Oil May Reach $200 on Shipping Fuel Regulations, Verleger Says

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Thursday, 12 March 2009

Crude oil may rise to $200 a barrel in five to seven years' time if regulations governing the sulfur content of ship fuel aren't relaxed, according to economist Philip Verleger. Refiners will have to buy more-costly low-sulfur oils such as West Texas Intermediate traded on the New York Mercantile Exchange to meet the new regulations. Low-sulfur laws caused the record oil prices last year, Verleger, president of PKVerleger LLC, told delegates at the Flame conference in Amsterdam today.
"Until the regulations are clear, and until the shipping industry indicates which direction it's going, refiners aren't going to make the investments" needed to make the fuel, Verleger, who last April predicted oil would rise to $200 by the end of last year, said in an interview.
The International Maritime Organization, the United Nations' shipping division, agreed in April last year to cut the maximum sulfur content in so-called bunker fuel to 0.5 percent by 2020 from 4.5 percent, starting from 2012. It is easier to convert low-sulfur crude into low-sulfur fuels.
It's still unclear whether refiners will be able to produce fuel oil, which most ships currently use, in sufficient quantities to meet the low-sulfur rules, Isabelle Muller, head of an industry group representing companies including Exxon Mobil Corp. and Royal Dutch Shell Plc, said at the time.
Refiners may produce more diesel to comply with the regulations, which could lead to shortages of the fuel in Europe, said Muller, secretary general of the European Petroleum Industry Association.
'Train Wreck'
It's not clear, even if refiners decide to invest in low- sulfur diesel, that they have the time to get it done, Verleger said. "You take all this together and you have a train wreck, which could easily arrive at 2015, where there's not enough of a fuel that they want you to use," he said.
Lawmakers worldwide are passing legislation, such as the federal Clean Air Act, aimed at reducing emissions of sulfur dioxide, which is blamed for acid rain.
Crude oil for April delivery fell as much as $1.02, or 2.2 percent, to $44.69 a barrel on the New York Mercantile Exchange, trading for $45.01 at 12:15 p.m. London time. Prices are up 1.6 percent so far this year and down from a record $147.27 in July.
Source: Bloomberg