One of the last freely competitive markets in the world today is the charter market for ocean tankers.
Crude oil constitutes the bulk of tanker transportation, and it must be transported over the world’s relatively few main tanker routes to reach the two major oil market places, the United States and Europe. Only two other market places, Japan and Brazil, deserve mention because of their growing oil consumption.
Of the four major consumer countries named, all but the United States have received Russian crude oil.
There are five major well springs of crude oil—-Venezuela, the Arabian Gulf, the U. S. Gulf Coast, the Middle East, and Libya— and three great, black rivers—from the Arabian Gulf or Middle East branching at Gibraltar to Europe and to the U. S. East Coast; from Venezuela to Europe and to the U. S. East Coast; and from the U. S. Gulf Coast to the U. S. East Coast. The last is traveled only by U. S.-flag vessels. Competition, here, comes not from foreign tankers, but from the pipeline. And competition is keen, for though it lacks the flexibility of the tanker, increasingly higher U. S. maritime labor costs will soon give the pipeline a lower unit transportation cost than the tanker.
The U. S.-flag charter market, influenced both by the large government fleet and by demand for government and foreign aid cargoes, has been in further turmoil due to the effect of the Colonial Pipeline. This pipeline, capable of moving at least one million barrels of product per day from the U. S. Gulf to New York, has made the U. S. charter market quite competitive, even to the extent of forcing some U. S.-flag tankers into occasional foreign trading during the months of low seasonal demand. There is no pipeline carrying crude oil to the U. S. East Coast. But Colonial, whose construction was begun in September 1962 by its nine oil company owners, delivers petroleum products along its 1,531-mile length from Houston to Linden, New Jersey. Its first full month of operation was December 1964. In fact, on the twenty- first of that month, Colonial delivered 967,532 barrels of product.
The U. S.-flag tanker fleet constitutes only about 12 per cent of the world tanker fleet. One quarter of the capacity of this fleet is owned by the government;' the remaining 75 per cent of capacity is about evenly divided between oil companies and independent owners.
Many of the independently owned vessels are under long-term commitment to oil companies and thus enter the market only when the commitments have expired. Oil company tankers enter the market only when they are surplus to company requirements or for scheduling and positioning purposes. Thus at any one time there is only about 10 to 15 per cent of capacity available for charter. Last fall, government chartering combined with the annual autumn build-up of fuel oil inventories made the market very thin and the few remaining vessels available for charter commanded relatively high rates.
Foreign-flag vessels owned by oil companies have a carrying capacity nearly equivalent to the entire U. S.-flag tanker fleet, both privately and government owned. These oil company “Flags of Economy” tankers make up 15 per cent of the world fleet which flies foreign flags. Independently owned foreign-flag vessels generally considered under U. S. control make up an additional 10 per cent of the foreign-flag part of the world fleet. The vessels owned by independents yet considered to be under U. S. control are under long-term charters to oil companies and can be considered in many ways to be part of the oil company fleet. The specific number of these vessels which may enter the charter market depends solely on oil company requirements and therefore varies widely from one period to the next. When the demand for petroleum is high, it would be safe to say that the only vessels placed on the charter market by the oil companies would be those for scheduling purposes. And they would not truly represent an addition to market capacity since they would be balanced by chartered-in replacements whose positions in loading port or loading date were more convenient at a specific time.
In foreign-flag trading over those two great branching flows of oil from the Arabian Gulf and Venezuela, the tanker’s reign is unchallenged. The cost of a pipeline would be prohibitive, especially when compared to the relatively low foreign labor costs which are reflected both in foreign vessel construction and crew wages. Thus, the various foreign “Flags of Economy” ply the ocean waves.
The cargoes which are carried in these trades are the crude oils to feed the hungry refineries. Aga Jari, Gach Saran, Santa Rosa, Tia Juana, and Oficina are among the names which identify the crude oils of the world. Tankers that carry crude oil and heavy oils are referred to as being in “dirty” trading as opposed to “clean” cargoes which consist of the more corrosive refined products—e.g., gasoline and kerosene. And, because clean cargoes are much more corrosive as well as more subject to contamination, clean vessels command ,a premium that dirty vessels do not.
Although the charter market is influenced primarily by the supply of tankers and the demand for petroleum, various psychological and emotional factors also are involved.
