The Level and Structure of Single Voyage Freight Rates in the Short Run

The oil-tanker markets have been for years a puzzle to economists and practitioners alike. Tinberger (1934), Koopmans (Koopmans, T. 1936. Tanker Freight Rates and Tankship Building . Haarlem, Netherlands.) and Zannetos (Zannetos, Z. S. 1966. The Theory of Oil Tankship Rates: An Economic Analysis of Tankship Operations . M.I.T. Press, Cambridge, Mass.) observed a cyclicality in the level of tanker rates and “feast or famine” patterns which cannot be fully explained by a cyclical demand. Zannetos (Zannetos, Z. S. 1966. The Theory of Oil Tankship Rates: An Economic Analysis of Tankship Operations . M.I.T. Press, Cambridge, Mass.) provided evidence linking these phenomena to price-elastic expectations by those who operate in the tanker markets and to the concomitant lumpiness in investment in new tankers. With the advent of the supertankers, especially the very large crude carrier (VLCC) and the ultra large crude carrier (ULCC), another paradox has been added, that of a structure of spot rates. The purpose of this paper is to shed some light on this last issue. A statistical model is constructed describing spot freight rates in terms of the operating costs of the marginal ship, the size of the various vessels relative to the marginal ship, the proportion of the tanker fleet operating in the spot market and the proportion of the fleet which is laid up for more than 2 months. The model developed is validated by using the empirical data of the entire period from September 1971 to December 1976, and also the stratified data of shorter periods characterized by either abnormally high or abnormally low rates. Based on these results, a measure of the economies of scale for tankers for different sizes is developed, and the proportion of these economies which is enjoyed by the shipowner, under various market conditions is calculated.