In just over a year, the International Maritime Organization, based in London on the banks of the Thames, will introduce radical new guidelines forcing shippers around the world to stop using dirty fuel oil and instead shift to low-sulfur marine diesel to help clean up the environment. However, the impact of the change will reverberate far beyond the world’s merchant fleets on the high seas.
Demand for transport diesel is expected to surge as a consequence of the rules known as IMO 2020, while supply remains constrained by the ability of refiners to adapt quickly enough. According to the International Energy Agency, bulk wholesale prices for diesel could increase by up to 30% as ship operators scramble for supplies of cleaner marine fuels in order to comply and avoid potential penalties.
Meanwhile, S&P Global Platts Analytics forecasts the shift could add $7 to the cost of a barrel of crude in 2020.
“If the market is right, we are probably set for considerable price volatility in 2020,” warned Bjarne Schieldrop, chief commodities analyst at SEB, in a recent research note on IMO 2020. The increasingly interconnected nature of commodity markets means this volatility will reverberate far beyond the trading screens of oil brokers and into household budgets.
Unless governments cut fuel taxes then motorists – especially in Europe where diesel cars still account for 45% of new purchases – could be hit hard in their pockets when they go to fill up at the pumps. The introduction of IMO 2020 rules on the seas could also be a final nail in the coffin of the diesel car on the roads, after sales already took a hit following the Volkswagen emissions scandal that has shaken consumer confidence in the once-favored engine technology. But the economic ramifications of the change will be even more profound.
The total economic cost of IMO 2020 may even reach $1 trillion over five years, according to S&P Global Platts Analytics. Shipping companies operating the world’s commercial fleet of about 80,000 vessels will inevitably pass on the higher fuel costs for using 0.5% low-sulfur diesel, or installing gigantic devices called ‘scrubbers’ to clean up engine emissions, to consumers. Each scrubber – which works by stripping the sulfur out of fuel – costs between $2 million and $6 million to install.
With shipping accounting for the carriage of about 90% of the world’s trade, the inflationary risks arising from the introduction of IMO 2020 are going unnoticed. Policymakers are for the most part oblivious to the danger despite the increasing number of warnings coming from the energy and shipping industries about the issue.
“This issue is flying under the radar for most politicians at the moment,” said Richard Joswick, head of oil pricing and trade flow analytics at S&P Global Platts, speaking this week at the Middle East Executive Petroleum Conference in Dubai. “Most people don’t know what fuel oil is but if costs rise for consumers because of IMO 2020 it will get a lot of attention.”
Environmentalists argue the introduction of tougher regulations are long overdue. Merchant shipping is among the world’s dirtiest industries, spewing out CO2 emissions on a frightening scale even for the most hardnosed climate change deniers. According to European Union figures, maritime transport disgorges 1 billion tonnes of CO2 annually and unless this is addressed the industry’s emissions are expected to increase by up to 250% by 2050.
But the IMO is determined to do its bit to save the planet and prevent a climate change apocalypse from happening. By forcing shippers to clean up their act, its strategy aims for greenhouse gas emissions to reach their peak soon and then fall by at least 50% from levels recorded in 2008 over the next 30 years. However, given the growing needs of a rising global population, meeting this goal will be tough and will require zero-emissions vessels to come into service on a commercial scale by the end of the next decade.
Of course, fuel oil – used to power the world’s ships ever since the Royal Navy turned its back on coal in 1912 – won’t completely disappear overnight. Some 18 billion barrels’ worth of fuel oil derivatives related to Platts price assessments are traded on exchanges every year. Significant questions also remain unanswered about how the IMO can enforce its new regulations. Although the major international commercial ship operators can be relied upon to comply, implementation among smaller fleets will be harder to monitor.
US President Donald Trump could also set IMO 2020 off course. Trump has made demanding OPEC delivers lower oil prices to protect US consumers a personal quest. A critic of global efforts to address climate change, he may also cause problems if fuel costs and inflation in the world’s largest economy rise as a consequence of the IMO’s policies. Although forcing cargo vessels to use cleaner fuels may help save the environment, it represents potentially another global economic risk policymakers would be wise not to ignore much longer.