Among the psychological factors that influence the trading pattern of the individual tanker, are those subtle skills which another generation referred to as “tricks of the trade.” For example, the astute operator endeavors to maximize the proportion of sailing time during which the vessel is carrying a full cargo and to minimize the amount of time and miles during which the vessel carries only ballast. Return—or “backhaul”—voyages with cargo from the vicinity of the discharge port are eagerly sought. And, to some extent, triangular voyages can be undertaken on which two of the sides are loaded, revenue- producing trips. The keen competition for the relatively few such trips keeps the rates for backhauls at about half the fronthaul rate.
A vessel’s size also influences her trading patterns. Small vessels trade to ports with limited facilities and to terminals with limited storage space. As the trend continues toward larger vessels, the day may not be too distant when small vessels will command a premium over the market because of their scarcity. Obviously, vessels of exceptionally large size are limited as to the number of ports that are capable of handling them. The 80,000- to 130,000-deadweight-ton vessels normally have been built for specific trades and grooved into shuttle runs. Although they do not often come on the market, they have such low unit transportation costs that the owners may be willing to accept rates at a discount from the market. But the fact remains that they compete with all the vessels in the market, and on a voyage charter basis should command full market rates for the trades in which it is possible to employ them.
Throughout the last 60 years the trend of operating cost has been downward as vessels have increased in size and in speed. In October 1939, the world’s average tanker was 10,700 deadweight tons and had an average operating speed of 11.1 knots. In January 1965, the average deadweight tonnage had increased to just over 25,000, the speed was 15.6 knots, and the average age was under eight years. But, at the same time, the average size of vessels under construction was nearly 50,000 deadweight tons.
It is interesting to note that the U.S.S.R. tanker has an age of 5.8 years compared to 14.1 years for the average U. S. tanker.
With today’s “awakening” of the Soviet Union’s tanker fleet it is somewhat startling to note that a Russian ship was one of the first to carry a cargo of crude oil to the now great Thames River ports.
The cargo came in the Ludwig Nobel (ex-Petrolea) in 1886, and was pumped ashore through underwater pipe. Nobel, himself, was one of the first to make an organized attempt —on the Caspian Sea—to transport petroleum in bulk, without using barrels or small tanks.
The Soviet tanker fleet has grown rapidly in the last several years from nearly nothing to 1.7 million deadweight tons by the end of 1962 and 2.7 million deadweight tons by the end of 1964, with an average age of somewhat over five years. It now represents over 3 per cent of the world tanker fleet.
The Soviet fleet’s future influence on the market was a matter of conjecture in the February 1964 Proceedings1 and continues to be when we read of a Black Sea port, Sheskharis, being built to handle 100,000- deadweight-ton tankers bound for Japan, Italy, and Brazil.
The tanker grew quickly in partnership with the demand for petroleum. The tanker freight market demonstrated more than once its inherent tendency to develop in cyclical movements. Periods of peak freight rates occurred in 1912, 1919, and 1927. And, in natural reaction to high rates, new construction of tankers followed, with peaks in new deliveries occurring in 1913, 1921, and between 1929 and 1932.
Rates rose moderately again in 1936 and 1937 followed by a surge of new building in 1938. Not until after World War II did we see the market return to what might loosely be called its “normal” cycles, with two pronounced peaks in 1951 and 1956, the latter followed by the greatest flood of new construction ever.
The reasons for the peaks were—and still are—inherent in a free market. Supply follows demand, and, when demand outpaces supply, the bidding turns it into a seller’s market. In 1951, the Korean War created a need for tankers and raised the specter of a wider conflict with implications of high demand and a reduction in supply.
Again, when the Suez Canal was closed in 1956, with dire predictions that it might never again function properly, charterers were frantic to fill current and future requirements for tanker transportation. The long haul around the Cape of Good Hope absorbed tonnage voraciously. As a result, the major charterers of tankers were on the market for tankers at nearly any price and found themselves the morning after with large fleets of tankers chartered for long periods at rates that were soon to seem too high. Shipyards benefitted from the panic as order after order was placed by independent owner and major charterer alike for new tonnage.
