International Oil Transportation

Author: Dr. Jean-Paul Rodrigue

1. Petroleum
Very few commodities have become as vital as petroleum since it
can be used as a source of energy as well as a raw material in the
manufacturing of plastics and fertilizers. As a commodity
of strategic importance, petroleum has for long been the object
of geopolitical confrontations. Several contemporary geopolitical
events were closely related to oil or had consequences on oil
supply and prices. The first event that triggered the geopolitical
importance of oil was the decision in 1912 by the British Admiralty
to convert warships from coal to oil propulsion because of speed
and range advantages.
Since Britain had no oil resources, it nationalized the AngloPersian Oil Company and committed itself to the protection of this
resource in Persia (Iran after 1934). World War I demonstrated the
growing importance of the internal combustion engine (trucks,
tanks and planes) on modern military operations. The 1920s were
characterized by exploding civilian demand for oil because of
motorization as the automobile was becoming a significant mode
of transportation. A the same time, the industry quickly became
controlled by a few major corporations that became the oil giants
of today. The oligopolistic commercial control on the price and the
production of oil was first established in 1928 by theAchnacarry
Agreements between the "seven sisters", the major oil
multinationals of the time.
"Seven Sisters". The seven major oil multinationals which by the
early 20th century have achieved dominance over the industry.
Five of them were American and the two other were British. The
American companies included Exxon (Standard Oil of New Jersey),
Mobil (Standard Oil of New York) and Socal (Standard Oil of
California which later became Chevron), all of which were the
result of the forced breakup of Standard Oil in 1911, and Gulf and
Texaco which were created after the discovery of the Spindletop
field in Texas in 1901. The British companies were Royal Dutch
Shell (a joint venture with the Netherlands) and British Petroleum
(BP), whose interest in world oil expanded with the discovery of oil

fields in Persia (Iraq) and in the Dutch East Indies (Indonesia).

Through mergers and acquisitions the "Seven Sisters" have
become four; ExxonMobil, Chevron-Texaco, BP (acquired Amoco
and Arco) and Royal Dutch Shell.
These corporations have invested massively in extraction
infrastructures, especially in the Middle East and Latin America.
They were effectively in control of the world's oil supply and
demand with a set of strategies such as fixing quotas, prices and
production. However, a nationalization trend started to emerge
in many developing countries, sowing the seeds of future oil
supply control and shocks. In 1938 Mexico forcefully took control,
through expropriation, of its entire oil industry undermining for a
while its access to foreign markets but triggering sympathy in
many developing countries as a symbol against foreign
exploitation of national resources. World War II revealed to be a
conflict strategically dominated by oil as key weapons were
armored and air forces.
The decision of the United States to establish an oil embargo on
Japan in 1941 is one event that triggered the war in the Pacific.
Japan's strategic objectives were to secure the resources of
Southeast Asia, especially the oil fields of Indonesia, and has
planned fast operations to achieve these objectives. The same
year, Germany's invasion of the Soviet Union had among its major
objectives the securing of the oil fields around Baku in the
Caucasus region. Both Germany and Japan failed to establish a
secure source of oil, contributing to their defeat in 1945 by
strategically more mobile allied forces. Allied nations controlled
about 86% of the world's oil supply.
The post World War II era underlined the growing geopolitical
importance of the Middle East, as Europe and the United
States were importing growing quantities of oil from that region.
In 1948 the Ghawar Field was discovered in Saudi Arabia, which
accounted for the largest conventional oil field in the world. The
supply was shifting rapidly to this region as more oil reserves
were discovered. Attempts were made to integrate countries like
Iran, Iraq and Saudi Arabia in alliances with Western powers, but a
series of geopolitical events, such as the creation of the OPEC and
Islamic nationalisms, would complicate access to oil resources.

