The stars are beginning to align for a summer of higher gasoline prices, as economic growth is strong in many corners of the world and Saudi Arabian and Russian attempts to curtail oil production have started to make an impact.
Normally, high prices induce more supply, as seen by the record U.S. production of over 10.2 million barrels of oil a day earlier this spring. But regulations can constrain fuel supply in weird but meaningful ways. Take, for example, the obscure corner of the global fuel market that supplies thousands of very large cargo and supertanker ships sailing the world’s oceans. Some observers claim that marine regulations surrounding this part of the global fuel market may spike fuel prices in the very near future.
The last time a major price spike took place was back in 2007 and 2008 when crude prices rose $50 in eight months and gasoline prices surpassed $4.00 per gallon nationwide during the summer. There were geopolitical reason for tight oil markets – continued U.S. occupation of Iraq, unrest in Venezuela and Nigeria – but the most unexpected impact on price was caused by U.S. and European environmental laws requiring refiners to dramatically reduce the sulfur content in its diesel fuel. The U.S. rules went into effect in 2006, while EU rules did so two years later. Refiners in Europe and the United States could not build new facilities fast enough to meet the standards, so they made less diesel to avoid expensive fines.
Now some analysts fear the same thing may happen with the threat of tightened regulation of fuel on the high seas. Rules set by the UN-affiliated International Maritime Organization (IMO) will limit sulfur content in its heavy fuel oil by 2020 in much the same way road diesel was limited in 2008. Yet shippers have not upgraded nearly enough ships with the sulfur scrubbers needed (only 250 out of the 60,000 global merchant fleet of ships were upgraded by the end of last year), according to the Rapidan Energy Group.
This means that unless the IMO pushes back on its implementation plans to allow more ships and refiners to upgrade, prices for refined products like gasoline, diesel and home heating oil could start to spike by the winter of 2019 to 2020; just in time for the next presidential election cycle. Indeed, estimates by the International Energy Agency point to a 20 percent spike in distillate prices when the new fuel specifications are implemented, but private analysts like Rapidan believe it could be higher.
The issue does not seem to be on the White House’s radar screen yet, but it is by no means a stretch to imagine the Trump administration threatening to remove itself from the underlying treaty that created the IMO back in the 1950s if the implementation is not pushed past the 2020 election cycle. In fact, it would be a normal Trump strategy to first invoke the treaty-mandated one-year waiting period around the Iowa and New Hampshire primaries in January 2020 (thus animating his nationalist base of voters) then attempt to negotiate a delay or weaken the rule allowing the United States to continue participating.
In the end, if you think the fireworks over the current mid-term elections are already loud and heated, imagine high consumer energy prices that coincide with a Trump reelection campaign.
Image credit: Anatoly Menzhiliy