Airlines, trucking industry face sharp rise in fuel prices
Obscure rule will be 'of increasing importance over the next 15 months,' says analyst
An obscure regulation targeting the international marine shipping industry could have a widespread impact on the economy, including the price of airline tickets and diesel at the pump.
The change affects large ships, which use a low grade of fuel that's considered the bottom of the barrel because of its air pollution.
The International Maritime Organization is introducing a sulphur limit rule for 2020, known as IMO 2020, which will decrease the amount of sulfur allowed in the fuel from 3.5 per cent to 0.5 per cent.
In order to comply, many ships will likely switch to diesel, which could lead to the strongest-ever demand for the fuel, according to CIBC analyst Jon Morrison.
"It will rise in a remarkable way," he said about the price of diesel, "in the neighbourhood of 30 per cent plus."
That increase could spur inflation throughout the economy, since the shipping industry relies on diesel to move products and materials by boat, train and truck.
"This is one of the topics that will be of increasing importance over the next 15 months," said Morrison.
The airline industry is not expected to be immune, since diesel and jet fuel of are of a similar grade and traditionally sell for a similar value. If diesel prices spike, so too will jet fuel.
"Diesel and kerosene (jet fuel) are both middle distillates, so they are fairly close in quality at the refinery," said Robert Marks, an analyst with Raymond James, in an email.
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Jet fuel prices have soared in recent years, rising about 45 per cent since the start of 2017. Air Canada and WestJet have raised ticket prices as a result. Some airlines in North America have already voiced concerns about the negative impact on the industry. The National Airlines Council of Canada would not comment.
IMO 2020 has been in development for more than a decade, but only now are governments and a broad range of industries starting to pay attention because of the potential impact, according to Richard Joswick, an analyst with Platts Oil in New York.
Joswick said diesel prices at the pump could rise between four and 34 cents per litre, depending on taxes and other factors.
"That's enough to get people's attention," he said.
The refining industry will adapt to the rise in diesel demand, but it will take time.
"We do think a lot of the impact will be relatively short-lived. We're talking a year or two or three," he said.
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Some shipping companies have said they will install scrubbers in the exhaust stacks of their vessels instead of switching to lower sulphur fuels. According to the Canadian Fuels Association, about 2,500 cargo ships are expected to install scrubbers before the Jan. 1, 2020 deadline. However, there are more than 85,000 ships operating around the world.
North American refineries began working to reduce the sulphur content of fuels for the marine industry in 2012.