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A Fuel Price ‘Armageddon’?

$8 diesel, $6 gas and global recession could result from maritime sulfur rule: Verleger

DENVER -- A regulation targeting marine fuel could have a massive effect on gasoline and diesel prices in the United States and a potentially catastrophic effect on the global economy.

That’s according to Philip Verleger of Denver-based PKVerleger LLC. In a recent white paper, the oil analyst predicts “an economic crash of horrible proportions” in 2020 for the global economy, triggered by a relatively unknown regulation. In 2016, the International Maritime Organization (IMO), an agency in the United Nations, finalized a rule requiring all oceangoing vessels to switch to fuel with a maximum 0.5% sulfur content by 2020. This is from the current 3.5% sulfur standard.

Most shipping companies are expected to switch to low-sulfur diesel (although transitioning to liquefied natural gas is also an option); however, fuel producers worldwide do not have the capacity to produce enough low-sulfur fuel to meet the current demands of land-based consumers—trucks, farming, railroads, etc.—and the shipping industry, Verleger says. Refiners would have to increase their production of low-sulfur fuel by about 2 million barrels per day (bpd) by Jan. 1, 2020—only about 17 months away.

The result is that low-sulfur diesel prices will rise—potentially by 20% to 30%, according to estimates from the International Energy Agency. Meanwhile, some refiners that had produced the high-sulfur fuel previously used in shipping will struggle to find buyers, and they likely will shut down. Others will push up demand for sweet, low-sulfur crude. Both trends would increase oil prices, which could hit $160 to a recession-triggering $200 per barrel once the rule is implemented.

Price Spikes

Verleger predicts that as higher crude prices pressure petroleum products, U.S. consumers could pay up to $6 per gallon for gasoline and $8 to $9 per gallon for diesel.

These increased fuel costs would trigger price increases on everything from food to airline tickets and delivery costs, which would depress consumer spending on items other than energy. Verleger sees the spending reductions affecting industries from restaurants to auto dealers and manufacturers to hotels. “In every instance, employment in these industries declines,” he writes. “Those losing jobs must consume less, multiplying the impact of higher fuel prices.” All will negatively affect U.S. economic growth.

The United States would be uniquely vulnerable to a recession in the next few years, he writes. 

“The increase in debt, combined with the tax cuts enacted in 2017, leaves the country with little room to address a recession,” Verleger writes. “Instead, a large oil price increase could lead to an extraordinarily difficult downturn.”

Verleger does see a few policies that could help soften the cumulative blow of the IMO low-sulfur regulation, including easing the low-sulfur rule, a release of oil from the Strategic Petroleum Reserve and even a full-blown trade war. But thus far, there is no momentum toward any one resolution. “Soon it will be too late to act,” he writes. “Very high prices and recession await.”
 

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