Transport Costs and Capacity Adjustment in the Tanker Market

Abstract

The contribution of transport to the delivered cost of oil and oil products has varied substantially over the past 20 years. The process by which tanker freight rates, following periods of apparent inactivity can speedily double or triple in value and just as rapidly fall again is only partially understood. In addition systematic differences in rates between specific classes of routes requiring different types of tankers have resulted in substantial differences in rates of return to tanker owners. Finally, structural changes such as the persistence of a large quantity of ageing capacity, changes in the mix of products and crude oil produced by the exporting countries, and the creation of a large network of pipeline substitutes for relatively risky Gulf sea routes, make it likely that the future course of transport costs will be quite different from that of the immediate past. It is the object of this study to investigate the influences underlying these features of the freight markets and to analyse some of the more likely developments in the market. In the first section I shall examine the historical impact on freight markets of the major shifts which have taken place in world trade patterns. This is followed by a discussion of cost changes and then the supply, demand and cost factors are brought together in a reduced form model to explain movements in freight rates.