The Regulation That Could Push Oil To $200

July 25, 2018: The Regulation That Could Push Oil To $200

Fuel oil storage

Oil prices could spike as high as $200 per barrel over the next 18 months, which would cause an “economic crash of horrible proportions,” according to a new report.

A research paper from economist and oil market watcher Philip K. Verleger predicts there could be a shortage of low-sulfur diesel fuel in 2020 as a result of regulations from the International Maritime Organization (IMO) aimed at cutting sulfur emissions. The regulations, due to take effect at the start of 2020, lowers the allowed concentration of sulfur in maritime fuels from 3.5 percent to just 0.5 percent.

Those rules have already sparked a scramble for low-sulfur options. But the current global refining capacity may not be able to churn out enough low-sulfur fuels to allow a smooth transition from high-sulfur fuels by the world’s shipping fleet.

The shipping industry accounts for about 5 percent of total global oil demand, and most ships burn heavy fuel oil that is high in sulfur. Switching over 5 percent of total demand to low-sulfur diesel and gasoil – a distillate similar to diesel – is a massive shift.

Ship-owners will have a few options: install expensive scrubbers to remove sulfur, switch to low-sulfur fuels such as diesel or gasoil, or switch over to LNG. Scrubbers and LNG are generally thought to be the most expensive options, requiring capital outlays to overhaul entire fleets.

That will put the onus on low-sulfur fuels. But the problem is that not all crude oil is the same – heavier and sour varieties hold more sulfur and are unable to produce lower sulfur diesel without extra processing. And not all refineries are equipped to handle that processing. Read more click here