Tanker Shortage.

Adding to the cost of oil worldwide is a shortage of tankers. The global tanker fleet is over-stretched by higher demand for oil, by looming deadlines for the phase-out of single-hull vessels for safety and environmental reasons and by lengthening backlogs at the shipyards where new tankers are built.

It is not clear that the existing fleet can handle the 2m b/d of new oil production that OPEC has promised to pump from July 1 and another 500,000 b/d to be added from Aug. 1. Says Jeffrey Goetz, head of marine projects and consulting at Poten Partners, a New York-based energy and ocean transport broker: "There is just barely enough shipping capacity at these high production levels".

Charter rates for tankers, which can be more volatile than oil prices, were driven up in recent weeks by the tight market. Shipping costs may $3/b to the price of crude oil delivered to the US from the Middle East, up from about $2 earlier in the year. Rates will rise further when OPEC (mainly its Middle East members) steps up production by 2m b/d from July 1 and by another 500,000 b/d from Aug. 1. Experts say much of the new crude supply would be stored waiting for scarce tanker space.

Tanker security is a growing issue. Tankers and tanker-loading facilities have been targets of attacks by Al-Qaeda and other terror groups threatening to disrupt oil supplies and adding to upward pressures on prices, maritime insurance premia and tanker charter rates. Complicating things, new security regulations will take effect on July 1 for all big commercial ships calling at US ports. Among other measures, new rules require ship operators to make their engine rooms more secure and demand identification from anyone who comes on board. Most major tanker owners would comply in time, but some smaller operators may not make the deadline. Enforcement of the new rules may leave some tankers excluded from delivering to the US.

Dragos Rauta, technical director of Intertanko, a trade association for tanker owners, says: "At no other time in history have all these factors gone in one way, to make the market this tight".

There are more than 3,600 tankers in service. But about one-third of the world's oil supply is transported by just 435 of them, the 2m-barrel VLCCs, which are almost always completely booked. The shipyards that can build them have deep backlogs of orders for tankers and other vessels, so a new VLCC ordered today would probably not be delivered until late 2007 or early 2008 at the earliest. Tankers of the next largest size, the Suez Max as they barely fit through the Suez Canal, are booked close to capacity. Shippers may be forced to use smaller vessels or keep older single-hull tankers in service longer than planned. About a third of large-scale oil deliveries worldwide this year will still be made by single-hulled vessels, and the looming shortage of tanker capacity may lead operators to extend their service lives. Some ports have banned single-hulled tankers. The International Maritime Organisation in late 2003 decided to move up the schedule for the switchover to double hulls. Almost all single-hulled tankers will be retired by 2010.

Effects On Asia: High oil prices are compelling Asian states to adopt energy saving, fuel efficiency and taxation measures. On June 9 energy ministers from South-East Asia met in Manila with counterparts from Japan, China and South Korea on how they might co-operate to reduce the effects of high oil prices. The Association of South East Asian Nations (ASEAN) organised the meeting under its Asean-plus-three initiative with its three larger northern trading partners. (ASEAN comprises Singapore, Thailand, Malaysia, Indonesia, the Philippines, Vietnam, Myanmar, Brunei, Cambodia and Laos). In a joint statement, the ministers said they had resolved to diversify their energy sources and promote a freer market for trading oil products. Most significantly, ASEAN was studying ways to create oil stockpiles that members could use in case of supply disruptions. ASEAN ministers agreed to improve the climate for investment in oil E&P and infrastructure and to raise the amount of electric power derived from renewable energy sources to 10% in the next six years.