ARTICLES
The Regulation That
Could Push Oil To
$200
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. ,
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il 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 econo-
mist 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 op-
tions: 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 prob-
lem 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