Whether we toil in or out of the oil and gas industry, most of us are familiar with the old saying: “It is an ill wind that blows nobody good.” The plain meaning of that sentiment certainly holds true for the falling oil prices we’ve experienced in recent years.
After all, lower oil prices are good for the economy in general. Family road trips, work commutes, and domestic heating expenses all become more affordable when oil prices fall.
In this post, we want to look beyond what falling oil prices mean for the economy at large, and focus on why cheaper oil prices mean good news for the shipping industry.
Recent History of Oil Prices
Between 2010-2014, oil prices seemed impervious to reaching any ceiling, having reached a high of $108/barrel in July 2014. Then, in the second half of 2014, oil prices began a steep decline. Prices dropped 75% over the following 18 months.
A period of great uncertainty plagued oil producers and whipped the global markets into a frenzy. It was the industry’s perfect storm, with these drivers:
- The supply of oil swelled as deep water drilling and fracking increased crude supplies.
- China cut back on oil imports when its economy slowed.
- OPEC dug in its heels to protect its price levels but did not slow oil production.
- Iran stepped up oil production and exports when the international community removed economic sanctions.
The falling prices idled oil rigs and caused oil giants like Chevron, Shell, and Halliburton to lay off workers. Prices rebounded above $50/barrel in 2015 following the troubles in Yemen, but that didn’t last long.
In February 2016, oil prices fell to their lowest level in 12 years. Prices started to go back up in the early spring of 2016 mostly due to production disruption and have continued a modest rise, however, as of June 2017, crude oil prices are still hovering in the $50/barrel range with most experts agreeing that it’s unlikely for prices to near the $100/barrel again anytime soon.
The Oil Industry’s Price Loss Is International Shipping’s Gain
When crude oil prices dropped, the shipping industry had reason to cheer because operating costs for shipping dropped. Bunker fuel costs are a major part of a ship’s operating costs, so shippers welcomed the bunker fuel prices slashed in half by oil’s price drop. In addition, lower bunker fuel costs means shippers could reach more markets after the price drop. Instead of cutting routes short or moving slower to save bunker fuel, ships can now travel at speed, take the long way around, and stop in more ports.
Another market development helped tanker companies. Countries like China began to stockpile oil, waiting to take advantage of “buy low, sell high” market forces. These stock piles increased the demand for very large oil tankers able to store oil. Supply and demand market forces increased the daily rates for large storage tankers far above the daily rate for shipping oil tankers.
Changing the Way Shipping Works
So, these days tankers no longer lay idle in port, waiting for shipping orders to come. And the increase in freight rates means greater profits, too. Higher profits mean the shipping industry can afford to increase salaries or hire more mariners and still build more facilities. Higher profits also mean that shippers buy more ships, upgrading fleets.
Companies, like Maersk Tankers, suddenly find they can make strategic choices that will affect their business model and the shipping industry for years to come. Maersk, for instance, changed to shipping clean, refined products, turning its focus away from unrefined petroleum oils.
And it’s not just oil shipments affected by the decrease in shipping costs. Dry goods are less expensive to transport due to the drop in bunker fuel costs. This has caused global manufacturers to step up their demands on the shipping industry. They have increased shipping orders and demand that the shipping industry satisfy their logistical needs to ship more products.
In the end, the politics of oil-rich countries versus the economics of large oil-guzzling countries is always a major driver of market decisions. Lower oil prices will inevitably give way to higher prices at some point and the shipping industry will feel the pinch. In the meantime, however, the shipping industry continues to reap the benefits of the current political and economic climate.
To learn more about the history of oil prices, read BloombergView.com’s article, updated in May 2017, entitled “Oil Prices,” which was an inspiration for this post. To view the shipping industry’s view of the effects of the decline in oil prices, read MarineInsider.com’s article entitled “Plummeting Oil Prices and Its Impact on the Shipping Industry.”