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How Will The Shift To Low-Sulfur Marine Fuel Influence Other Industries?

The International Maritime Organization (IMO)is determined to slash sulfur emissions. The United Nations agency in charge of setting standards for shipping across the globe will be enacting new regulations regarding the sulfur content of marine fuel.

“From 1 January 2020, the limit for sulphur in fuel oil used on board ships operating outside designated emission control areas will be reduced to 0.50% m/m (mass by mass),” states the IMO website. “This will significantly reduce the amount of sulphur oxides emanating from ships and should have major health and environmental benefits for the world, particularly for populations living close to ports and coasts.”

Currently, marine vessel fuel sits at a 3.5% sulfur content. Though the changes will inevitably be better for the environment (and the health of the creatures that live in the environment, which includes human beings), it could have a pretty significant unplanned-for side effect.

A staggering number of industries rely on diesel fuel to function, most notably the trucking industry. Approximately two-thirds of Canada-US trade is moved by truck, almost all of which are powered by diesel engines. Ship owners currently using high sulfur fuel oil (HSFO) are expected to turn to very low sulfur fuel oils (VLSFOs) and marine gasoil (MGO), both of which are produced from the distillate/diesel supply chain; if all of the VLSFOs and MGO are going to shipping vessels, there may not be enough diesel products to go around.

“The world wants to buy VLSFO,” said Adrian Tolson at the SandP Global Platts conference in Houston. The question, he said, is “can we produce it? If the supply of VLSFO falls short of demand, prices will increase and that demand will shift over to MGO.” As he noted on one of his slides, “the end result is greater middle distillate demand and much higher prices for MGO and VLSFO.”

“The industry is not ready,” said Kurt Barrow, an IHS Markit consultancy vice president, who forecasts a “sizeable” price increase for diesel. “You’re not going to build enough new refining equipment nor add enough scrubbers to meet initial requirements for VLSFO.”

This is bad news for both companies and consumers. Consider what happened to the price of helium as the shortage became more severe; although the U.S. is the number one supplier of helium in the world, crude helium prices for delivery in 2019 jumped 135%.

Supply shortages — whether they’re helium or oil — force businesses to pay more for their use, which then translates to higher final costs for consumers. Because no one can actually put a number to the expected price hike, industries across the globe are hanging in the balance. We know that daily global oil consumption is expected to grow from 89 million barrels in 2012 up to 109 million barrels in 2035, but we don’t know how demand will impact those prices.