Publications: The Petroleum Economics Monthly

IMO 2020: Implications for Crude (January/February 2018)


The International Maritime Organization (IMO), a United Nations-sanctioned body that was formalized in1959 but traces its origins to the end of World War I, has issued regulations that will require the sulfur content of fuels used on most ships to be 0.5 percent or less after January 2020. The 0.5-percent limit represents a significant cut because the average sulfur content of such fuels now exceeds two percent.


A report by CE Delft, a consulting firm hired by the IMO, concluded that the shift to low-sulfur fuel would have minimal impacts on petroleum markets. CE Delft prepared its analysis in 2016. Its conclusions are no longer valid. Increased production of very light crude from the United States combined with the collapse of Venezuelan crude output, the logistical and legal impediments to Canadian crude oil exports, and production cuts implemented by OPEC nations create a situation where the IMO rules may cause low-sulfur distillate and crude oil prices to double.


In its Oil 2018 report, the International Energy Agency provides a detailed survey of the problems likely to occur if the IMO does not alter its program, noting among other things that gasoil prices will probably increase twenty to thirty percent.


Oil 2018 represents a classic, careful analysis by a nongovernmental organization. It is by far one of the best reports on oil markets produced by a government or NGO in decades. By nature of the source, however, such analyses must understate the impact of policy actions by governments or other NGOs. In this case, the IEA is commenting on rules adopted by the IMO, rules that seemed satisfactory two years ago.


That said, the IEA study does provide a basis for comparing instances of sudden changes in oil demand that affected oil prices. In our January/February report, we present a detailed comparison of the proposed IMO rules and the oil market’s behavior between 2007 and 2008. In it, we show that the impacts of the IMO rules on the supply-and-demand balance would be far greater than the impacts of the unexpected increase in demand for distillate ten years ago. Accordingly, the scenarios presented here see a much larger crude price increase occurring by 2020 if the marine-fuel sulfur content rules take effect as written. Indeed, we could see $200 crude in 2020 if the IMO proceeds unchecked.


This issue of The Petroleum Economics Monthly does not address the global economic impact of the change to low-sulfur marine fuel. A future report will explore this subject. In this summary, we simply note that the IMO rules could depress world trade and cause a serious global recession.


More importantly, we note that the IMO could moderate the oil price increase by revising its compliance schedule such that it calls for reduced sulfur content in bunkers between 2020 and 2024 but does not mandate the 0.5-percent level until 2025. Alternatively, oil-exporting countries could ease the transition by agreeing to boost output now. This action would enable refiners and traders to build the inventories of the low-sulfur product needed to comply with the 2020 regulations. Neither of these approaches seems likely to be implemented.


Today, we have a six-month window to avert a crisis, one that closes around September 2018. Absent action to moderate the impact of the IMO rules, the world seems on track to very high crude prices in 2020. Ironically, US voters may go to the polls in November 2020 at a time of very high gasoline prices and in a recession caused by high crude oil prices. Indeed, future historians may remark that the exorbitant prices occurring around the 2020 election marked the last hurrah for the global fossil fuel industry.


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