2. The Geopolitics of Petroleum

In view of the powerful economic control of oil production by
Western multinational corporations (the Seven Sisters), several
producing countries, most of them in the Middle East, had a goal
to gather a greater share of the oil incomes by controlling supply.
Venezuela, Iran, Iraq, Saudi Arabia and Kuwait founded
the Organization of Petroleum Exporting Countries (OPEC) in 1960
at the Baghdad conference. From its foundation until the
beginning of 1970s, the OPEC was unable to increase oil prices.
The main reasons were that production was very important in
non-member countriesand because of the difficulty of OPEC
members to agree on a common policy since economic theory
clearly underlines that cartels are bound to fail at fixing prices.
Consequently, developed countries were confident that the price
of petroleum would remain relatively stable. The American
Government even predicted in the early 1970s that oil prices
might rise to about 5 dollars per barrel by 1980. In such an
environment of low petroleum prices and strong economic
growth, no developed country had an energy policy and energy
waste was common. This situation however changed quickly. In
the 1970s, OPEC countries achieved control over more than 55%
of the global oil supply and started to fix production quotas based
on the oil reserves of each of its members. Each member began a
process of nationalization of their oil industry (Libya, 1971;
Iraq, 1972; Iran, 1973; Venezuela, 1975). By 1972, 25% of the
ownership of oil operations in OPEC countries is nationalized, a
figure that climbed to 51% by 1983. Another objective was to
establish co-operation between producers in order to avoid
competition that would bring the down the prices.
This cartelistic objective was feasible in the context of a growing
market demand and the dependency on only a few oil suppliers,
but very difficult to maintain in a competitive environment.
However, the initial trigger of the surge in oil prices in the 1970s
was a monetary event. In 1971 the United States decided to
"close the gold window" essentially removing the convertibility of
the US dollar in gold. The dollar thus because entirely a fiat
currency only backed up by the confidence in the American

economy. Strong inflationary pressures thus began, as this event

essentially became a "license to print", which quickly percolated
into commodity prices, including oil. Between 1970 and 1973, oil
prices jumped from $1.80 to $3.29 per barrel as OPEC countries
adjusted their price to reflect the American inflationary monetary
policy.
The Kippur War between Israel and Egypt (and several other
Arabian countries) in 1973 gave OPEC additional reasons to
intervene by nationalizing production facilities, reducing
production by 25% and imposing export quotas. The goal was to
undermine Israel's support, mainly by the United States. Oil
became a geopolitical weapon.
On October 19 1973, OPEC declared an oil embargo against the
United States, which lasted until June 1974. The price of oil
consequently climbed to $12 per barrel by the end of 1973, a
fourfold increase. In a context of high oil demand, of limited
additional capacity in developed countries and of no readily
energetic substitutes, OPEC gained the temporary ability to
control the price of oil. Themarket became controlled by
supply (oil producers) causing the first oil shock. Under the
control of the OPEC, the price of oil remained high but stable from
1974 to 1978, around $12 per barrel. Developed countries started
to worry about the exhaustion of oil reserves and unreliable
supply sources but not much was done on this regard.
The Iranian revolution of 1979 and the ensuing Iran-Iraq War
(1980-1988) caused the second oil shock where the price of oil
surged over $35 per barrel, imposing several drastic, but
somewhat temporary, measures to lower oil consumption.
This resulted in a relocation of energy-consuming industries, in
strategies for consuming less energy (such as energy efficient
cars and appliances), in relying more on national energy sources
(petroleum, coal, natural gas, hydroelectricity, nuclear energy),
in building strategic reserves, and in substituting petroleum for
other energy sources when possible. It is estimated that about 2
billion barrels are held in strategic reserves around the world, the
bulk of it in the United States, Japan and Germany.

