Preface.  Ships made globalization possible, and play an essential role in our high standard of living, carrying 90% of global goods traded. But the need for a new, cleaner fuel may cause the next economic crisis.  Currently ships can burn anything, shipping fuel is almost asphalt, but will be less so if cleaned up for emissions. What follows are excerpts from P. K. Verleger’s 2018 article “$200 Crude, the economic crisis of 2020, and policies to prevent catastrophe”.

Update Feb 2021: covid-19 has knocked petroleum use down so much that the jet and diesel portions of crude oil are being added to marine fuels.  These are more expensive fractions of a barrel. But blending can cause problems. Using too much kerosene can lower the temperature at which fuels catch fire, a serious risk for vessels (Loh and Koh 2020).

Here are a few summary paragraphs from this paper:

The global economy likely faces an economic crash of horrible proportions in 2020 due to a lack of  low-sulfur diesel fuel for oceangoing ships when a new International Maritime Organization rule takes place January 1, 2020. Until now, ships have burned “the dregs” of crude oil, full of sulfur and other pollutants, because it was the least expensive fuel available.

The economic collapse I predict will occur because the world’s petroleum industry lacks the capacity needed to supply additional low-sulfur fuel to the shipping industry while meeting the requirements of existing customers such as farmers, truckers, railroads, and heavy equipment operators.

Operators of simple refineries, in theory, could survive the IMO 2020 transition by changing the crude oil they process to “light sweet” crudes that can yield high volumes of low sulfur distillate, crudes such as those from Nigeria.  There is, though, a market constraint to this option. Volumes of low-sulfur crude oil are limited, and supplies are less certain because these crudes are produced primarily in Nigeria, a country that suffers frequent, politically induced market disruptions. Thus, when the inflexible refiners begin bidding for Nigerian oil, prices will rise, perhaps as much as three or four-fold.

IEA economists explained at the time that the oil price rise from 2007 to 2008 resulted in part from the frenzied bidding for limited quantities of low-sulfur crude oil, especially supplies from Nigeria. Then, as today, many refineries could not manufacture low-sulfur diesel from other crude-oil types, such as the Middle East’s light crude oils, because they lacked the needed equipment. In 2008, such refiners contentiously bid for low-sulfur crude, driving prices higher as they sought to avoid closure. This inability to process higher-sulfur crude oils created a peculiar situation. Ships loaded with such crudes were stranded on the high seas because the cargo owners could not find buyers.

At the same time, prices for light sweet crudes rose to record levels. The desperate need for low-sulfur crudes caused buyers to bid their prices higher and higher. This situation will reoccur in 2020. The global refining industry will not be able to produce the additional volumes of low-sulfur diesel and low-sulfur fuel oil required by the maritime industry. In some cases, refiners will close because they cannot find buyers for the high-sulfur fuel they had sold as ship bunkers. In others, refiners will seek lighter, low-sulfur crude oils, bidding up prices as they did in 2008. This price increase may be double the 2008 rise, however, because the magnitude of the fuel shift is greater and the refining industry is less prepared.

The crude price rise will send all product prices higher. Diesel prices will lead, but gasoline and jet fuel will follow. US consumers could pay as much as $6 per gallon for gasoline and $8 or $9 per gallon for diesel fuel.

Below are excerpts about peak diesel from this article: Antonio Turiel, Ugo Bardi. 2018. For whom is peak oil coming? If you own a diesel car, it is coming for you! Cassandra’s legacy.

Six years ago we commented on this same blog that, of all the fuels derived from oil, diesel was the one that would probably see its production decline first. The reason why diesel production was likely to recede before that of, for example, gasoline had to do with the fall in conventional crude oil production since 2005 and the increasing weight of the so-called “unconventional oils,” bad substitutes not always suitable to produce diesel.

…since 2007 (and therefore before the official start of the economic crisis) the production of fuel oils has declined.

