Tankers Exploding

Jim Brown
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That headline conjures up images of fireballs and massive oil slicks. However, the actuall explosion is in the rate of new tankers being built and put into service and it is depressing rental rates.

Frontline, the world's largest operator of supertankers warned that earnings would decline as the global tanker fleet increased by 3.7% in 2010. Frontline said profit would be "materially lower" for the current quarter than the prior three months.

The rate to ship two million barrel cargoes of Middle East crude to Asia collapsed -87% to only $11,126 per day according to the Baltic Exchange. Analysts estimate it costs $18,000 per day to operate a VLCC supertanker. Fortunately for Frontline they have a wide variety of tankers and routes but the excess new production coming online will seek out the profitable routes and underbid them in order to put their tankers to work.

Frontline said they earned an average of $46,000 a day in the first half of the year for a VLCC rental. The Suezmax tankers made $31,400 per day.

Analysts had expected a faster phase out of the older single hull tankers. Those tankers will be banned by the International Maritime Organization in 2015.

The tanker business will pickup in the years ahead because of the increase in global auto production. A senior executive with Nissan said global auto sales are expected to reach 70 million units for 2010. Production in 2009 was only 60.99 million because of the impact of the recession.

China is a main driver of the increased production. They surpassed the U.S. in production in 2009 and the rate of increase is dramatic. The rate of sales increases is also significant. Nissan said they sold 5,113 Inifiniti cars in China in the first half of 2010. That was double the sales in China in all of 2009. They believe full year sales will be more than 10,000 units and quadruple the 2009 rate.

This is a prime example of why there will be a permanent oil shortage in the next 2-3 years. The Nissan Infiniti is only one brand and model of car being sold in China. Multiply that across the dozen brands and hundred models and you see how fast auto sales and usage is expanding.

China is building the equivlent of the U.S interstate highway system every year but the majority of Chinese towns still do not have paved roads and streets. As China builds out the roads and infrastructure the automobile ownership and traffic immediately follows.

Also, in the developing nations the rate of salvage is only a fraction of that in developed countries. For instance the U.S. is on track to produce 11.5 million vehicles in 2010 but only around two million older cars will be scrapped. That is a net gain of more than nine million vehicles per year. In the developing nations hardly any cars are scrapped. Any vehicle that runs will continue in service for a decade longer than it would in the USA. They just get cheaper as they get older but with 1.1 billion people hoping to someday own a vehicle there is always a ready market for an old car.

Translate this into real terms and you have 70 million new cars in 2010 according to Nissan. There will probably be less than 10 million scrapped making a net gain of 60 million units. The vast majority of those 60 million will run on gasoline or diesel and that is music to the ears of oil company executives.

How much gasoline will 60 million vehicles consume? If you assume they are all economical and get 25 miles per gallon and the owners average 100 miles per week then they will consume 240 million gallons per week. That equates to 5.7 million barrels or roughly a million barrels per work day.

That means that we are adding roughly 1 mbpd to our global consumption every year for automobile transportation alone. Five years from now we will have added 5 mbpd to our consumption. Actually it will probably be more like 6 mbpd because of the annual increase in the number of autos sold. China expects to be selling 20 million vehicles of its own by 2020.

People who claim there will be no peak oil have not done the math. We are adding well over 1 mbpd to our consumption from automobiles alone and depletion subtracts 5 mbpd every year. We are finding and develping an average of 2.5 mbpd of new oil. Unless math has changed since I went to school the answer to that supply and demand question is a shortage in 2-3 years.

Jim Brown

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