Economists got it all wrong in 2008. And economics has had a hard time recovering amid the debacle over the past decade. However, it may once again be time to test basic economic theory. A perfect testing ground is being offered by IMO 2020.

IMO 2020 happens to be a gamble. Clever marketeers have approached shipowners on behalf of scrubber manufacturers with intriguing calculations.

Buy a scrubber and payback time may be less than a year, two years, or more. Or at least before the unwieldy installations become obsolete.

Stock market investors especially have found the story convincing. Most listed shipping companies have been politely pressured by their investors to order scrubbers. Sometimes many of them.

Simple stories are a good sell in public markets.

Market assumptions

One important assumption in all these calculations has not so much been on the brilliant technology built into the scrubbers — everyone agrees that they may not be the most genial pieces of equipment.

But the assumption is on the price differential between marine gasoil (MGO) and heavy fuel oil (HFO), between “clean” and old-style dirty fuel.

A law of nature seems to suggest that there is a differential of roughly $200 per tonne. At least, that is, if we look long and hard into the past.

Many things have been said about the technology, about port policy on open and closed-loop scrubbers, and the technology as such. However, as an economist, the most interesting thing in this case is price.

Basic microeconomics assumes that demand is inelastic when the buyer has not much of a choice to buy a certain product.

You can perfectly well decide to buy, or not to buy, another shirt — possibly depending on price.

You cannot decide as liberally to buy bunkers for your ship. If you want to transport goods, the engine needs fuel. Thus, you better buy it.

We call this an almost perfectly inelastic situation, as you buy the fuel no matter what the price is.

Perfectly inelastic

Having invested in a scrubber for a vessel, you are obliged to buy HFO. And you will buy it as long as it is somewhat cheaper than the only alternative, MGO.

You may even buy it if it is occasionally a little more expensive than MGO because of operational costs associated with a change. But that is negligible.

Oil majors and bunker suppliers have been sufficiently silent on their pricing of HFO and MGO after 1 January 2020.

It is not that they have no idea what to do, or plan to decide their pricing strategy during the Christmas holidays.

It is more likely that they have something to hide.

An economist would assume that enough fuel of both major types is available.

The same economist would assume that the supply side — the oil majors — happily observe the largest possible number of scrubbers to be built into vessels.

Such development should continue unhindered as long as possible.

In an almost perfectly inelastic market, the suppliers can then put the price of HFO as close to the price of MGO as they want

Reducing spread

In an almost perfectly inelastic market, the suppliers can then put the price of HFO as close to the price of MGO as they want. As long as there is a minimal price differential, ships with scrubbers will be supplied with HFO.

Thus, the economist would not be surprised to see prices of HFO and MGO almost converge in the first months of 2020 and stay that way for good.

The narrowing of the gap to $100 in September was an indication. A further drop to a $10 differential is more likely. But that may be just the theory.

Dr Max Johns is a maritime economist and professor at the Hamburg School of Business Administration

Tankers

Scrubber users will be held over a barrel if basic economics apply