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Supply Chain News: Analysis Predicts Oil and Diesel Prices to Soar, Leading to Recession


New Rules for Ocean Carrier Emissions Strangely could Lead to a Diesel Crisis

July 24, 2018
SCDigest Editorial Staff

As we reported a couple of months ago, in April the International Maritime Organization (IMO) issued new rules that will mandate cargo ships reduce sulfur emissions either from moving to what will be more expensive low sulfur fuels or installing scrubber systems that could cost as much as $10 million each.

The IMO rules are scheduled to go into effect Jan. 1, 2020 – less now than 18 months away.

Supply Chain Digest Says...

Because of the lack of refineries equipped to produce low sulfur diesel, prices are likely to spike even more than higher oil prices alone would cause.

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The impact on ocean carriers is expected to be significant, with Junichiro Ikeda, CEO of Japanese carrier MOL, recently saying "We're all going to go bust" from the change, worried that container carriers would not be able to boost rates or fuel surcharges enough to mitigate the impact of the $300 per metric ton of extra cost of low-sulfur fuel oil. (See CEO of Container Carrier Says Sulfur Emissions Rule will Cause Some Carriers to Go Bust.)

But it may be more than ocean carriers that go bust – it may be the global economy too, as diesel prices that power truck and rail transportation prices soar too.

So says Philip K. Verleger, senior adviser to the global consulting firm the Brattle Group and an adviser to Congress on commodity prices. He released a report this week from his independent firm PKVerleger LLC that included the bold claim that there will be 2020 economic collapse based on the oil commodity market - and a lack of diesel fuel.

"Catastrophically high oil prices will cause the impending recession," said Verleger. "The world oil market will see prices at least double."

As reported by the Washington Examiner, oil market observers have noted that global oil reserves are thin and anticipate oil prices surging to $90-$100 per barrel after Iran sanctions kick in, while also pointing out the coming diesel crunch that Verlenger is watching.

And this is primarily the result of the looming new IMO rules.

For example, a research note from Morgan Stanley said that as the world transitions from low-sulfur diesel, a cleaner-burning fuel, it will cause big disruptions in the price for oil.

"The stricter regulation on the fuels used by the shipping industry will result in booming demand for middle distillates that would boost crude oil demand by additional 1.5 million barrels per day, potentially sending oil prices to as high as $90 a barrel in 2020," Morgan Stanley said this year.

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But it won't only be rising oil prices that will send diesel prices upward. Verleger says the global demand for low-sulfur diesel, which the U.S. transitioned to for trucks in 2010, will increase global demand for more expensive, less-heavy forms of crude oil to make the cleaner-burning fuel.

This will place an enormous demand on the fuel, and because of the lack of refineries equipped to produce low sulfur diesel, prices are likely to spike even more than higher oil prices alone would cause.

"If nothing changes, the 2020 diesel and gasoil crisis will occur because as many as half of world refineries cannot produce fuel that meets the new regulation," the analysis read. "The owners of these units will face harsh choices," including closing down their facilities.

The upshot: "The economic collapse I predict will occur because the world's petroleum industry lacks the capacity needed to supply additional low-sulfur fuel to the shipping industry while meeting the requirements of existing customers such as farmers, truckers, railroads, and heavy equipment operators," Verleger predicted.

SCDigest Comment: Predictions for runaway oil prices usually prove false or temporary, as the high prices reduce demand – sometimes via recession – and create more supply. That said, it looks like the crunch on diesel could be very real – so would delaying the Jan. 2020 implementation of the new IMO rules make sense?

Should IMO rules on bunker fuel be allowed to take the economy down? Let us know your thoughts at the Feedback section below.


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