This article was written by TPA Director of Policy Ross Marchand, and originally appeared in InsideSources on August 15, 2018.
The constant fluctuation in the price of oil affects virtually everyone across the globe, making and breaking entire nations. While peaks and valleys occur because of well-publicized geopolitics (for example, threats to close the Strait of Hormuz), there are times when obscure developments disrupt the normal operation of oil.
The decision by the United Nations’ International Maritime Organization (IMO) to phase out sulfur from ship fuels by 2020 is one such case. This move threatens to wreak havoc on the global oil market.
In 2016, the IMO agreed to lower the limit on sulfur from the current maximum of 3.5 percent to 0.5 percent. IMO’s mandate, slated for implementation in 2020, was affirmed last month as members agreed on critical sulfur testing and verification issues. But refineries’ inability to lead a dramatic shift toward low-sulfur blends will cause significant turmoil, leading to higher fuel prices and fewer opportunities for billions of citizens.
As a taxpayer-funded International Governmental Organization, IMO doesn’t exactly command the headlines. For example, games played by the Organization of the Petroleum Exporting Countries get far more attention and are front and center of President Trump’s promise to lower gas prices across America. But prices are just as beholden to the maneuverings of obscure, unaccountable organizations that hold taxpayer dollars hostage.
On the surface, the IMO appears to be a harmless organization tasked with “safety and security of shipping and the prevention of marine and atmospheric pollution by ships.” But pollution reductions are achieved by changing shippers’ fuel content, making life difficult for the refineries struggling to keep up.
Shippers, who currently make up around 5 percent of global demand for oil, will likely have to switch over to diesel or gasoil to comply with the 2020 mandate. This change in demand will lead to pressure for refineries to ramp up production of sulfur and gasoil. The end result will be that many refineries will fall behind. As economist Philip K. Verleger explains in a recent report, “As many as half of world refineries cannot produce fuel that meets the new regulation. … They cannot reprocess a high-sulfur diesel fuel to a low-sulfur diesel because their facilities are inflexible.”
Verleger goes on to explain that, while refineries could survive the transition by processing a different type of oil (called “light sweet” crude), supply is limited and primarily comes from conflict-ridden Nigeria. By virtually putting all the oil eggs in one basket will, at the very least, increase disruptions, making it difficult for refineries to keep their head above water.
And these aren’t the hypothetical musings by a rogue economist. A similar scenario happened in 2007-2008, when excessive bidding on low-sulfur fuels caused the price of oil to skyrocket. If many refineries lose out on the scramble and close, the gap between supply and demand will only grow with prices further hiked.
To officials at the IMO and many environmental advocates, these developments are a necessary tragedy to wean the maritime industry off dangerous pollutants. Health officials and experts claim that sulfur caps can save more than 100,000 lives because of lower air pollution. But if shippers no longer have any use for high-sulfur fuels, demand (and prices for certain blends) will certainly nose dive. Perhaps companies in heavily polluting nations will buy up supplies for cheap, merely shifting around pollutants to areas with denser populations.
Something similar happened when the United States adapted the Acid Rain Program in 1990, leading to a collapse in price for coal with high-sulfur content. While sulfur-dioxide emissions collapsed in the United States, China and other developing nations simply bought up cheap, dirty American coal, and imported the resulting pollution.
At least in the American example, the U.S. government could claim a narrow victory in clamping down on pollution. But the world’s seas and oceans are different. As a global commons, merely shifting pollution elsewhere would do nothing to make the problem better. And to the billions of people stuck with a new, gargantuan gas bill, the IMO’s decision makes life far more difficult. By committing to more open markets and lower tax burdens, the IMO can clear the air and promote opportunity for all.