Changes Coming on the High Seas--How Will They Affect US Agriculture?

Published on: 11:01AM Aug 28, 2019

On January 1, 2020, all commercial ocean-going vessels will have to meet new requirements for sulfur content in the fuel they utilize, in an effort to reduce sulfur dioxide emissions globally.  Sulfur dioxide (SO2) is a gaseous chemical that reacts with other substances to form harmful compounds such as sulfuric acid that contributes to environmental problems such as acid rain.  Acid rain was first identified as contributing to degradation of both natural landscapes and stone buildings and monuments in the 1960s, a consequence of industrial pollution primarily from burning high-sulfur coal in power plants.

Despite steps taken to reduce SO2 emissions from power plants in most developed countries, acid rain continues to be a problem around the world.  In response, the International Maritime Organization (IMO) announced in October 2016 that as of January 1, 2020, the fuel used by maritime vessels could not have sulfur content exceeding 0.5 percent by mass, an 85 percent reduction from the previous permitted level of 3.5 percent.  The IMO is a specialized agency of the United Nations given global standard-setting authority for the safety, security and environmental performance of international shipping, dating from the beginning of the UN in 1948. They are charged with enforcing several international conventions--the relevant convention for this regulation is the International Convention for the Prevention of Pollution from Ships, established in 1973. 

According to estimates from the U.S. Energy Information Administration (EIA), about 12 percent of all transportation fuel used globally is used by marine vessels, translating to about 3 million barrels of oil per day.  The high sulfur fuel currently used is known as bunker fuel or fuel oil, which is drawn from the lower part of the distillate column from a barrel of oil at a typical refinery.  One study showed the annual SO2 emissions from one large container ship was comparable to the emissions from 10 to 15 million cars running on diesel fuel.

After January 1, commercial vessels will no longer be able to use such fuel unless they install scrubbers on their engines to reduce the sulfur component of their emissions.  Maritime analysts believe that about one-third of vessels will adopt this option, which is expected to cost between $3 to $5 million per ship, depending on the type of scrubber installed and the age of the ship.

There will be two conventional options available in terms of eligible fuels for ships that choose not to go the scrubber route--Marine Gasoil (MGO) or Low Sulfur Fuel Oil (LSFO).  MGO is produced by refiners who use sweet light crude oil as their petroleum source, primarily in newer, more complex refining facilities found primarily on the U.S. Gulf Coast, as well as in Europe and Asia.  MGO is predicted to be the dominant fuel option chosen when the new rules go into effect early next year, as most refiners who are contemplating production of LSFO are still tinkering with their specifications.  LSFO, once it is available on the market, is expected to be a combination of HSFO and diesel fuel, blended to meet the IMO sulfur requirement.  Using biodiesel in the new fuel instead of regular diesel is being contemplated by some refiners, but this idea has not yet been put into practice.  Some companies have announced that they will switch to Liquified Natural Gas (LNG) to power their newer ships, such as CMA CGM, a French-based maritime shipping company.

170 countries, including the United States, have agreed to abide by the new IMO regulations.  After a three-month grace period, ships found at sea to be using high sulfur fuel without scrubbers would be subject to the penalty of being impounded at port.

How will this new regulation affect U.S. agriculture?  Over the long term, all farmers will benefit by reduced incidence of acid rain globally.  Acid rain leaches organic matter out of soil and can reduce both crop yield and crop quality.  The latter has been a major concern for producers of horticultural crops, whose retail market prices depend heavily on the physical appearance of the product.  Acid rain can cause blemishes on the skins of perishable fresh produce such as tomatoes and berries.

In the short term, it will increase ocean freight rates for both commercial exports and U.S. food aid shipments, especially early in 2020 as shipping companies are scrambling to re-write contract specifications.  If the logistics of delivering the new fuels to ports are not worked out, shipping availability itself could be a problem early on in the transition.  Most large maritime companies, such as Maersk and MSC, have already announced that they will impose surcharges on their freight shipments beginning next year, to help cover the additional billions of dollars in annual fuel costs they anticipate. Some shipping lines expect to reduce some of those costs by simply running their ships at slower speeds, potentially adding several days to trips on longer ocean routes.

To the extent that production of LSFO for marine vessels utilizes significant amounts of diesel in the new blend, that will reduce the availability of diesel for surface vehicles such as trucks, trains, and farm machinery, raising diesel prices by as much as 20 to 25 percent in 2020.