Oil refiners get behind UN fuel rules that analysts say will drive up prices in 2020

Source: By John Siciliano, Washington Examiner • Posted: Tuesday, February 5, 2019

Oil refiners are defending new United Nations environmental rules against private consultants’ forecasts that they will hurt consumers in the run-up to the 2020 election, rather than aiding President Trump’s energy dominance agenda.

The refinery industry supports the impending new 2020 International Maritime Organization rules, which call for the use of cleaner, low-sulfur fuels in all seagoing vessels and could drive up costs by diverting millions of gallons of diesel, jet fuel, and heating oil to the maritime sector.

The American Fuels and Petrochemical Manufacturers, the refining industry’s main trade group in Washington, says the environmental rules will likely be a boon for the U.S. energy industry, which has been meeting federal low-sulfur fuel standards for years.

The 2020 U.N. rules require a massive cut in the amount of sulfur allowed in conventional fuels used in large commercial tankers and cargo ships. The rules go into effect Jan. 1, 2020.

“We think that cost impacts, if they occur, will be short-lived and minimal,” said Derrick Morgan, the refinery group’s senior vice president for federal and regulatory affairs.

But there have been a number of consulting firms in Washington and elsewhere that have projected the implementation of the rules as potentially catastrophic.

Some analyses have showed the rules raising oil prices to $200 per barrel next year, projections that got the attention of both the Trump administration and Congress. Other refinery officials view those scenarios as overly pessimistic.

The industry doesn’t rule out some price impact, Morgan said, but it expects that it would be very minimal.

Bob McNally, a private analyst and president of the Rapidan Energy Group who has warned the rules will raise prices, takes the refiners’ criticism in stride. He’s met with pushback from the industry, especially after testifying before the Senate on the issue last year.

The new maritime rule “poses a risk, and I want to underscore the word ‘risk,’” McNally told the Washington Examiner.

The risk of implementing the rules as quickly as called for “will cause what Donald Trump fears the most,” he said: a spike in fuel prices, especially for diesel that the nation relies on for moving goods to market.

McNally points out that the International Energy Agency had forecasted last year that the start-up of the U.N. regulations will cause a 20 to 30 percent spike in the price of a number of fuels, including heating oil, jet fuel, and diesel.

Recently, the U.S. Department of Energy’s Energy Information Administration put out a much more conservative analysis, showing prices will go up around 6 percent, he said. Most other analysts and consultants fall somewhere in between, McNally explained.

Supply and demand dictate that the rule, aimed at ships, will drive up the costs of a number of consumer energy resources. The rules require a massive fuel switch from heavy, tar-like bunker fuels used in ships to low-sulfur fuels, which the U.S. has an abundance of and is used to making for road vehicles, jets, and home heating. The surge in demand could divert those fuel supplies to the maritime sector, resulting in higher prices for average consumers, McNally says.

The debate centers on how fast the refiners can push more diesel into the market to meet the surge in demand that the U.N. rules will cause.

“This was not something that refiners asked for, but it is something we are well-prepared for,” said Morgan, representing the industry. “We think that it ought to go forward on time and that the market will adjust.”

But that doesn’t mean the refinery industry isn’t being vigilant with policymakers in the run up to the IMO rules. The industry is engaged in an education campaign on Capitol Hill to convince lawmakers that the rules will not lead to consumer pain.

In fact, the refiners say the U.N. rules could actually help, not hinder, Trump’s “energy dominance agenda” by encouraging the export of more U.S. crude oil and diesel fuel to the rest of the world that is not as prepared as the U.S. to meet the rules.

Although the White House has said it has no plans, right now, to intervene in the IMO rules, it had been concerned about them based on the analyses that came out last year, said Morgan.

The Wall Street Journal reported last fall that the issue had been concerning for the administration, especially with the rules going into effect in an election year.

The issue will become more sensitive toward the end of 2019, and if prices do go up as a result of the rules in 2020, the likelihood of Trump intervening also will go up, McNally says.

“One thing we absolutely know is true of Donald Trump, that he cares of few other things more than low oil prices,” McNally said. “He proved that when he went easy on Iran in terms of the sanctions on their oil exports, and he said publicly, ‘I did it to keep gasoline prices low.’”