With high oil prices, now may seem like a good time to invest in new oil tankers. But orders for new tankers are at a record low, reports John Konrad for gCaptain.
According to BIMCO, the global trade association for the ocean-shipping industry, orders for new tankers in the first half of this year were the lowest on record at 1.6 million deadweight tons. (Deadweight tonnage measures how much weight a ship can hold.) Translating from weight to number of vessels, that’s only 23 tankers for the entire world’s shipping industry over the first six months of the year. To give perspective on how low this half’s total was, the lowest half on record before this year was 3.0 million deadweight tons.
Konrad writes that the global fleet of oil tankers is likely to decline in size. The low building numbers are only half of the story. Ships are scrapped as they age, and the average age of the global tanker fleet has been increasing, which would indicate more scrapping upcoming. With few new ships being built, the global fleet is essentially below replacement level.
Many factors contribute to the hesitance for new orders. Shipbuilders have seen inflation just like the rest of us: The price of a new ship has gone up by 25 to 42 percent since 2020. The largest player in oil-tanker construction is South Korea, which has seen a shipbuilding-labor shortage this year.
BIMCO says that shipping companies may be unsure which type of fuel their new ships should use. Global environmentalist initiatives have encouraged transition away from bunker oil and toward liquefied natural gas and methanol as cleaner-burning alternatives.
Those global standards also involve reducing the speed of oceangoing vessels, in an effort to save fuel and reduce emissions. As ships go slower, expected profits to decline because ships will be able to complete fewer trips in a given amount of time than they used to.
A new oil tanker is very expensive, and the time horizon that companies use when making purchasing decisions is decades long. With some Western leaders essentially signaling that they plan to use government power to end the petroleum industry in its current form over the next few decades, industry executives are likely hesitant to make long-term investment decisions.
The possibility of a new kind of “peak oil” in the medium-term future is also likely stifling orders. In the ’70s, people were concerned about peak oil supply; now people are concerned about peak oil demand. If global oil demand begins to decline with the adoption of more renewable technology, investing large sums of money in oil tankers now won’t pay off over the decades-long time horizon.
The world’s leading petroleum producer, the United States, has many navigable inland waterways and lengthy bluewater coastlines on the Atlantic, Pacific, and Gulf of Mexico. Many U.S. refineries are located along these waterways. But the American domestic tanker fleet is small due to the Jones Act driving up costs.
A 2014 report from the Congressional Research Service found that the purchase price of an American-built tanker is four times greater than the price of a foreign-built one. On top of those fixed costs, the cost per barrel of oil shipped is also much higher on Jones Act ships than on foreign ships.
Most of the tankers that are compliant with the Jones Act are relatively small. Only eleven are the large type of ships more commonly used in international petroleum trade, and all of them are engaged in shipping oil back and forth from Alaska to the rest of the country. The world’s largest oil producer is effectively sidelined from purchasing oil tankers for its own market, which would contribute to the shrinking global fleet.
Global energy markets are experiencing tremendous uncertainty right now, which would also give reason for hesitance when ordering new tankers. In a different piece, Konrad writes about the expanding “dark tanker” sector. These are ships used to evade oil sanctions. More vessels are being used to ship Russian oil to new customers in India and China who aren’t following the West’s sanctions over the war in Ukraine. As global trading routes reshuffle, companies could be waiting to see how things shake out before placing tanker orders.
All of this does not portend positive news for energy prices. With fewer tankers to transport oil, flexibility will go down and prices will go up. We seem to be in the middle of a sort of reorganization of global energy markets. That makes hesitance to order tankers understandable, but it won’t help to make the reorganization any easier.