The Carter Doctrine (1980), stating that the United States would
intervene militarily if its oil supply was compromised, is also the
outcome of the uncertainties derived from the first and second oil
shocks. The military presence of the United States in the Middle
East was increased, as the oil of the Persian Gulf was clearly
perceived as of foremost importance to national security. At the
end of the 1980s and at the beginning of the 1990s, OPEC
countries lost their price-fixing power because of internal
problems (economic and geopolitical conflicts between its
members) and especially with the arrival of new producers such
as Russia, Mexico, Norway, the United Kingdom and Colombia.
These new producers were not submitted to OPEC policies and
were free to fix their own prices. Mexico, for instance, surpassed
Saudi Arabia in 1997 to become the second largest oil exporter to
the United States. Latin American countries such as Columbia and
Brazil are trying to boost their oil production.
Vietnam is exploring offshore fields, as are other Southeast Asian
countries, hopeful that there are major reserves under the South
China Sea. From 1982, divergences occurred within OPEC
members to fix quotas and prices as competition increased.
Furthermore, the share of OPEC dropped from 55% of all the
petroleum exported in the 1970s to 42% in 2000, with an all-time
low of 30% in 1985. That year, Saudi Arabia lowered its oil price
to increase its market share while OPEC members were
competing with each other to be allotted larger quotas. A decision
was made to allocate quotas in proportion to proven oil reserves,
which lead to an array of "creative accounting" practices in the
estimation of reserves. Thus, reserves were indexed to fit
production needs, leaving doubts about their true extent. For
instance, Kuwait's reserves surged from 64 to 92 billion barrels in
just one year and without any new discoveries. The reserves of
the United Arab Emirates were boosted from 31 to 92 billion
barrels. Iran announced that its real reserves were 93 billion
barrels, up from 47 billion barrels.
The most significant "increase" in oil reserves in 1985 came from
Iraq when its reserves went to 100 billion barrels, up from
previous figures of 47 billion barrels. Those inflated and possibly

non-existent reserve figures remain today. The result of this

inflation of reserves and the larger export quotas they permitted
was an oil counter-shock that lowered the barrel price under 20
dollars, even reaching a record low of 15 dollars in 1988. The oil
market was again a market controlled by the demand. Abiding
to production quotas became a major issue among OPEC
members with countries such as Kuwait producing well above
quota. This transgression was a motivation, among others, for the
invasion of Kuwait by Iraq in 1990, triggering the First Gulf
War (1990-1991). The market reacted to these uncertainties and
the price of petroleum jumped to $23 per barrel. The United
States applied the Carter Doctrine an intervened with a massive
military operation, which ousted Iraqi forces of Kuwait. Then an oil
embargo on Iraq was established by the United Nations. However,
other petroleum-exporting countries were quick to expand their
production to replace Iraq's and Kuwait's shortfalls and the price
of oil fell to $15 per barrel by the end of the 1990s. Henceforth,
OPEC countries only control about 40% of the global oil
production. In the current setting OPEC can be considered as
a dysfunctional cartel likely bound to failure and be dismantled.
Formal price fixing mechanisms, both on the supply and demand
sides, commonly fail as there are too many incentives not to
abide, particularly if oil prices are high.
The beginning of the 21st century saw increased insecurities in
oil supply, political pressures, monetary debasement and military
interventions; a third oil shock has unfolded between 2003 and
2008. The Second Gulf War (2003), under the pretense of
fighting terrorism and securing weapons of mass destruction
(which turned out to be non-existent), saw the American
occupation of Iraq. The outcome was a greater control of long
term petroleum supply sources but with increasing political
instabilities in the Middle East.
Oil output from Iraq, which account for the fourth largest reserves
on the world, has remained problematic. Additionally, instability in
Venezuela (corruption and nationalization) and Nigeria (civil
unrest), have stretched the worlds extra capacity thin. Increased
demands, mainly from China which has become the world second

largest importer, are also stretching global oil supplies. There are
numerous challenges facing the global oil industry in terms of
additional capacity, refining capacity and its distribution through a
system of pipelines and tankers. The systematic debasement of
the US dollar by the Federal Reserve is also contributing to higher
oil prices through inflationary policies also followed by the
European Central Bank. Attempts at mitigating the consequences
of an asset inflation phase triggered by accommodating credit
creation policies have spilled over the commodity and energy
sectors. Unlike the first two oil shocks, the third oil shock was
related to unhealthy mix of strained supplies, geopolitical
risk andmonetary debasement.
3. Petroleum Supply and Demand
The oil industry is oligopolistic both in its supply, demand, control
and in its functional and geographical concentration. The demand
is controlled by a few very large multinational conglomerates,
each having a production and distribution system composed of
refineries, storage facilities, distribution centers and at the end of
the supply chain, gas stations. The supply is controlled by a few
countries where the oil industry is often nationalized or by the
OPEC umbrella, which regulates about 37% of the global oil
production. Since
the
first
commercial
exploitations
in
Pennsylvania in 1859, the importance of oil increased significantly
in the global economy. In 1920, 95 million tons of oil were
produced annually around the world. This number reached 500
million tons by 1950, a billion tons in 1960, and an average
annual production around 3 billion tons in the 1990s. This strong
growth rests for a very large part on the availability of oil
resources and their low cost. Like many otherresources,
petroleum reserves is subject to variations that are related to new
discoveries and what can be economically extracted. Continuous
technological innovations in surveying and extraction enabled to
discover and economically exploit oil resources in previously
inaccessible locations. This notably involves artic and sub artic
environmental conditions (e.g. Alaska and Siberia) or offshore
locations (e.g. North Sea). The relationships between oil supply
and demand are characterized by:

