The Digest’s 10 Top Advanced Bioeconomy Markets & Predictions for 2020

2. The Oil and Fuels Price Disconnect

We think that you’re going to see something interesting that we haven’t seen before. Generally, we’ve seen liquid fuel prices relating back entirely to petroleum prices and prosperity. When oil prices rose, fuel prices generally followed, and the only other significant lever was overall prosperity which could stimulate demand, strain refinery capacity especially in some niche markets, and there were instances of runaway prices from time to time in the past even when crude oil wasn’t going crazy.

That connection is starting to come under some pressure that may have reached a tipping point. For some time, renewables have been cutting into fossil fuel demand owing to policy support, but another policy support comes into play this year, relating more to low sulfur than low carbon.

Beginning this week, the International Maritime Organization (IMO) is set to enact Annex VI of the International Convention for the Prevention of Pollution from Ships (MARPOL Convention), which lowers the maximum sulfur content of marine fuel oil used in ocean-going vessels from 3.5% of weight to 0.5%.

Why important? The US Energy Information Administration projects that this regulation will encourage global refiners to increase refinery runs and maximize upgrading of high-sulfur heavy fuel oil into low-sulfur distillate fuel to create compliant bunker fuels. EIA forecasts that U.S. refinery runs will rise by 3% from 2019 to a record level of 17.5 million b/d in 2020, resulting in refinery utilization rates that average 93% in 2020. EIA expects one of the most significant effects of the regulation to be on diesel wholesale margins, which rise from an average of 45 cents per gallon in 2019 to a forecasted peak of 61 cents/gal in the first quarter of 2020 and an average of 57 cents/gal in 2020.

That’s significant because we have an instance where the leading experts are predicting lower crude oil prices and no real positive change in global prosperity that might otherwise boost fuel prices, yet fuel prices are expected to rise. Policy has an impact, in other words, and almost nobody really supports having more foul-smelling sulfur in the atmosphere than in absolutely necessary, and there’s widespread support for this move by the IMO.

Long-term, we start to see that abundant supplies of crude oil may no longer have the same impact, automatically, on fuel prices at the pump, and the more that prices get decoupled from fossil fuel abundance, the better. It might help forestall a traditional fossil energy playbook to a drive towards renewables, which is, a) announce some long-term projects in renewables that suggest oilcos are taking action and b) reducing fossil fuel prices and pain at the pump until no one cares about making a market for renewable alternatives.

It’s early days and the impact is limited and muted — but we may well look back and see 2020 as the tipping point where the market prices for fuels were set by attributes and not just energy value.