Surely, in this shortage, we can start noting the absence of some 2.5 Mb/d of conventional oil (more versatile for refining and therefore more suitable for the production of fuel oil), as we were told by the International Energy Agency in his last annual report. This explains the urgency to get rid of the diesel that has lately shaken the chancelleries of Europe: they hide behind real environmental problems (which have always troubled diesel, but which were always given less than a hoot) to try to make a quick adaptation to a situation of scarcity. A shortage that can be brutal, since no prevention was performed for a situation that has long been seen coming.

the production of heavy gas oil has been dropping from 2007, when there was not as much regulatory interest as there seems to be now. There is one aspect of the new regulations that I think is interesting to highlight here: from 2020 onwards, all ships will have to use fuel with a lower sulfur content. Since, typically, the large freighters use very heavy fuel oils, that requirement, they say, makes one fear that a shortage of diesel will occur. In fact, from what we have discussed in this post, what seems to be happening is that heavy fuel oils are declining very fast and ships will have no choice but to switch to diesel. That this is going to cause problems of diesel shortage is more than evident. It is an imminent problem, even more than the peaks in oil prices that, according to what the IEA announces, will appear by 2025.

fracking oil only serves to make gasoline and that is why the diesel problem remains.

That is why, dear reader, when you are told that the taxes on your diesel car will be raised in a brutal way, now you know why. Because it is preferred to adjust these imbalances with a mechanism that seems to be a market (although this is actually less free and more adjusted) rather than telling the truth. The fact is that, from now on, what can be expected is a real persecution against cars with an internal combustion engine (gasoline will be next, a few years after diesel).

And more from this author in a different article:

conventional oil crude arrived to a peak in 2005 (followed by minimum attempts in 2012, 2015 and 2016confirming a plateau, note of the translator. Data from Art Berman). This is a recognized fact, even by the International Energy Agency (IEA) in its World Energy Outlook (WEO) of 2010

This conventional crude oil is still the most of the oil we consume today worldwide; more than 70%, but their production is declining: in 2005 69,5 Mb/d were being produced. Today some 67 Mb/d. That is, some 2.5 Mb/d less.

The conventional oil crude is the easiest to extract and also the most versatile; the oil that has more wide uses. Specifically, it is the most adequate to refine diesel from it.

To compensate the conventional crude oil, the good one, several oil substitutes were gradually introduced. There are the most diverse ones: biofuels, bitumen,Light Tight Oil, Liquid fuels from natural gas….all of them have two common characteristics: they are most costly to be extracted and their production is quite limited, it cannot rise much.

Besides, most of these so called “non conventional oils” are not suitable to refine or distillate diesel. That’s why we have the present problems with diesel. The more the conventional oil crude production will fall, more will the diesel production drop.

In addition, the latest EIA 2018 report says that if oil companies continue to not invest in oil exploration and production as they have been the past few years, in 20205 we are likely to be short 34 million barrels per day — about a third of all liquid fuels we consume today.

Some statistics:

By value, more than 70% of global trade makes part of its journey by ship, by volume 80%, using 4% of global oil, or 3.3 million barrels a day of the nastiest gunk at the bottom of the oil barrel.

Bunker fuel is also known as high-sulfur fuel oil because it contains up to 3,500 times as much sulfur as the diesel you put in your Volkswagen. Although sulfur’s not a greenhouse gas, it triggers acid rain, which contributes to ocean acidification, and ship exhaust intensifies thunderstorms, so shipping lanes get extra lightning. Sulfur emissions cause respiratory problems and lung disease in humans, especially those who live near ports. It’s such a problem, the IMO estimates the new sulfur-curtailing rule will prevent more than 570,000 premature deaths in the next 5 years.

Alice Friedemann   www.energyskeptic.com  author of “Life After Fossil Fuels: A Reality Check on Alternative Energy”, 2021, Springer; “When Trucks Stop Running: Energy and the Future of Transportation”, 2015, Springer, Barriers to Making Algal Biofuels, and “Crunch! Whole Grain Artisan Chips and Crackers”. Podcasts: Collapse Chronicles, Derrick Jensen, Practical Prepping, KunstlerCast 253, KunstlerCast278, Peak Prosperity , XX2 report

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Verleger, P. K., Jr. July 2018. $200 Crude, the economic crisis of 2020, and policies to prevent catastrophe.   Pkverlegerllc.com

