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Oil Prices and Their Impact on Shipping

The precipitous decline of oil prices in the past six months worldwide is a tectonic shift in the energy market.  The principal reasons for the decline are the glut of high-quality crude oil supply and demand which is not keeping up with supply. The supply is increasing because of the new technologies being applied to the extraction of oil from shale beds. All crude oil is held in shales which are a product of ancient seabeds and marine organisms. Over gological time some oil under pressure is excreted from the shale matrix and pools upward in more accessible loci, usually under impervious domes such as salt domes. From these accumulations past drilling has been able to extract the oil fairly easily. Now technology has advanced such that in shales not having readily accessbile oil, a combination of water and sand and some chemicals forced into the beds creates fractures which allow the oil to be released, follow the fracture lines and accumulate near the proximate start of the fractures. The sand holds the fractures open for the seepage. This process is relatively inexpensive for each well. Exacerbating the problem is the political maneuvering within he OPEC cartel as it disintegrates.  The change in prices has extraordinary implications for the world economy of the future but immediate and in general beneficial implications for blue water and brow water shipping although some sectors of the industry will be hurt.

First is the pain. The majors are taking the riskier ocean oil projects off the table until prices make them worthwhile. This eats into the oil service sector which services rigs and the like. I suspect that that sector will be hit hardest simply from lack of demand of the vessels within the sector. No demand is going to mean that as vessels wear out they will not be replaced which impacts the smaller shipyards. Shipyards are backbone economic businesses which emanate further ripples outward. The boom-or-bust US Gulf petroleum economy will be hurt and likely revert to lively markets in used luxury automobiles and wristwatche, as was facetiously said of the 1973 downturn.

What about the other sectors? The tankship sector should not be hurt although there will be two things occurring. There will be shifts in trade routes with much fewer imports to the US Gulf as is now already occurring. The shift to Japan from the Persian Gulf will intensify. But interestingly, there will be more oil to China at these prices and lesser coal as oil-fired plants become more attractive. This will be environmentally beneficial. In general not as many replacement VLCCs will be built and older tonnage will be scrapped.

There is more of course. Fuel is our largest cost. Its reduction in price makes the passenger trades more attractive for investment because there is greater flexibility in top seasons for moving ships more rapidly to meet demand and changing trade routes as necessary to optimize revenues rather than concentrating on saving fuel costs. In the container trades slow steaming may stop as the routes adjust. Larger and faster ships to replace smaller, older and slower ships may gradually occur.

The press for economy through fuel savings will continue, however, it will not be as attractive to find savings there as to find them in operations and fleet and route adjustments.

In the world economy the bulk trades there will shift toward grains and ores and cement and away from coal as the world economy is injected with new money to use newly priced oil. There may well be more  tank ships in the products trades as the VLCC fleet declines

Hence, overall, there will have to be adjustments to the new market realities but this is not bad and profits will increase with better cost impacts from bunkers. We will have to see how this evolves but I think that it is an exciting time to be in shipping.

Categories: Oil Prices
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John A. C. Cartner

John A. C. CartnerJohn A. C. Cartner

Dr. John A. C. Cartner practices maritime law domestically and internationally. He is designated Proctor in Admiralty by the Maritime Law Association of the United States and is member of other state maritime law associations.

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