Almost without warning the spot-charter market shot up in 1956 to rates which returned the owner his operating cost plus 250 per cent. Within the space of eight months the market had fluctuated from operating cost plus 75 per cent up to the peak referred to above and back down to only 15 per cent over operating cost for the average tanker. Even the abrupt change in trading patterns which substituted U. S. and Venezuelan crude for Arabian Gulf loadings failed to prevent the violent reactions of the charter market. The effect of the new construction inspired by the Suez Crisis was to be felt in depressed rates for years to come.
But the effects of the Suez Crisis were not unique in 60 years of market rates. As mentioned, there have been several extreme fluctuations to heady peaks and then back down to bare operating costs or below. No peak rate period, however, was of a longer duration than six months, and rates on the plus side of average operating cost lasted only about two and one-half years at the most. Rates lower than average world fleet foreign- flag operating costs lasted three and four years at a time.
It appears, then, that the tanker market reacts violently to short-term changes in tanker demand caused by unexpected events, and that the reactions are seldom of longer than two years’ duration, or about the time it takes to build new ships.
Rates high enough to pay for a tanker in one to three years encourage oil companies and independent owners alike to order new construction when rates are at their peaks. After rates have risen considerably, time- chartering also starts on a large scale. But, since few owners would give up the windfall profits of a high voyage market to time charter their existing ships, the new charters usually call for new ships. When the vessels are finally delivered in large numbers, the market takes an abrupt plunge, for the demand has slackened slightly while the supply of tankers has increased greatly.
Since the charter market for single voyages represents only the demand for the supply of incremental tonnage, it is sensitive to changes in that supply which occur when the majority of the oil campanies attempt to time-charter more vessels to cover anticipated increases in requirements or surmount unusual operating difficulties. Changes in supply also occur when the oil companies find they suddenly have time-chartered too much tonnage and then offer it on the voyage market for rates that may be as low as will yield no more loss than would laying up their owned vessels.
When the Suez Canal re-opened and proved to be an efficient enterprise under its new owners, the market was lowered by mid- 1957 to what we have been conditioned to consider a normal level.
Petroleum demand is a fairly constant factor with an average annual rate of increase since 1900 of about 3¼ percent. Most forecasts of petroleum demand made during the last six years have agreed on a Free World demand of about 33 million barrels per day in 1970, and about 40 million barrels per day in 1975. At present, demand is between 26 and 27 million barrels per day. Thus, the forecasts are for a Free World annual growth rate in the use of oil of close to 5 per cent during the next decade. The major area of growth is, of course, Europe, where energy needs are expanding and there is a shift from coal to oil.
In the postwar period, coal’s share of the U. S. energy market slipped from 44 per cent down to 23 per cent. And this was despite the rapidly increasing demand for energy. In the same period, coal’s share in Europe dropped from 67 per cent to 44 per cent. Now, with refineries blossoming out all over Western Europe and the great new transportation facilities for petroleum making the price of oil ever more competitive, there is every reason to believe that, by 1975, coal’s share in Europe will drop nearly to 20 per cent.
The supply of tankers depends on the fleet currently in existence, new construction, and the rate of scrappage. The existing fleet, however, varies due to layup and vessels in other types of bulk cargo service such as grain.
This year, it is expected that tanker supply will be 15 per cent in excess of demand. A level of ten per cent in excess is generally considered reasonable, although it tends to maintain the market at low levels. When the surplus is reduced to the point at which demand nearly matches supply, the market becomes extremely erratic and overly sensitive.
With the supply of tankers only slightly in excess of demand there is a tendency for market rates to hover at or around the operating cost of the average tanker on the market. But, when the supply becomes too great a burden for the market, charter rates drop to a level which permits the owner of the most efficient vessel to cover only his out-of-pocket costs. As this level approaches, the less efficient tankers are laid up, thus reducing supply and acting as a safety factor which places a floor under which rates will not go.
Present supply/demand forecasting methods generally rely on intuition and experience. If the level of rates could be forecast for long periods into the future with a reasonable degree of confidence, there would exist the possibility for the major oil corporations to plan capital spending for ocean tankers on a long term basis with greater security. The decision as to whether one should build, charter for long periods, or depend to a larger extent on voyage charter would be an easier one. Naturally, efforts are made to look into the future, some relying on statistical methods of analysis. But the weak link in all such studies is the broker’s or chartering man’s guess of market rates. As a result, there is a conservative reluctance to invest in company-owned tonnage when the rate of return is so open to question. This may be one of the reasons for the surging growth of the non-oil-company tanker fleet from 1955 to the present.
