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When the IMO 2020 Hits the Fan

Posted October 29, 2019

I was a dead man. We were going 130 miles per hour. My date was passed out, head lolling above a cloud-like mauve dress as we launched south on Interstate 87 in the backseat of a Buick Grand National. Empty wine coolers rolled on the floor.

It was prom night, and we had left Saratoga in a jovial mood, but things had taken a dark turn as Scot in his dad’s Fiero kept edging us faster from the next lane. The engines screamed and the white lines looked like dots.

I’m decidedly middle-aged now, the statute of limitations is over, and besides, I wasn’t driving. I only bring up this tale of youthful indiscretion to point out the gross unintended consequences of government regulations.

Broken Windows and Bartels and James

In 1850, French economist Frédéric Bastiat published an essay titled, “That Which is Seen, and That Which is Not Seen.” Bastiat illustrated, through a story of the broken window fallacy, the destructive effects of unintended consequences that result from government intervention in the economy. 

The examples of government malfeasance are myriad, including, but certainly not limited to, minimum wage laws, rent control, Pell grants, Social Security, and the war on drugs. 

The U.S. government has a program that pays famers to take the fat out of milk, thus creating skim milk — for your supposed good health. It has another subsidy for “real cheese” that enables those same dairy farmers to sell the fat it was just paid to take out.

But I’m not here to talk about past government foolishness; I’m talking about the greatest fat-thumb rule shoved down the throat of the most complex system in the world. It’s called IMO 2020, and no one knows the chaos it will cause.

First, let's look at an example of the last time the government meddled in the energy market.

In the U.S. in 1973, the United States Environmental Protection Agency issued regulations to reduce the lead content of leaded gasoline and increase gas mileage. The EPA's rules were issued under section 211 of the Clean Air Act, as amended 1970.

In 1968, the United States made the greatest cars in the world, and Detroit had the highest per-capita income on earth. By 1974, it was all over. The 1975 Firebird of Smokey and the Bandit fame went from zero to 60 in 7.8 seconds, up from 5.4 seconds in 1972. Not only were they slower, but they were also poorly made and didn't last.

By the late 1970s, the Big Three were closing plants, Toyota and VW were fixtures, Chrysler was bailed out, and formerly great middle-class cities from Akron to Gary were destroyed. It took 13 years for the United States to build a car like the Buick Grand National, and by then it was too late.

IMO 2020

It's going to happen again on a much greater scale. As I wrote in this space last week, a small UN organization called the IMO passed a set of regulations that will introduce tremendous changes on the global shipping industry — an industry that accounts for 90% of global trade.

The rule states that high-sulfur fuel oil (HSFO, or 3.5% fuel) that is used by the vast majority of global shipping will be changed to low-sulfur fuel oil (LSFO, or 0.5%, called gasoil) by the first of the year.  

The consequences to this shift will be far reaching.

Alan Gelder of Wood Mackenzie stated that he foresees a shortfall of 1 million barrels a day of LSFO and an increase in marine gasoil demand:

Shipping consumes 3.5 million b/d of high-sulphur fuel oil (HSFO, sulphur content capped at 3.5%). Refiners globally will be able to deliver 1.5 million b/d of VLSFO (very-low sulphur fuel oil, capped at 0.5%) by our reckoning... That leaves around 1 million b/d looking for marine gasoil (similar to diesel) which is more expensive — so shippers will pay more for their fuel.

Gasoil prices are already surging, as speculators are buying it up and storing it in offshore tankers with the idea that it will be much more valuable in two months.

There will be winners and losers. The U.S. has light sweet crude that can be converted into gasoil and so will be a winner. Others, such as select shipping companies that have already converted to the new fuel, will be big winners as rates surge and old non-compliant ships are retired.

I don’t have the space here to give you the full lowdown of how to profit from the IMO 2020 regulations. But I will send out a free report tomorrow.

Don’t miss it. The opportunities for profits are huge, and likewise, you don’t want to be stuck holding the wrong stocks when the fuel oil hits the fan on January 1, 2020.

All the best,

Christian DeHaemer Signature

Christian DeHaemer

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Since 1995, Christian DeHaemer has specialized in frontier market opportunities. He has traveled extensively and invested in places as varied as Cuba, Mongolia, and Kenya. Chris believes the best way to make money is to get there first with the most. Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor's page.

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