by Scot free. There will be some grumbling by the shipping industry but it will be resolved and we'll all breathe a bit easier.

In reply to by rtb61

Last of the Mi… Justin Case Wed, 07/25/2018 - 09:29 Permalink

If you can't control the price of a commodity for your own political agenda, then find some way to legislate it for your own political agenda. 

Another agency insinuating itself between you and your product "for the good of the children" Oh, and of course the extra money goes in someone else's' pocket that you'll never ever see. 

Best example in the US is Obamacare. 

In reply to by Justin Case

Colonel Jessup Four Stop Wed, 07/25/2018 - 10:15 Permalink

Matters not - Oil is not a limited resource. Ever hear of well in KSA filling back in years after they were thought dry? Look into it.

Also -ever hear of oil bugs? Scientists in the UK created an organism that ate sawdust and excreted crude oil that could be refined just as we do crude extracted from the ground.

Oil is neither scarce nor a limited resource.

In reply to by Four Stop

Kokulakai iClaudius Wed, 07/25/2018 - 10:41 Permalink

"Container ships are taking longer to cross the oceans than the Cutty Sark did as owners ... cut back on fuel consumption."
Guardian 2010

Standard speed of container ships is 25 knots
In the 1850’s Cutty Sarks reached speeds of 14-17 knots with the fasted speed recorded at over 22 knots.

The solution seems pretty simple.

"Wooden ships on the water very free and easy"
"Easy, you know the way it's supposed to be"
Crosby, Stills, and Kanter.

In reply to by iClaudius

herkybird SoDamnMad Wed, 07/25/2018 - 06:42 Permalink

The International Maritime Organization (IMO) is a department of the United Nations that does for shipping what the International Civil Aviation Organization (ICAO) does for aviation.  It makes rules and sets standards for the UN's member nations.  FYI, the U.S. is not an ICAO-contracting nation relying, instead, on our own FAA for rule making and regulation.

In reply to by SoDamnMad

Haus-Targaryen Wed, 07/25/2018 - 03:40 Permalink

This would be the end of the financial system and now that the problem is known  (a "known known") the powers that be will simply axe the regulation. 

Yayyy the fiat debt paradigm can continue. 

iClaudius Wed, 07/25/2018 - 03:51 Permalink

The date chosen for the legislation to come in to effect was set so that this apocalyptic scenario wouldn't occur. It gives time for all interested parties to effect the changes required without crashing society.

EddieLomax iClaudius Wed, 07/25/2018 - 05:20 Permalink

My thoughts too, its in the future so a known problem, at worst it will at a 10-20 dollars per a barrel.

A bigger problem is the fact that we are finding 6 billion barrels a year and burning 30 billion barrels a year, or in other words we are investing far too little into exploration and development.

That's the big problem coming, when a gap develops between supply and demand, and this gap keeps widening since it takes a long time for development on conventional oil to yield results, then we'll panic.  It won't really be the end of the world since we can get shale etc to plug the gap at high enough prices, but the market will panic for a good few months.

I'd say that's a opportunity to buy oil and gas supply and exploration stocks, they'll skyrocket during the crises and then drop to reasonable levels after.  And in case I'm wrong a stock that pays a reasonable dividend isn't a loser to hold onto anyway, a safe bet.

In reply to by iClaudius

hola dos cola Wed, 07/25/2018 - 04:33 Permalink

Something else: The Iranian threat is real. But it will pan out differently than everybody seems to be expecting. It's not 'Hormuz' that'll do the damage.

Again: Do not draw on the SPR.

San Pedro Wed, 07/25/2018 - 04:49 Permalink

The price of transportation fuels directly impacts the cost of all goods and services. It's a lot more than just the price of gas. Your service providers will mostly disappear and the ones left will charge you a king's ransom. 

Kyddyl Wed, 07/25/2018 - 05:14 Permalink

I have vivid memories of the first Oil Embargo. I lost a good business as unemployment, prices and interest rates soared, and that was just a short embargo. Too many people don't realize the US buys, and wants to forcefully take, Iranian oil. Russia, China and India may have a thing to two to say about that. In the not too distant future something is going to hit US oil prices hard. Especially when other countries get really sick of our circuses. Odd thing about the Oil Embargo though, Ford had all those little Mustangs with the goofy fuel tanks all ready to roll...Bet the same thing is on the offing.  

SmittyinLA Wed, 07/25/2018 - 05:20 Permalink

Funny how the herd o sheep US pickup truck industry has switched to "fake cleaner" diesel for pickup trucks, one also has to buy some "special fluid" and new filters every few years, they lied like Volkswagen too, bullish refinery builders?

U. Sinclair Wed, 07/25/2018 - 05:22 Permalink

Who cares.
Can't they just print the money for it?
Since everybody seems to think there are no consequences to debt, the Central Banks can print our prosperity forever.
Or can't they.....?? :)

bombdog Wed, 07/25/2018 - 05:26 Permalink

Speaking of "blending", I'm just so glad I bought my Mitsubishi hybrid SUV now. In the UK I can get free electricity at many charging stations, government also charges me zero road tax too, so I can "blend in" nicely with all of my left wing "green" buddies. Can drive into London with my low CO2 emissions and live in a land of milk and honey, pretend none of this affects me. Now just imagine charging all of these cars by using high sulphur fuels in some old power stations, when you absolutely need to have some hypocrisy in your life: go Green! All cars to be electric by 2040. Forwards not backwards comrades!

TheAnswerIs42 bombdog Wed, 07/25/2018 - 08:53 Permalink

Just because you don't pay "at the pump" doesn't mean that the electricity is free. You may have begun to notice the increase in your electric bill at home or business. EV's do not run on unicorn farts. We are all paying for the Green monster in more ways than money.

The poor and fixed income are paying the greatest cost, especially in the winter, when some pay with their lives.

In reply to by bombdog