In fact, at this date, under 30 per cent of the vessels being constructed are destined for oil company ownership. This will further decrease the present oil company share of ownership in the Free World fleet, which is now nearly 40 per cent. As long as charter rates are at their present level the return on capital investment is lower than oil companies can expect from other areas of capital employment. There is then little incentive for them to build, instead of charter, new tankers.
The major charterers of tankers are, of course, the major international oil companies. Tankers are owned by the major oil companies in various proportions to their requirements, but 40 to 70 per cent would express the range. The remainder of requirements are covered by long-term charters and finally about 10 to 15 per cent by spot-charters, for single voyages.
Because the major oil companies own about half of the tankers they require, independent ownership of tankers is an extremely important factor. Approximately 65 per cent of the Free World fleet is in the hands of independent vessel owners. Much of the non-oil- company fleet exists only because of long-term charters with major oil companies, who have nearly half of the independent fleet under period charter. Many vessels were financed by banks and insurance companies with charters of up to 20 years duration as security. The oil company’s payment for transportation is made in many cases directly to the lending institution which extracts the payment due on principal and interest before forwarding the remainder on to the vessel’s owner.
Thus, the oil company acquires transportation without capital investment; the lending institution acquires a very secure outlet for its funds; and the independent owner acquires a ship which in many cases will be completely paid off in less than half her normal useful life.
The balance between oil company ownership and non-oil company ownership has swung heavily toward the latter in the last decade presumably because oil companies feel that higher rates of return are available for invested capital in other areas such as exploration, production, and refining. The balance will continue to swing as charter rates remain at low levels.
A recurring attempt has been made by independent owners to lessen the risks involved in vessel ownership during periods of low charter market rates.
In 1934, the International Tanker Owner’s Association was formed to alleviate the conditions of depressed rates brought on by a surplus of tankers. Virtually all of the independent owners joined, and the major oil companies furnished support by chartering only vessels from the tanker pool.
Ocean Tankers Owned as of January 1, 1965 |
|||||
Major Oil Companies |
Under 20,000 DWT |
20,000 to 35,000 |
35,001 to 60,000 |
60,001 to 100,000 |
Over 100,000 DWT |
Royal Dutch Shell |
|||||
U.S. Flag |
None |
|
|
|
|
Liberian |
None |
|
|
|
|
Other Foreign |
91 |
34 |
12 |
5 |
0 |
Standard Oil of New Jersey |
|||||
U.S. Flag |
1 |
10 |
6 |
1 |
0 |
Panamanian |
8 |
7 |
15 |
1 |
0 |
Other Foreign |
11 |
17 |
36 |
12 |
0 |
British Petroleum |
|||||
British |
50 |
20 |
26 |
2 |
0 |
French |
1 |
4 |
2 |
0 |
0 |
Gulf Oil |
|||||
U.S. Flag |
11 |
10 |
0 |
0 |
0 |
Liberian |
1 |
3 |
14 |
0 |
0 |
Other Foreign |
6 |
4 |
8 |
0 |
0 |
Texaco |
|||||
U.S. Flag |
12 |
9 |
0 |
0 |
0 |
Panamanian |
1 |
7 |
5 |
2 |
0 |
Other Foreign |
9 |
3 |
1 |
0 |
0 |
Caltex |
|||||
Panamanian |
12 |
0 |
0 |
0 |
0 |
Other Foreign |
26 |
7 |
6 |
0 |
0 |
Socony Mobil |
|||||
U.S. Flag |
2 |
5 |
1 |
0 |
0 |
Liberian |
0 |
0 |
3 |
1 |
0 |
Panamanian |
3 |
0 |
3 |
0 |
0 |
Other Foreign |
4 |
4 |
8 |
3 |
0 |
Tidewater |
|||||
U.S. Flag |
4 |
2 |
0 |
0 |
0 |
Liberian |
4 |
1 |
11 |
6 |
0 |
Panamanian |
5 |
0 |
1 |
0 |
0 |
Owners Major Independent |
Under 20,000 DWT |
20,000 to 35,000 |
25,001 to 60,000 |