The proverb “For want of a nail” ends by warning that a kingdom was lost “all for want of a horseshoe nail.” The proverb dates to 1230. As Wikipedia explains, the aphorism warns of the importance of logistics, of having sufficient supplies of critical materials.  The global economy likely faces an economic crash of horrible proportions in 2020, not for want of a nail but want of low-sulfur diesel fuel. The lack of adequate supplies promises to send the price of this fuel— which is critical to the world’s agricultural, trucking, railroad, and shipping industries—to astoundingly high levels. Economic activity will slow and, in some places, grind to a halt. Food costs will climb as farmers, unable to pay for fuel, reduce plantings. Deliveries of goods and materials to factories and stores will slow or stop. Vehicle sales will plummet, especially those of gas-guzzling sport utility vehicles (SUVs). One or more major US automakers will face bankruptcy, even closure. Housing foreclosures will surge in the United States, Europe, and other parts of the world. Millions will join the ranks of the unemployed as they did in 2008. All for the want of low-sulfur diesel fuel or gasoil.   Wikipedia [https://tinyurl.com/n7sb629].

The International Maritime Organization (IMO) decreed that oceangoing ships must adopt measures to limit sulfur emissions or burn fuels containing less than 0.5 sulfur—in other words, switch to low-sulfur diesel fuel. The sulfur rule takes effect January 1, 2020.

The economic collapse I predict will occur because the world’s petroleum industry lacks the capacity needed to supply additional low-sulfur fuel to the shipping industry while meeting the requirements of existing customers such as farmers, truckers, railroads, and heavy equipment operators. These users purchase diesel fuel or gasoil, the petroleum product that accounts for the largest share of products consumed. In most countries, they must buy low-sulfur diesel fuel to reduce pollution.

Economists at the International Energy Agency, have warned that these prices must increase 20 to 30%.

While higher prices are worrisome, they should not by themselves lead to a major recession. After all, diesel fuel prices have increased more than 30% at various times this decade. However, these estimates assume that crude prices do not change.

Difficulties will arise because crude oil is not a homogeneous commodity like, for example, bottles of Jack Daniels Kentucky sour mash. Instead, crude oils vary regarding their qualities and composition, and these differences exceed those of most other goods.

Two important distinguishing factors among crude oils are how much sulfur they contain and the diesel fuel volume they produce when refined.  Some crude oils—the light sweet varieties—contain minimal sulfur and produce large amounts of low-sulfur diesel. A far greater number—the heavy sour crudes— contain a higher percentage of sulfur and do not produce diesel that meets environmental sulfur content standards without expensive additional processing.

While many world refineries can produce low-sulfur diesel fuel from heavy sour crudes, a large number have not been equipped to do this yet and thus cannot help in meeting the IMO 2020 requirements.

Much of the incremental crude that will be supplied in 2019 as world production increases will be Arab Heavy. The distillate produced from this crude contains between 1.8 and 2% sulfur.

Much of the sulfur in crude is not removed during refining but rather ends up in “fuel oil,” the “dregs” or residue left over after all the high-value products have been distilled out. It is the cheapest liquid fuel available. It is also viscous (it must be heated before use) and contains many pollutants, particularly sulfur, that are harmful to humans, animals, and plants. Since the turn of the 21^st century, most fuel oil has been consumed by the shipping industry due to the environmental restrictions on other uses. It was only a matter of time before those restrictions came to marine fuel.

In order to make enough clean fuel available to vessels, very large price hikes may be required to suppress non-maritime use.

Refiners will need to “destroy” or find new markets for up to two million barrels per day of high-sulfur fuel oil. Some of it will be sold to oil-burning power plants such as those in the Middle East. These plants could and likely will shift to residual fuel oil to save money

Other volumes of high-sulfur fuel oil will be sold to refiners configured with cokers, where they will be “destroyed,” to use the oil industry’s language. Cokers split heavy fuel or heavy crude into light products and coke. ExxonMobil’s new coker at its Antwerp refinery, for example, will “turn high sulfur oils created as a byproduct of the refining process into various types of diesel, including shipping fuels that will meet new environmental laws.”4 These units will be critical in converting fuel that can no longer be burned in ships into marketable products. The rub is that cokers are very expensive (ExxonMobil’s will cost more than $1 billion) and require significant construction time.

The magnitude of the coming oil market transformation is unprecedented. This historic increase in demand for low-sulfur diesel combined with the equally historic need to dispose of unwanted fuel oil that will, absent moderating actions by nations and the IMO, cause an economic collapse in 2020.

