Part 2: International Maritime Organization (IMO) - About to Cause and Oil Spike?

In Part 1, I look at the potential spike in oil prices due to an International Maritime Organization (IMO) ruling to reduce the sulfur content in the fuel that shippers use. They ruling seeks to reduce the sulfur content from 3.5% to 0.5%.

In this post, I look at the argument that the impact to oil prices will be minimal.

Counter Argument

Now with even Goldman Sachs, Morgan Stanley and Philip Verleger warning about this, there is always the counter argument.

The counter argument is a touch older, August 2017, via Antoine Halff.

He believes that the impact of this switch will also be mitigated via:

1. Slow Steaming -- slowing down of ships.
2. Industry consolidation.
3. Vessel Design.
4. Shorter routes -- via Panama Canal expansion.
5. Digitalization -- productivity improvements.
6. Fuel switching to LNG.
7. Battery-Powered Ships.
8. Electric vehicles -- autos
9. Non-compliance

This was written in 2017 and Bloomberg has a more recent quote from him:

“A certain amount of oil-market turmoil and a fair dose of noncompliance increasingly seem a given at the beginning of the new emissions regime”: Antoine Halff at Columbia University, citing conversations with industry participants.

And in the US News and World Report, he is quoted as saying:

"You would expect them to have a price impact during the initial period of adjustment. I wouldn't necessarily be as alarmist. At the risk of more boring, you have to be a bit more balanced."

One may argue he's a touch more concerned now than he was in August 2017. Of course, those are just brief quotes.

Regarding his arguments:

Points 1 through 5 are basically productivity gains, which I'm not sure how that impacts the fact that Verleger is saying that 1.5 to 2.0 million barrels of oil will no longer be in use and must be replaced. Point 6 is something that seems like a slow roll-out as Goldman Sachs sees LNG hitting only 5% of total maritime fuel use by 2030 so I'm not sure this would have any impact for 2020. I'm thinking 7 and 8 are immaterial for 2020. Point 9 is possible though Verleger counters that ships will be required to comply in order to keep their insurance -- as insurance companies are demanding the switchover. 

Final Thoughts

My big question is: won't this require additional oil supply? As Verleger states, this is "residual fuel oil" with little value to anyone else but the shipping industry. It is what is left of the oil once oil is processed for other more valuable products. If no one else can use it, then doesn't over-all supply need to increase?

Well, the firm that helped the IMO come up with the 2020 deadline has this to say via the Bloomberg link:

For its part, CE Delft remains confident there won’t be wild gyrations in the oil market, says Jasper Faber, the lead author of its study. No Shortage “Fundamentally, there should not be a shortage,” even if there may be an initial period of teething trouble and some regional supply issues, he said by phone.

Yeah, you'd kind of expect them to say that.

On the other hand, I'm not sure Verleger's conclusions will occur. If oil prices did hit $200, I suspect world governments would demand changes to the implementation of the ruling. Though certain countries might oppose changing the ruling, I suspect they'd be more than happy to see it postponed.