60,001 to 100,000 |
Over 100,000 DWT |
Onassis |
|||||
Flag: Liberian |
12 |
22 |
16 |
4 |
0 |
Niarchos |
|||||
Flag: Liberian |
9 |
19 |
13 |
1 |
0 |
Greek |
0 |
2 |
2 |
0 |
0 |
Moller |
|||||
Flag: Liberian |
2 |
0 |
0 |
0 |
0 |
Danish |
6 |
19 |
5 |
3 |
0 |
Ludwig |
|||||
Flag: U.S. |
2 |
3 |
0 |
0 |
0 |
Liberian |
0 |
5 |
8 |
7 |
2 |
German |
3 |
0 |
0 |
0 |
0 |
Naess |
|||||
Flag: Liberian |
1 |
3 |
7 |
0 |
0 |
British |
0 |
4 |
2 |
4 |
0 |
Dutch |
0 |
2 |
1 |
0 |
0 |
Norwegian |
0 |
1 |
0 |
0 |
0 |
Bergesen |
|||||
Flag: Norwegian |
4 |
5 |
9 |
5 |
0 |
Jahre |
|||||
Flag: Norwegian |
7 |
5 |
9 |
1 |
0 |
Livanos |
|||||
Flag: Liberian |
6 |
11 |
1 |
3 |
0 |
Panamanian |
0 |
1 |
0 |
0 |
0 |
Greek |
1 |
0 |
0 |
0 |
0 |
Government Owned |
|||||
U.S.A. |
107 |
10 |
0 |
0 |
0 |
U.S.S.R. |
79 |
14 |
31 |
0 |
0 |
Source: The Tanker Register, H. Clarkson Company, Ltd., London |
The method used by the Association was for each member to pay part of the earnings of each voyage into a common pool. The pool was then used to reimburse owners who laid up their vessels in order to reduce the surplus. In this manner there were few bankruptcies, and rates were maintained at a moderate level until the outbreak of World War II. The tanker pool, which was created as a method of relieving the pressure of competing tonnage, was most successful for the few years of its existence. However, it is a matter for speculation if moderately high rates would have encouraged substantial new construction, thus destroying the pool. Indeed, there was rather a large increase in new construction in 1938, but the war came before the tanker pool was put to the acid test in a proposed attempt by members to extend pool regulations to limit the number of new vessels constructed.
Recent low rates and a moderate surplus of vessels created an environment which caused the establishment of a new tanker pool two years ago by the Independent Tanker Owners’ Association in London. The Tanker Recovery Scheme started with a prediction that owners of 54 per cent of the tanker tonnage not long-term chartered at the end of 1963 would join the scheme. It was reasoned that the major oil companies prefer rates at a sufficiently high level to make difficult competition by non-tanker-owning oil companies in the sale of crude oil. But survival of the Tanker Recovery Scheme is in doubt, since, to this date, membership has been short of that originally desired. In addition, market rates have not dropped low enough to force any but the least efficient vessels into layup. Nor have the major oil companies limited their chartering to members of the scheme.
When rates do fall to the point at which the average vessel cannot earn sufficient revenue to cover fixed costs there are several methods used by the oil companies to absorb the slack. Layup is the most obvious course to follow. Before the high cost of layup is incurred, particularly in terms of more rapid vessel deterioration, loss of trained personnel, and higher repair costs, there are other policies which should be adopted.
For the major oil company, tonnage absorption is most readily achieved, with the least harm to the vessel, by merely slowing down an entire fleet by about 15 per cent. In fact, an ideal speed for efficient, lower fuel consumption and minimum wear on the propulsion units may be chosen for each vessel. So, while unit transportation cost increases with the longer trip time, there are savings in repair costs and fuel costs.
If still more surplus must be absorbed then the transportation analysts are set to work to compare the relative cost of layup versus longer voyages such as via the Cape of Good Hope instead of through Suez. Longer port times and slower turn-arounds in port may also be used to accomplish further absorption. And vessels may be put into other types of use such as grain carrying.