Today, the high sulfur fuel oil price is roughly 90% of the crude price. In 2020, it could fall as low as 10% of the crude price. As a result, the price of low-sulfur distillate, which today sells for 120% of the crude price, would need to rise to perhaps 200% of the crude price to compensate the owners of refineries with limited flexibility that can produce some low-sulfur diesel along with equal or larger volumes of high sulfur fuel oil. Should prices of low-sulfur distillate fail to rise to such levels, these facilities will have to close.

Owners of simple refineries could attempt to procure a different crude feedstock. The only way for these refineries to vary their output is by changing the crude processed. Some crude oils, as mentioned, produce more low-sulfur diesel and less high-sulfur fuel oil than others. Operators of simple refineries, in theory, could survive the IMO 2020 transition by changing the crude oil they process to “light sweet” crudes that can yield high volumes of low sulfur distillate, crudes such as those from Nigeria.  There is, though, a market constraint to the third option. Volumes of low-sulfur crude oil are limited, and supplies are less certain because these crudes are produced primarily in Nigeria, a country that suffers frequent, politically induced market disruptions. Thus, when the inflexible refiners begin bidding for Nigerian oil, prices will rise, perhaps as much as three or four-fold.

Economist James Hamilton asserts strongly, for instance, that the oil price increase in 2008 would have caused a recession on its own. The price rise had already exacerbated a significant downturn in the US automobile industry. General Motors, Ford, and Chrysler had begun closing plants and laying off workers early in the year as sales of SUVs and many autos all but stopped due to lack of demand.

IEA economists explained at the time that the oil price rise from 2007 to 2008 resulted in part from the frenzied bidding for limited quantities of low-sulfur crude oil, especially supplies from Nigeria. Then, as today, many refineries could not manufacture low-sulfur diesel from other crude-oil types, such as the Middle East’s light crude oils, because they lacked the needed equipment. In 2008, such refiners contentiously bid for low-sulfur crude, driving prices higher as they sought to avoid closure. This inability to process higher-sulfur crude oils created a peculiar situation. Ships loaded with such crudes were stranded on the high seas because the cargo owners could not find buyers.

At the same time, prices for light sweet crudes rose to record levels. The desperate need for low-sulfur crudes caused buyers to bid their prices higher and higher. This situation will reoccur in 2020. The global refining industry will not be able to produce the additional volumes of low-sulfur diesel and low-sulfur fuel oil required by the maritime industry. In some cases, refiners will close because they cannot find buyers for the high-sulfur fuel they had sold as ship bunkers. In others, refiners will seek lighter, low-sulfur crude oils, bidding up prices as they did in 2008. This price increase may be double the 2008 rise, however, because the magnitude of the fuel shift is greater and the refining industry is less prepared.

The crude price rise will send all product prices higher. Diesel prices will lead, but gasoline and jet fuel will follow. US consumers could pay as much as $6 per gallon for gasoline and $8 or $9 per gallon for diesel fuel.

The high petroleum product prices will have two impacts. First, prices of everything consumed in the economy will rise. Second, high prices will force consumers to spend less on other goods and services, which will depress demand for airline travel, restaurant dinners, and new automobiles, to mention just a few. The potential impact of higher fuel prices on everything purchased across the economy is obvious. They will raise costs in the agricultural sector, leading to higher food prices. They will boost delivery costs and airline ticket prices.

Sadly, the economic losses could be much greater than any experienced in the prior five decades. The US economy will be further handicapped by the federal government’s debt. The ratio of US debt to GDP has increased from 60% in 2008 to 103% today

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

The government might find it impossible to fund an infrastructure program. Many states might be unable to provide income supplements to the unemployed. Emerging market nations would suffer as well. These nations would be especially exposed because they already face significant economic weakness as a strengthening dollar and rising US interest rates cause large declines in bond and equity markets in countries such as Brazil and Turkey.

If it were a country, the global shipping industry would rank as the 6th largest emitter of greenhouse gasses worldwide.

The IMO adopted a rule in 2008 that contemplated removing most sulfur from fuels used in the world’s oceangoing vessels, which number more than sixty thousand.

