LOGBOEK  - JOURNAL DE BORD

Oil and Tankers, a Volatile Cost Mix

30 April 2010

Getting the goods to market is what all product businesses are about and key to that is transport. In the international sphere that means shipping. For as long as oil has been around the role of tankers has been indispensa-ble. But for the oil industry and oil consumers just what does it cost to get the oil to market and are tankers doing a good job? Our Graph of the Week highlights the key components in this business chain.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inflating Oil….

The cost of oil is represented by the average price of Saudi Arabian Light (the bars). And it’s been on a pretty sharp upward trend in recent years. During the 1990s it was consistently below $20/bbl - as low as $10.94/bbl in 1998. During the first half of this decade the price eased its way up to over $40/bbl and since then has been in excess of $60/bbl, peaking at over $95/bbl in 2008.

In the first quarter of this year it has averaged $77.30/bbl. That means oil this year is 4½ times the price it was in the 1990s and is 2½ times the price of the early 2000s.

A Spiky Mixture

The lines in the graph show the share of transport cost in getting the oil to market by VLCC. The upper one is for delivering oil to the West and the lower one to the East.

In the period up to 2004, average transport costs were around $1.50/bbl to the West and $1.03/bbl to the East, but their share of delivered cost was particularly volatile. There was rarely more than one year’s movement in either direction.

The spikes in 1991 and particularly in 1998, when transport costs peaked at 12% of the delivered cost, were more the result of falling oil prices. Only the spike in 2004 to 8+% of delivered cost could be levelled at sharply rising freight.

Rising Costs, Falling Shares

Since 2004 the share of freight in delivered cost has declined; that’s somewhat perverse given that in these years tanker owners experienced some of their best ever earnings. Transport costs to the West fell from over 8% of delivered cost to about 3% and to the East from almost 7% to 2½% of delivered cost. They now stand at around $2.44/bbl to the West and $2.08/bbl to the East.

Moreover, apart from 2009 when freight rates slumped, transport costs are now lower than at any time since 2004, while the price of oil has more than doubled. Nevertheless, they are now double what they were in the 1990s; but as we have seen the comparative increase in oil prices was more than fourfold.

Consumer’s Friend?

So, getting oil to the market has become pretty costly and consumers are the ones having to pay. For the oil producers and the oil companies it’s the price of oil that matters most as they would most likely happily attest. But transport matters and shipping markets can at least take some credit for keeping the relative cost of freight in check.