On the other hand, when rates increase there is a lot of capacity easily made available by instituting operating efficiencies. Resumption of normal speed, higher pumping rates in port, more diligent use of backhauls and the resultant increase in the proportion of the voyage during which a vessel is carrying cargo, return of vessels from the grain trade, and the breaking out of layup of the last least-efficient vessels are all relatively fast means of increasing tanker supply. In addition, scrappage shows a marked decrease. Somewhere near the end of the list, new construction is initiated. In the past, the time it has taken to build a vessel has been sufficiently long to make most new construction enter the market after the temporary spurt in demand for petroleum has ceased. The large amount of tonnage thrown on the market as demand subsided to normal levels has forced rates to drop once again to form a trough of depression and layup. Conditions may be changing, as is evidenced by the fact that in the most efficient yards construction times for large tankers can now be as little as six to seven months.
There are four trends which have immediate bearing on the tanker freight market. The first is the steady increase in demand for petroleum, reinforced by the change from other mineral fuels such as coal. Europe may be experiencing now the same revolution that the United States did when petroleum replaced coal as the major source of energy.
New sources of supply are a second factor that may change the whole pattern of trading. The great discoveries in the Arabian Gulf had enormous effect on the Venezuelan trades. Now North Sea exploration is causing speculation on the possible effect of a major discovery on the tanker market. Several years ago, North African oil was a cause for speculation, but its effect in depressing the tanker market has been minimal. It is true that Libya is now a major source of crude oil; but the consistent increase in European demand has readily absorbed the new production.
In 1955, Europe obtained 86 per cent of its crude oil from the Middle East. By 1962, the share brought from the Middle East was only 68 per cent, while North Africa supplied 12 per cent of requirements. Yet, the total requirements had increased so much in the same period that actual Middle East volume flowing to Europe had increased 80 per cent, even though its market share was less. And in the following year Middle East production increased another 11 per cent.
In combination with the trend to new supply sources is that to the construction and use of pipelines. The economics of the pipeline in the United States has substantially reduced orders to shipyards for new construction. The Colonial Pipeline for petroleum product shipments could inspire plans for a crude oil pipeline unless radical cuts can be made in U. S.-vessel operating costs.
There is a sparse but growing network of pipelines in Europe. In conjunction with the development of Libyan oil is the new pipeline system from Southern France up into West Germany. But, as far as Europe is concerned, pipelines which tend to supplement tanker operations and lower the cost of petroleum may even increase the demand for crude oil and for the tankers that carry it.
The trend toward more efficient vessels that operate at lower cost, in its effect on the tanker market, is second only to increasing petroleum demand. For many owners the hangover from the Suez binge is about to start. Blocs of vessels that have been on 10- year and 12-year charters can be replaced by the oil companies at far lower rates or with very large new ships, many of which will take advantage of the strides made in vessel automation. One example of the above is a major international oil company which has on order five 90,000-deadweight-ton tankers and four of the 165,000-deadweight-ton size. That same company is building pier facilities in Rotterdam, the Netherlands, capable of handling tankers up to 200,000 deadweight tons. Shipyards in Japan have on order at the present time more than 25 tankers of 100,000 deadweight tons and up.
The excess of tankers presently operating and of tankers on order over the level required to service demand requirements for the transportation of crude oil and petroleum products makes the near future of the freight market appear to be without any substantial profits for the tanker owner. And the U. S.- flag market, with the exception of strike periods, has been so depressed by pipeline competition and surplus vessels that U. S.-flag vessels have been forced into foreign trading.
It is doubtful if market rates over the next several years will return to the owner of the average tanker more than bare operating costs. Even for the owner who presently enjoys high rates on long-term charters made in the Suez Crisis there is a bleak future. As an increasing proportion of high-rate charters expire, the market must feel a continuing relentless pressure downward.
For the years through 1975, a projection of market rates based on presently known factors indicates no more than a continuance of current conditions. Rates will trend downward, keeping within five or ten per cent of normal operating cost of the most recently built new vessels. Layups and accelerated scrappage will not sufficiently offset the continuance of a rush to construct larger and more highly automated vessels. The drive for sharp reductions in vessel operating cost has begun in earnest and can only result in surpluses of tankers into the foreseeable future. Many will survive, but only the swift will prosper.
1. See A. B. Zerfoss, “Dilemma in Oil”, U. S. Naval Institute Proceedings, February, 1964, pp. 52-63.