The oil industry has done its best to play down the oil market effect of the impending IMO 2020 rule. Executive after executive has tried to reassure politicians and policy makers that no substantial impact will occur. As always, though, oil executives have been parsimonious with the facts. In my experience, these individuals do not lie; they just say as little as possible.
Things are changing, however. The opinions of some in the industry have now been revealed via a new group called the “Coalition for American Energy Security” (CAES). As the CAES “About Us” webpage explains,
The Coalition for American Energy Security (CAES) is a diverse and broad coalition of American manufacturing workers, integrated energy companies, refiners, industry associations, shipping companies and other groups that play a crucial role in the maritime fuel supply chain. We believe the United States should adhere to the scheduled implementation of the International Maritime Organization’s (IMO) standards, which will reduce sulfur emissions from nautical fuel by 80 percent when they take effect in January 2020.
This PR effort should not surprise anyone. Oil refining is a capital-intensive, low-return business. Profits tend to be depressed during periods of stable demand and supply, unchanged government regulations, and high crude prices. Profits rise when crude prices fall, when operations at facilities are disrupted, or when consumption increases unexpectedly.
The real opportunity for profit, though, occurs when environmental regulations change in a way that makes it more difficult to produce specific products. This occurred from 2004 to 2008, a time labeled the “Golden Age of Refining.” In 2004, gasoline prices and US refiner profits surged when the US Environmental Protection Agency tightened rules on motor fuel sulfur content. A Wall Street Journal article noted that imports from traditional sources dropped because foreign refiners could not make lower-sulfur products. Prices and US refiner profits surged, as WSJ reported:
Independent refiners, in particular, are enjoying an unusually strong run. Take Valero Energy Corp. VLO 0.16%, which has grown from one refinery 20 years ago to 15 today. The San Antonio company earned more profit in the second quarter of 2004—$633 million—than it did all of last year. Valero’s share price has soared nearly 50% since the beginning of the year and more than 250%, or more than tripled, since December 1998.
In the first months following the implementation of the new low-sulfur rules, refining margins rose by almost $5 per barrel. If one adjusts for taxes and retail distribution costs, these margins may have doubled. Today as in 2004, the members of CAES have no interest in the consumer or common good. The companies that have joined the organization understand that the IMO 2020 regulation offers an opportunity to make record profits if President Trump does not intervene.
Platt’s Meghan Gordon explained that trade groups created the CAES weeks after The Wall Street Journal published an article describing the ways in which the Trump administration was considering delaying the IMO 2020 implementation. After observing that the White House wants to push back the sulfur rule deadline of January 1, 2020, authors Timothy Puko and Benoit Faucon noted the following:
The White House says the administration is focused on the damage rising fuel costs might have on the economy, but some administration officials concede the timing of the implementation could have political implications in an election year.
“Few things terrify an American president more than a spike in fuel prices,” said Bob McNally, a former energy adviser to then-President George W. Bush. “If President Trump learns that IMO 2020 risks a big fuel oil-price spike in the winter of a presidential election, he is going to object.”
In her article, Platt’s Gordon suggested that Trump is powerless in this regard beyond his tweeting:
So if US pump prices or oil benchmarks spike ahead of implementation day, what can the White House do to delay IMO 2020? Not much at all—short of building a majority coalition supporting delay ahead of the IMO’s Marine Environment Protection Committee meeting in May. That looks very unlikely, though, after the panel in October already rejected a proposal for a soft rollout of the standards.
Trump does hold a few tools that he could use for domestic messaging purposes if prices spike: releasing fuel from the 1 million barrel Northeast Home Heating Oil Reserve or ordering an emergency crude oil drawdown from the Strategic Petroleum Reserve.
If Gordon is correct, one should ask why oil refiners and others are putting money into the CAES? Why suddenly is the IMO 2020 issue receiving such attention from firms like Valero?
The answer is simple. Trump has access to two tools that Gordon ignored. One is the “Emergency Economic Powers Act of 1977.” Another is the “National Emergencies Act,” which is almost one hundred years old. Either could be used to constrain the activity of US refiners.
The most likely restriction would involve imposing limits on exports of diesel fuel and gasoline. The US is a net exporter of both fuels, although some regions are net importers. The CAES members are undoubtedly worried that the president might invoke his executive powers to cut these exports—and perhaps those of other petroleum products—should US refiners not act to ensure that the fuel supplies needed to keep prices at current levels are made available to US consumers.
As Bloomberg’s Liam Denning and Elaine He noted prior to the 2018 midterms, higher gasoline and diesel prices hit red-state voters hardest:
It is 110 days to the midterms, and you will likely visit the gas station many times between now and then.
Hence there’s an all-hands effort to keep a lid on pump prices. Pushed by the tweeter-in-chief, Saudi Arabia has executed a supertanker-size U-turn, pushing barrels back onto the market. Congress, meanwhile, threatens new legislation allowing lawsuits against OPEC (not for the first time). And there is now open debate about President Donald Trump dipping into the Strategic Petroleum Reserve for a little relief (something we warned about here last month).
Denning and He concluded that “it is the curse of U.S. presidents that whoever sits in the Oval Office gets blamed for high oil prices despite having little control over them.” At the time they wrote, President Trump had not yet declared a national emergency. He now has. As a result, $6.5 billion in defense spending will be reallocated to build a border wall despite the objection of the US Congress. Does anyone doubt he would act in a similar fashion if the IMO 2020 implementation leads to higher gasoline and diesel prices? Should prices rise, Trump could declare another national emergency, and his action will crush the independence of the US refining sector. If necessary, the president will take steps to avoid the negative political fallout from higher fuel prices.
The CAES clearly fears this outcome, but it is powerless to stop the president’s intervention, thus its preemptive campaign casting the IMO 2020 rule as essential for America’s energy security and job growth. The members know that if Trump acted to lower US gasoline and diesel prices, he would be cheered by almost every voter. There would be no effort to block his move. The oil industry has few supporters in Congress and even fewer among the general population.
By Philip Verleger for Oilprice.com
