Oil prices could soar heading into the election year as new clean fuel mandate kicks in

Source: By John Siciliano, Washington Examiner • Posted: Wednesday, January 23, 2019

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The Energy Information Administration will put out its much-anticipated Annual Energy Outlook on Jan. 24. Matt Rourke

President Trump has been playing up low oil prices as a second tax cut for the American people and boasting that the low prices are a direct result of his actions.

An impending oil price increase brought on by new global clean fuel rules taking effect, however, is set to undermine his talking points.

Oil prices are set to go up by this time next year, along with jumps in the price of diesel fuel that could make transporting food and goods more expensive, according to an analysis released by the Energy Information Administration last week that also delved into the causes of the looming price increases and its effects of consumers.

The analytical agency pointed out that, beginning on Jan. 1, 2020, new clean fuel rules go into effect for all cargo vessels and ships mandating that they switch out dirty bunker fuel for cleaner low-sulfur fuels. Bunker fuel is the type of thick, sometimes tar-like, oil used in marine vessels.

The agreement was endorsed by dozens of countries, including the U.S., under the International Maritime Organization, a large international grouping formed under the United Nations. The U.N. maritime group decided to implement the agreement as part of a plan to cut pollution from ships.

It is essentially a new environmental regulation imposed on a global scale to phase out dirtier fuels that add a lot of sulfur dioxide pollution into the air, especially when ships are docked.

One private analyst issued a shocking forecast last summer that showed oil prices surging to near $200 per barrel, or even higher, because of the new marine fuel rules.

Philip K. Verleger, senior adviser to the global consulting firm the Brattle Group and adviser to Congress on commodity prices, included the bold claim in a report in July from his independent firm PKVerleger LLC.

He predicted a 2020 economic collapse based on the oil commodity market and the lack of diesel fuel. Other analysts have made similar assertions about a coming economic collapse tied to rising oil prices, even without the additional projection of $200 per barrel prices.

“Catastrophically high oil prices will cause the impending recession,” said Verleger. “The world oil market will see prices at least double.”

Others, like Berkshire Hathaway’s Warren Buffet and Moody’s, predicted last year’s rise in oil prices was a harbinger of a coming economic recession in 2019. But that was before the oil price dropped after OPEC members injected large amounts of crude oil into the market ahead of Trump’s re-imposition of oil sanctions on Iran.

OPEC supply cuts that are going into effect in 2019 could complicate the marine fuel switch next year by causing further uncertainty in the oil supply, which could drive up prices above what EIA is predicting.

The Energy Information Administration is taking a much more conservative outlook when it comes to the effects of the fuel switch on the global oil price.

It sees the per-barrel price going up about $11 this year, to $61 per barrel, with the new marine vessel rules helping to push the price up to $65 per barrel by the beginning of 2020.

That’s far less than what Verleger had predicted, but it is still around $15 higher than current prices. The agency expects big global refiners like Exxon and BP to begin switching over their facilities to produce the cleaner fuels at he end of this year.

The switch will force U.S. refineries to increase their production runs significantly, resulting in a large number of refiners working at nearly 100 percent their capacity. Because refiners will be using low-sulfur diesel fuel to clean up the thicker bunker fuels used in ships, the price of making diesel fuel will rise from 43 to 65 cents in a matter of months. Gasoline prices will also rise slightly.

The effects of the marine fuel standards will diminish over time, the agency said. But it could still be felt going into the 2020 presidential election.

A group representing U.S. refiners said the new maritime rules place the U.S. in a great position to dominate the fuel market.

“The IMO 2020 standards provide an enormous economic opportunity for the U.S. energy industry and its workers to supply low-sulfur fuels to the global market,” Ken Spain, spokesperson for the Coalition for American Energy Security, said in a statement to the Washington Examiner .

These standards give the U.S. the upper hand over foreign oil producers who have not made the necessary infrastructure investments, providing greater energy security and increased geopolitical advantage to the United States, he said. Basically, the U.S. is in a good position to sell its fuel into the global market to help other countries meet the standards.

The Energy Information Administration will put out its much-anticipated Annual Energy Outlook on Jan. 24, which will include projections out to 2050, and should provide a more comprehensive analysis of the effects of the change.