In 1973, the International Maritime Organization (IMO) enacted regulations to reduce pollution from marine and shipping operations. The International Maritime Organization’s new regulations (IMO 2020) limit the sulfur content in marine fuels that oceangoing vessels use to 0.5% by weight, a reduction from the previous limit of 3.5% established in 2012. Most developed countries have already put in place regulations that limits sulfur content to 0.01% of weight while in territorial waters. Many ports, such as Los Angeles Port and Long Beach Port, have installed electricity plugins to enable the vessel to reduce emissions to zero while in port.
As the implementation date for the 0.5% sulfur cap approaches, the U.S. Energy Information Administration (EIA) expects that shifts in petroleum product pricing should begin right now. EIA anticipates that the effects on petroleum prices will be most acute in 2020. The marine fuel demand shift from high sulfur fuels to lower sulfur fuels is why the EIA expects that diesel fuel refining margins will increase from an average of 43 cents per gallon (gal) in 2018 to 48 cents/gal in 2019 and to 65 cents/gal in 2020.
Assuming $4 per gal, the refinery margin increase represents a 5% increase in fuel price. For agriculture, fuel cost is extremely important because it factors into the farming operations’ profit as a direct cost, derived cost, and transportation cost. The price increase directly increases the cost of operating farm machinery. Many farm chemicals use petrochemical feedstocks, which are lighter low sulfur products. Lastly, the domestic transportation companies will charge a higher fuel surcharge fee that will increase the cost of all farm inputs. Also, due to farmers being price takers, the farm soybean price will ultimately reflect the increased cost of shipping soybeans from the farm level to the Center Gulf. Of course, ocean freight cost will eventually have to increase to cover the increase in fuel cost.
The U.S. already has a sulfur limit of 0.1% of weight while in U.S. waters. So, the increased cost is largely already included in trips from the U.S. The good news for future energy prices is the U.S. continues to increase crude oil production, which eventually will drive down the cost of crude oil and in turn, all petroleum products.
