A Re-Look: International Maritime Organization (IMO) - About to Cause and Oil Spike?

OilPrice has an interesting article up on the upcoming January 2020 International Maritime Organization ruling regarding global shipping. The ruling will cut the sulfur content in maritime fuel from 3.5% to 0.5%. It was first announced in 2008 that this would be going into effect. The target date of 2020 was set in 2016.

Though the ruling was set in 2016, it wasn't until recently that economist Philip Verleger raised the red flag about the ramifications of this ruling. He argued that oil prices could hit $200 due to the ruling.

As for the shipping industry, there are three ways to meet the sulfur cuts:

1. Put scrubbers on their ships, which helps reduce the sulfur content.
2. Switch to LNG.
3. Buy lower sulfur content fuel.

Per OilPrice, it appears that the scrubbers option might not be viable:



A little over 1,500 vessels have been fitted with sulfur scrubbers as of October this year, according to the senior vice president of engineering and technology at the American Bureau of Shipping. By January 2020, when the new emission rules come into effect, the number of scrubbers both installed and ordered would reach 2,278, S&P Global Platts has calculated. And all these vessels will be producing sulfur acid-rich wastewater from the scrubbers and will need high-sulfur fuel. One port, Singapore, has already banned the discharge of wastewater from vessels fitted with sulfur scrubbers. Chances are it won’t remain the only one. But there’s more. Singapore’s Port Authority also introduced a requirement that all vessels calling at the port should use 0.5-percent sulfur fuel. Again, Singapore is by far not the only port setting new fuel requirements for vessels in compliance with the IMO rules. 

One argument against Verleger's conclusion was the idea that scrubber installations would prevent oil supply problems. If the Singapore port is of any indication, scrubbers are no longer a viable option. If I recall correctly, switching to LNG is an expensive option and might even require new ships due to engines associated with LNG so it appears to me that option 3 is the only immediate option available. Verleger's prediction might look more likely now.

S&P Global Platts has this warning:

Market participants are factoring in a window of disruption after January 1, 2020, ranging from a few months to years, prompting fears of gasoline and diesel shortages, high fuel costs, hoarding of transportation fuels and even sustained high crude oil prices  . . . IMO 2020 will be one of the most disruptive changes to ever affect the refining and shipping industries with a global impact in excess of $1 trillion over five years and implications for all sectors in the energy space as well as many other industries, Chris Midgley, head of S&P Global Platts Analytics, said.

As a note, Reuters stated in September:

The global shipping industry burned a total of 3.3 million barrels per day (mbpd) of high-sulfur marine fuels in 2017, according to the bank.

Verleger stated in his research:

The IEA also estimates that two million barrels per day of residual fuel oil that would have been used by ships will suddenly be surplus. Up to three-quarters of it will have no market unless blended with light, low-sulfur diesel fuel. 

I wonder if that two million barrels per day estimate now increases. My assumption is that scrubbers was one reason why there is a gap between 3.3 million and 2.0 million.