$200 Oil in 2020? The Impending Energy Crisis and Biofuels’ Role in Relieving the Refining Capacity Crunch

by Jim Lane (Biofuels Digest) “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,” writes renowned energy analyst Phil Verlager in a note this month titled “$200 Crude, the Economic Crisis of 2020, and Policies to Prevent Catastrophe”. Not good timing for a White House re-election effort if, as expected, the blame falls on lack of preparedness in the 2017-2020 run-up to the projected crisis..

It’s a dire scenario but there’s hard data behind it, and though few go as far as Verleger, almost every expert is warning of a low-sulphur diesel; refining capacity crunch. You can read the Verleger note in full here.

The root cause? A rule agreed by the International Maritime Organization in 2008 and confirmed in 2016 to reduce sulphur content in marine fuels from 3.5 percent to 0.5 percent beginning in January 2020.

The proximate cause? Neither shipping owners nor oil refiners found a way to comply either through fuel-switching, crude-switching to bring in less sulphur-laden “sour” crudes, or to add enough refinery equipment to remove sulphur.

Instead of “playing checkers” with refinery modifications or scrubbers for a short term fix, we should be “playing chess” with low-sulfur, low NOx, and low-carbon solutions like biofuels or methanol, LNG, or DME, which can be bio-based. The stakeholders needing to examine strategies in this area include, besides the refiners, fuel brokers, and ship owners, also companies that use ocean shipping (that is, nearly all manufacturers, retailers, etc.) and have commitments to lowering carbon footprint (that is, many companies).

Shale oil from fracking operations is loaded with sulphur — so it is not a case where fracking operations will necessarily save the day.

So, the swing producer necessary to moderate prices when demand shifts is going to be hard to find, despite the fact that, as Verlager notes, “the public-health arguments for the IMO 2020 rule are incontestable and compelling,” and the refiners and shipping owners have had 12 years to make ready.

The impact?

Verlager writes: “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.”

IMO’s secretary-general Kitack Lim told Platts recently: “At this point, the regulation which brings into force the 0.5% limit in sulfur in fuel oil from January 1, 2020 cannot be changed from a legal perspective, so there is no possibility of delay.”

The US could release light sweet crude from the Strategic Petroleum Reserve. Non-compliance is a risky option — shippers that violate the rule are likely to have their insurance invalidated, based on recent IMO moves.

The biofuels option: biorefining capacity eases the oil refining strain

As Fenwick told The Digest. “Biodiesel will play a role, whether it is on the ship, or backfilling the low-sulphur road transport volumes that are diverted from traditional oil refineries to serve the new demand for low-sulphur marine fuel.” Already biodiesel and renewable diesel have extended the global refining capacity and fuel supply by 4-4/12 percent. There’s an opportunity to step up here to supply more low-sulphur fuel, and it is estimated that one billion gallons per year could be added to the supply of low-sulphur fuels. READ MORE

Excerpt from Politico's Morning Energy: Congress has promised to pull so much oil out of the Strategic Petroleum Reserve that lawmakers on the Hill today are considering what to do with the soon-to-be empty space. ...

More than 290 million barrels of oil will be sold from the reserve by 2027, according to prepared testimony from the Government Accountability Office released ahead of today's hearing. Those sales were primarily aimed at offsetting the costs of unrelated legislation — such as 21st Century Cures Act of 2016 and a major budget package earlier this year — not for DOE to buy more oil to refill the SPR. ClearView Energy's Kevin Book — who will testify at the E&C hearing — explained it to ME using investor-speak: "Congressional portfolio managers are rotating out of energy security," he said. READ MORE