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October 23, 2019 10:30 AM, EDT

Energy Experts Remain Cautious About Price Hikes as IMO Mandate Looms

IMO mandate loomsGetty Images

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The price of low-sulfur diesel is expected to surge in the near future as a mandate that cargo ships dramatically cut sulfur emissions takes effect.

The International Maritime Organization has ordered ocean carriers, which use as much as 4 million barrels of diesel a day, to switch to low-sulfur diesel beginning in 2020. The sulfur content must be slashed to meet a 0.5% limit from 3.5%.

The sharp reduction likely will cause a spike in diesel prices, energy analysts warn, due to greater demand for the fuel that already is heavily used by the trucking industry.

RELATED: Diesel Slips 0.1¢ to $3.050 a Gallon

Come Jan. 1, any ship that doesn’t convert to low-sulfur fuel must use marine scrubbers to reduce emissions.

Scrubbers are an economical and environmentally friendly way to remove sulfur oxides from the exhaust gas of ship engines and to protect air and water quality.

Because of the timeline — too short to build the number of process units needed to convert high-sulfur fuel oil to the new 0.5% limit — demand is expected to be high but supply low.

“Right now it’s out of sight, out of mind, but I think that we’re going to get a wake-up call in a couple of weeks,” said Phil Flynn, senior oil analyst at Price Futures Group in Chicago. “This could turn into a bad situation, a big price spike.”

Phil Flynn, an oil analyst at the Price Futures Group of Chicago

Flynn

Flynn’s dire prediction came just as the U.S. average retail price of diesel dropped by 0.1 cent to $3.050 a gallon, reported by the Department of Energy on Oct. 21. That cost is 33 cents less than it was a year ago at $3.38, said DOE. Those prices are highest on West Coast which marked a 2.2-cent jump to $3.675 a gallon.

In May, the U.S. Energy Information Agency reported the mandate could push the price of diesel higher by as much as 20 cents to 25 cents.

Some analysts fear the impact will be hardest on the East and West coasts — home to the nation’s major ports that are dredged deep enough for massive ocean carriers that would need a great amount of the low-sulfur diesel to fuel their ships.

It’s expected the majority of shipping companies will significantly increase the use of diesel, or use new blends of fuel oil, which will be produced to meet the IMO’s mandate.

Emissions from high-polluting marine diesel — so-called “bunker” fuel — are known to cause respiratory symptoms and lung disease, and they lead to acid rain that can harm crops, forests and aquatic species, according to IMO.

Limiting emissions from ships will improve air quality and protect the environment, the group said.

Several nations, including Japan and China, now say their refineries are starting to produce more low-sulfur diesel to meet the expected increase in demand from shipping.

But Glen Kedzie, counsel for Energy and Environmental Affairs at American Trucking Associations, said there are so many variables for calculating energy prices that it is hard to say whether prices will rise or by how much.

Glenn Kedzie, energy and environmental counsel at the American Trucking Associations

Kedzie

“Calm before the storm, possibly. Can I say that with certainty, no,” he said.

There’s another factor that could affect prices, especially along the East Coast: the availability of home heating oil. A cold winter could tighten supplies for trucking, ocean carriers and homeowners.

“Home heating is not a big part of the market, but it will get a lot of attention if something does happen in the Northwest and in the Midwest,” Kedzie said.

The Department of Energy estimates 5.7 million homes in the United States use heating oil. Eighty-five percent of those homes are in the Northeast, nestled in New York, Pennsylvania, Massachusetts, Connecticut and Maine. In 2017, consumers in those states used nearly 2.6 billion gallons of oil. (Home heating oil and diesel are essentially the same fuel — the only difference is the color. Home heating oil is dyed red to indicate that it is not legal to burn in a diesel vehicle because the dye indicates that there were no road taxes paid with it.)

“Our general feeling is that we think the market is going to get really tight here in a few weeks, and it’s going to get really interesting,” Flynn said. “I think we should be concerned. If we get an early cold winter, the draw on heating supplies will be a factor. This could turn into a bad situation, with a big price spike.”

One factor that could help mitigate concerns over much higher prices is U.S. oil and refining capacity, according to the latest summary of oil production by the Institute for Energy Research. U.S. crude production increased by 3.3 million barrels a day, to more than 12 million barrels daily, as a result of hydraulic fracturing and horizontal drilling. As a result, the United States is among the world’s largest oil producers.

Also, according to the American Petroleum Institute, U.S. refining capacity has increased nearly 7% since 2010, while throughput, the amount of petroleum passing through refineries, has increased 11.7% in the last nine years.

Staff Reporter Jim Stinson contributed to this story.

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