IMO 2020: Council of Economic Advisers

Oil Price has an article up from Economist Philip Verleger where he discusses IMO 2020. IMO 2020 is the new fuel standard issued by the International Maritime Organization that starts in January 2020. It requires the sulfur content used by ships must be at 0.5 percent. Current limits are at 3.5%. Verleger believes that a large disruption will result due to this transfer. His article looks at a recent report from the Council of Economic Advisers. The key quote from the CEA report can be found on pages 294/295.

The shortfall will likely trigger higher prices, though estimates of price shocks to fuels including diesel, gasoline, and jet fuel vary substantially.

The reason behind this is that they see a short-fall ranging from 0.2 MMbpd to 0.6 MMbpd. I'm not exactly sure how they're coming up with that range.



The report states that anywhere between 1.5 - 2.0 MMbpd of HSFO (High Sulfur Fuel Oil) will be displaced. I take it that this needs to be made up via lower sulfur fuels. Current ULSFO (Ultra Low Sulfur Fuel Oil) can cover 0.6 MMbpd. And then another replacement fuel called MGO can cover between 0.6 - 1.1 MMbpd.

To me, displaced fuel will range between 1.5 - 2.0 MMbpd. Replacement fuel will range between 1.2 - 1.7MMbpd. That seems to indicate the potential for a surplus of fuel if replacement fuel hits 1.7 MMbpd while displaced fuel could be just 1.5 MMbpd.

Maybe there's some flux going on that isn't explained in the section of the report I'm reading.

Since I shouldn't be judging potential Noble Prize winning economists and their ability to do simple math, one should assume that as we get closer to January 2020, we should see price spikes in diesel, gasoline and jet fuel -- if their forecasts are accurate.

One question is if these forecasts come true, what will President Trump do with an election just around the corner? Here's one option via FreightWaves and Verleger:

But what Verleger sees Trump doing is suspending or limiting U.S. exports. The question of how that would be implemented and enforced is largely irrelevant, Verleger writes. “Should an export ban occur, the lack of the necessary bureaucratic system to administer it would likely lead to a total suspension of U.S. shipments of key fuels for some time,” he writes. “No refining or trading company would risk the penalties that could be imposed. Trade would stop.” He then lays out a cascading scenario of chaos in fuel markets around the world, the impact of which would be higher prices. As anybody who studies oil markets knows, chaos never lowers prices.

Basically, if President Trump goes with this option, he'd cause market chaos.

Another option mentioned via JOC:

“If the US — or any other country — were to seek to overturn the new 0.5 percent sulfur limit, it would need to find a majority of the signatories to Marpol Annex VI, the IMO’s convention on pollution from ships, who were willing to amend it,” S&P Global Platts said in October.