Publications: Notes at the Margin

Getting Causality Wrong: Misunderstanding the Impact of the PES Closure; Bad Predictions on the IMO Impact on Prices (July 1, 2019)


The Coalition for American Energy Security (CAES) published a study this month entitled "“Economic Analysis of IMO 2020: The Benefits to the U.S. Economy of Full Participation and Compliance." In it, CAES asserts that the marine fuel sulfur content rule that will take effect January 1 will have little effect on crude oil and product prices. For example, the authors expect diesel prices might increase just four cents per gallon. The study illustrates the CAES expectations for diesel and gasoline prices with the graph shown below.


 CAES Figure 4


We found a problem, however, with the CAES analysis and projection of future prices: the data are misrepresented. PKVerleger LLC has a data file of the daily settlement curves for WTI, Brent, gasoline, heating oil, natural gas, and gasoil dating to the beginning of 2005. We were able to match the heating oil data (called diesel fuel by CAES) shown in the graph above to the May 31, 2019 settlements. Some of the gasoline settlements also match. However, as can be seen from our figure below, the settlements for September 2019 through March 2019 and September 2020 to December 2020 are very different.




Our assessment of the IMO 2020 rule's effect on markets finds that very large increases in gasoil prices are likely in 2019. Indeed, prices might even double if there is no flexibility in the IMO 2020 enforcement. For this and other reasons detailed in the July 1 Notes, we find the CAES projections for the IMO 2020 price impact to not be credible.


This week's report also provides an analysis of the market impact of the PES refinery closure and updates, as noted above, our analysis of how the IMO 2020 rule might affect crude and product prices.


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