The Impact of Oil Price Volatility on the Maritime Industry: A double-edged sword

Falling bunker prices are only part of the big-picture equation.

I had the good fortune to be in Washington, DC last week on business and was able to time my schedule so as to attend a joint Kings Point / Propeller Club function in Arlington. The luncheon included a series of lectures on “The Impact of Oil Price Volatility on the Maritime Industry,” followed by an informal Q&A period. I’m guessing there were as many as 100 industry executives, Kings Point alumni and a few of us state academy-types in attendance. The well-attended affair touched upon some important hot button issues – some too esoteric for this writer – but could have touched upon others, as well. Here’s why:

Beyond the fellowship and – I think – pretty good food, the event targeted one of the most important aspects of the maritime industry’s ability to survive the current economic downturn. And, amidst the recent downward spiral of charter rates, especially in the bulk trades, we are also bombarded daily with the news that the disappearing capital base is now beginning to impact the shipyard outlook, here and abroad. Fortunately, some of that bad news is tempered by the fact that bunker prices are moving south as well, perhaps not necessarily in a parallel fashion to the cost of a barrel of delivered crude oil, but certainly providing some much needed financial respite for operators. But, the falling price of crude oil has the potential to impact the maritime industry in other ways, as well. It’s not all good news.

At this same event, The U.S. Maritime Administration (MARAD) passed out a small brochure entitled, “U.S. Water Transportation Statistical Snapshot.” Perhaps the most significant statistic from that handout is contained in the reality that about one-half of the U.S. deepwater, privately owned fleet is found in the offshore supply sector of that demographic. In fact, of any category in that broad grouping, the offshore sector showed highest percentage growth (36%) for a major category over the time frame of 2002-2007. Implicit in all of that, then, is the understanding that the falling price of crude not only impacts the cost of marine fuels, it also affects the viability of offshore operations, especially in the growing U.S. Gulf so-called “deepwater” sector.

As the price of crude oil continues to head south – it was below $55 dollars per barrel at the time I pulled the trigger on this week’s e-newsletter – shippers and operators alike were welcoming the lower cost of fuel oil. At the same time, oil & gas exploration executives have to be nervously watching the same metric. Knowing all that, the question that needs to be answered is: At what price crude oil is it still profitable to pull a barrel out of a deepwater production site?

There is, of course, no easy answer to a hard question. The question itself doesn’t touch upon many factors, including but not limited to (a.) the correlation (or lack thereof) between crude oil and refined product pricing, and (b.) the differences in costs and pricing between different global drilling locations. At last week’s luncheon, one attendee offered up a basic price of $60 crude oil in answer to my question. And yet, I have been advised by another industry executive in a position to know (see our December print edition for more details) that the bottom price may reside somewhat closer to $40 per barrel. Any MarEx readers with better data than that are welcome to take me to school in a letter to the editor.

Without pretending to have even the slightest inkling of what price delivered crude oil will make the exploration, production, refining and shipping folks all happy, I do know one thing: There will be a point that it will not matter how cheap bunkers can be gotten if the offshore sector folds up its tents in an unprofitable financial climate. And a good portion of those 652 offshore & supply vessels counted by MARAD will be left sitting at the dock when that happens. Count on it. Anyone who lived through the early and mid-1980’s in Houston – as I did – will vouch for that.

Price volatility in the oil markets does affect the maritime industry. As we head further offshore and into deep waters to explore for more energy, that volatility extends far beyond the price of bunkers. As the so-called brown water boats become larger and more sophisticated, they in turn become much more important to the overall maritime picture. Despite the seemingly disconnected relationship between crude oil and refined petroleum pricing (see your retail gasoline pump pricing), the blue water transportation sector is also now inextricably linked to the health of their oil service cousins. Today, and from where I sit, the health of the oil and gas offshore sector is just as important as that of the liner trades straining for bunker price relief as they face downward pricing pressures for their services. I challenge you to disagree. – MarEx.

Joseph Keefe is the Managing Editor of THE MARITIME EXECUTIVE. He can be reached with questions on this article or any other aspect of this newsletter at [email protected]