By Dr. Lars Schernikau: Energy Economist, Commodity Trader, Author (recent book “The Unpopular Truth… about Electricity and the Future of Energy”)

Details including the full Blog on Marine Fuels are available at www.unpopular-truth.com

Have you ever considered that your next pair of shoes may come with a climate policy surcharge? A charge which you will not find itemized on the receipt but rather buried in the cost of transportation and production.

The same could be true for your refrigerator, your furniture and much of what you fill your supermarket trolley with.

Somewhere along the supply chain, a ship probably transported part of your next purchase… someone fueled the ship and someone had to decide which vessel to build years before you decided to make your purchase.

Now imagine investing in that vessel while the rules governing its profitability keep changing.

How confidently would you spend your money on this moving target?

That is the driving question behind my recent blog article titled, Marine Fuels… What Actually Moves World Trade which was also published in a slightly amended form at Elsevier’s SSRN. With detailed input from marine fuel specialist Gareth Williamson of HMS Bergbau, I explore an industry whose investment decisions eventually reach much further than just the waters it occupies… all the way into your shopping basket.

What happens at sea doesn’t stay at sea

According to UN Trade and Development, around 80% of international merchandise, trade by volume, travels by sea. Ships are the carriers of the materials from which our economies are built, and the finished goods we buy.

Think iron ore before steel, fertilizer before the harvest, fuel before the factories starts their operations.

Figure 1 shows some of the physical scale of which we speak. Behind the containers and cranes lies a much larger network of mines, refineries, factories and inland transport. An increased shipping bill can influence a product’s cost at multiple points long before it reaches the retailer.

Figure 1. Thousands of vessels moving billions of tons | Source: Marine Fuels… What Actually Moves World Trade

I am not saying that every increase in freight rates automatically translates into an identical increase at the store counter, but rather that competition, contracts, margins and the value of the cargo all have an influence on how much of the costs are passed on, and when.

But the fact that remains is… those costs have to be absorbed somewhere.

In the full blog’s breakdown of seaborne trade, I examine the billions of tons moving across our oceans and I dare say that once you see what those ships carry, marine fuel stops looking like a specialist concern and it becomes a question about the cost of living.

Which ship would you order?

Put yourself in a shipowner’s position.

Imagine you are ordering an asset you expect returns on for decades. Its engine, fuel tanks and operating range will determine which cargoes it will carry, which ports it could serve and whether those voyages actually make you money.

If you choose a conventional engine, you face future emissions costs and regulatory exposure. And if you choose an alternative-fuel engine, you must assess a different set of risks namely fuel prices, production capacity, bunkering infrastructure and availability along your routes.

And although a dual-fuel engine gives you options, it cannot guarantee affordability of fuel supply.

Waiting, on the other hand also has its own consequences. Existing ships keep ageing as the maintenance continues. The opportunity to replace an older vessel with a more efficient one may be delayed while its owner tries to figure out which investment will remain viable.

This is the investment problem we discuss in the blog –uncertainty can postpone precisely the improvements policymakers say they want… a perfect example of standing in your own way.

A fuel switch changes the ship

Try this as an experiment. Keep the voyage and the energy requirement broadly the same, but replace the fuel with one that stores much less energy per cubic meter.

Where does the extra fuel go?

Figure 2 shows how sharply volumetric energy density differs between fuels and storage conditions. The blog’s accompanying marine-fuel table makes the comparison more specific: methanol contains about 42% of the energy per cubic meter of very low sulphur fuel oil (VSFO); liquid ammonia contains about 35%; liquid hydrogen about 23%.

Figure 2. Energy density of different fuels. Fuel and storage conditions as shown in the original chart | Source: Marine Fuels… What Actually Moves World Trade.

Those percentages describe the fuels themselves but actual tank requirements and vessel performance also depend on the engine, storage conditions and safety systems.

This exposes a constraint that a policy target cannot remove. You see, more space for fuel and its associated equipment can mean less space for revenue generating cargo, a larger vessel or more frequent refueling. Each option has operational and economic consequences we need to consider.

The fuel tank is part of the business model!

Figure 3 illustrates why changing the fuel can change the whole ship. The implications faced extend to port infrastructure, handling procedures and the routes a vessel can economically serve.

Figure 3. Changing the fuel changes the whole ship. Conceptual illustration from Marine Fuels… What Actually Moves World Trade.

That is why in my blog article, I discuss matters beyond just the engine. Producing a replacement fuel is only the beginning… but delivering it reliably, at the right ports and at a competitive price, is what makes it useful.

You can mandate the switch… but can you supply the fuel?

The European Union’s shipping regulations already affect fuel costs and investment decisions.

The EU Emissions Trading System requires shipping companies to surrender allowances for covered emissions, which covers 100% of emissions on voyages between EU ports and 50% on voyages between EU and non-EU ports. Coverage rises from 40% of chargeable 2024 emissions to 70% for 2025 and 100% from 2026, with allowances for 2026 emissions surrendered in September 2027.

Shipowners also face progressively stricter requirements under the EU’s regulation. For commercial passenger and cargo ships above 5,000 GT calling at EU ports, regardless of flag, FuelEU Maritime caps the annual average GHG intensity of energy used on board. The cap is at least 2% below a 2020 fleet-average reference value of 91 gCO2e/MJ from 2025, tightening in five-year steps to 80% below from 2050.

But recognizing lifecycle emissions does not settle matters regarding engineering nor economics.

I also want to ask…How much electricity is required for these synthetic fuels? How will that electricity be generated? What storage, conversion and transport losses occur before the fuel even reaches the vessel? How much will the delivered fuel truly cost?

And ultimately… will it be available when the ship arrives?

An emissions charge only changes the relative prices of competing fuels. It cannot, by itself, build the production plant, secure its energy supply or deliver fuel to a distant port.

“You can price shipowners out of conventional fuel. But what, exactly, are you pricing them into?”

The practical test is whether the replacement delivers a worthwhile improvement across its production and operating chain, at a cost society can reasonably bear.

Follow the bill back to the customer

The shipping industry already deals with oil-price fluctuations, conflict, disrupted routes and commercial competition… regulation just adds another cost and another set of investment assumptions to decipher.

When a voyage becomes more expensive the knock-on effect starts. Carriers seek to recover that expense through freight rates and surcharges as importers, manufacturers and retailers then decide how much they can absorb and how much to pass on.

There is no single universal surcharge per pair of shoes, but you can be sure there is a connection between the rules governing a ship and the price of the goods it carries.

One of the main questions I raise in Marine Fuels… What Actually Moves World Trade is – what are we achieving with these additional costs, and who ultimately foots the bill?

I believe that shipowners need stable rules under which they can invest in better vessels, alternative fuels should compete on their complete requirements and performance, research should continue into more efficient propulsion, including nuclear options for suitable commercial applications, while taking their regulatory, safety and commercial obstacles seriously.

There is plenty of useful work to do, don’t you think?

So, before demanding a different fleet, we should be able to answer the question facing the people expected to finance it.

So let me ask you …Which ship would you order today?

If that answer remains uncertain, do not be surprised when some of the cost turns up in your next pair of shoes.

The full analysis, fuel comparisons and underlying references are available in my blog article Marine Fuels… What Actually Moves World Trade and at Elsevier’s SSRN here

 

Links and resources

Full marine fuels analysis and original figure numbering

UN Trade and Development on the share of trade carried by sea

European Commission maritime EU ETS questions and answers

European Commission FuelEU Maritime overview