It Does Get Risky Out There

Mar 07, 2011, 10:47AM EST
The ferment in the Middle East and North Africa, and the growing aggressiveness (and violence) of Somali pirates are a compound scenario for instability in our industry.

You wouldn’t know it from reading our favorite trade journals, but the shipping industry is not immune to “country risk.”  One story, dated 18 February, tells us that General National Maritime Transport Co. of Libya has just purchased an 180,000-dwt capsize dry bulker.  Well, I wish the company the best of luck.
 The current, um, unrest in the Middle East and North Africa is of more than slight interest to shipowners. 

The ferment in the Middle East and North Africa, and the growing aggressiveness (and violence) of Somali pirates are a compound scenario for instability in our industry.  Commercial shipping runs on oil.  While the present threat of disruption is likely to be temporary, underlying trends are a real threat to what is still a fragile global recovery.  The shipping industry has not, historically, been good at hedging its bets against rising fuel costs and supply bottlenecks.  In that, we are no different from most other businesses.  What makes us particularly vulnerable is that we have little of the “think tank” mentality that characterizes the more sophisticated markets analysts of, say, the Warren Buffet type.  However, a few observations may be helpful. 

 First, it is becoming apparent that even the threat of interruption in supply is likely to cause price instability and inflation.  Speculation is driving the rise in oil and iron ore prices – both highly consequential to those who own or operate ships. 

 To avoid damaging swings in the price of bunkers, we must develop stocks of fuel that will last for more than a few weeks.  This means that production must in fact increase, which in turn requires that more offshore oilfields must be developed.  The key is to diversify global oil supplies beyond the shaky regimes of Africa and the Middle East.  The risks and weaknesses inherit in the existing oil supply chain are rowing, and until governments cope with rising demand, led by China, the shaky economic recovery rests on a very rickety oil market. 

 Today, more than 40 million barrels of oil a day are traded internationally, and this amount is rowing.  It means that supply and point of delivery, and therefore use, are increasingly far apart.  What “new” supplies there are, continue to be produced in states that are hardly stable democracies.  Even Saudi Arabia, a trusted source of reserve capacity as well as actual production, is now seen as being potentially unstable.  This realization is a major reason for oil price instability and inflation, of the type we are now seeing.  The implications for shipping are clearer by the day.  And “what does this have to do with piracy?” you may ask.  The fact is, a major interruption of traffic flow in the Arabian Sea and the Indian Ocean would add up to two disruptions at once.  You do the arithmetic.  

Clay Maitland       
Filed under: Arabian, bulker, Indian, Ocean, oil, Sea
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