Oil production in Venezuela, a major player in the global oil market, collapsed. OPEC, Russia, and several other producing countries reduced output to force inventory liquidations and raise prices. To top it off, in 2018 the United States seems intent on reinstating sanctions on Iran, possibly removing a crude supply source that might be essential in cushioning price increases. These events and actions will all influence market developments in 2020 when the IMO rule becomes effective.

The amount of crude available for refining has a direct impact on the availability of diesel fuel. At the most basic level, world refiners can produce roughly 560,000 barrels of diesel from every million barrels of crude refined, according to Morgan Stanley analysts, so 1.8 million barrels per day of crude must be refined to produce one million barrels per day of diesel.

Global crude production of one hundred million barrels per day in 2020 would require an 8% increase in output from 2017. The annual rate of increase would need to be 3% per year, three times the rate of increase for the last decade. Achieving this boost will be difficult, if not impossible, should the changes in the global supply situation noted at the start of the section— Venezuela’s production decline, OPEC’s output restraint, and the reinstatement of US sanctions on Iran—remain unchanged.

The collapse of Venezuela’s oil production was not anticipated in 2016. Oil output from the country totaled around two million barrels per day when the IMO program was ratified. Two years later, output has declined to 1.5 million barrels per day. By 2020, Venezuela may be producing no crude, which would remove 1.5 million barrels per day from the global market.

Taken together, the loss of Venezuelan output, the inventory reduction engineered by OPEC, Russia, and a few other producers, and the renewed sanctions on Iran will subtract 2.5 to three million barrels per day from the market.

These estimates assume consumers in every country accept the higher prices. This assumption is questionable, however. Recently, truck drivers in Brazil brought the nation to a standstill while demanding lower diesel prices. Eventually, the Brazilian government gave in to the drivers’ demands when gasoline stations ran dry and grocery store shelves emptied. The president cut the diesel price twelve percent, reduced the road tolls paid by trucks, and offered other benefits to end the strike. Truck drivers in other countries could respond in the same way to high prices.

Believe it or not, this prediction must be viewed as optimistic even though the economic consequences of oil selling for $130 per barrel would be terrible. It is optimistic because it assumes market disruptions will be limited to a loss of Iranian crude and the collapse of Venezuelan output. It also assumes the pipeline constraints that keep US “light tight” crude oil (LTO) away from the market today will be resolved and that world refiners will be able to process the LTOs. Finally, it assumes that production in Canada, Libya, and Nigeria continues uninterrupted and that no other disruptive events occur.

US LTOs may create problems for refineries even if they get to market. These crudes are very light. Many refiners must blend other crudes with them before processing. The analysis here assumes this obstacle will be overcome.

A large oil price increase could create a catastrophe where debt cannot be serviced, and a situation such as the Asian debt crisis of 1997 could result.

Any action taken would probably occur after the economic collapse was well under way, just as the financial problems that caused the 2008 meltdown were only addressed after 2008.

These members see global warming as a serious issue and strongly favor the Paris Accords adopted in 2016. The United States withdrew from that agreement in 2017. Thus, one can envision the IMO members refusing to moderate the 2020 rule unless the United States reverses course and ratifies the Paris climate agreement. The United States has no control over the IMO and so can do nothing on its own. It is part of a very small minority there.

The Trump administration’s trade policy will further weaken the willingness of other nations to ease restrictions to help the US. The United States has followed an aggressive unilateral trade strategy since Donald Trump became president. His administration’s policies have left many frustrated and angry. The upcoming economic squeeze tied to the IMO rule provides them a way to even the score.

Economic policies being followed by the Trump administration threaten to reduce the amount of goods moving in international trade. Ironically, a trade war could decrease the amount of fuel used in international commerce, which would lessen the sulfur rule’s impact.

The IMO regulation on marine-fuel sulfur content, if left unchanged, will likely have widespread impacts on the petroleum sector. Crude oil prices could rise to $160 per barrel or higher as the rule takes effect, assuming no market disruptions. Prices could rise much higher with any disruption, even a moderate one. The higher prices will slow economic growth. If they breach $200 per barrel, they would likely lead to a recession or worse.

References

Low E, Koh A (2020) Jet Fuel Finds Once Unthinkable Home. Bloomberg.