Reserves. Oil reserves have a high level of concentration,

with 64% of proved reserveslocated in the Middle East. The
question remains about how much reserves of oil are

available and how much time they would last. Figures about
the totality of earth's oil reserves were between 2,100 and
2,800 billion barrels before oil began to be exploited in the
19th century. As of 2001, an estimated 1,020 billion barrels
of proved oil reserves were available and 900 billion barrels
have been extracted, which represents about a third of all
available oil reserves. To this figure, can be added between
200 to 900 billion barrels of oil that potentially remain to be
found.
Considering
these
figures,
the
global
oil
production should peak around 2005-2010 and then start to
decline. This trend is being confirmed by the output of
theworld's largest oil fields, all which is either in decline or
possibly declining, in addition to an ongoing decline in
several oil producing regions in the West. On a long-term
perspective, the control of OPEC will emerge again since the
bulk of oil reserves is located within its jurisdiction. Saudi
Arabia alone has about 25% of all the world's oil reserves,
putting upward pressures on energy prices. There is however
a potential in tapping tar sands (particularly in Canada) to
produce oil, but this process is energy intensive and leads to
low quality fuels.
Supply. Oil production has steadily increased in the second
half of the 20th century to satisfy a growing demand. On
average 81.6 million barrels of crude oil are produced each
day (2006 figures), 32% of it in the Middle East, the single
most important oil producing region in the world. About 60%
of all the oil being produced is already committed and 40%
is sold on open markets. More significantly, excess oil
production is limited both in capacity and in its geographical
origin. 90% of this excess oil production is located in the
Persian Gulf with Saudi Arabia, along with accounting for the
world's largest oil reserves, being the only major supplier
able to provide instant additional capacity if required. Excess
production capacity is of high relevance as if a major
disruption in other suppliers occurs, the additional capacity
can immediately be brought up to maintain the current oil
supply level without significant price disruptions. Recent
events, namely the conflict in Iraq, nationalization in
Venezuela and civil unrest in Nigeria, have increased
uncertainty for oil supplies.
Demand. An average of 83.7 million barrels of petroleum per
day were consumed (2006 figures), compared with 31.2

million barrels in 1965. Economic systems, which include

industry, housing, energy generation and transportation,
became dependent on cheap oil prices, with the United
States being the most eloquent example. While the United
States ranks as the leading global consumer of oil (20.1
Mb/d), the rapid growth of the Chinese economy in the last
decade has propelled China to the second rank of oil
consumers (5.5 Mb/d), surpassing Japan (5.3 Mb/d). China
accounted for around 40% of the global growth in oil
demand in the recent years. Since 52% of all oil is consumed
by transportation activities, motorization is one of the
driving forces behind the consumption of petroleum.
Demand is also characterized by a level of seasonality with
heating oil demands in the winter and more gasoline
demands in the summer.
There are also concerns that at the same time that global oil
production could be leveling off and eventually decline
that exports could drop at an higher rate because of growing
consumption in oil producing countries. Thus, potentially
dwindling supply and growing demand could create multiplying
effects. This trend applies well to the United States, China or
Indonesia, which from being net exporters of oil have become net
importers.
For many other cases oil consumption has not changed
significantly over time. An overview of the geography of oil
production and consumption thus underlines a strong spatial
differentiation between the supply and the demand.
Because of geographical and geological factors, where oil is
mainly produced is different from where oil is mainly consumed
resulting in acute imbalances which are growing rapidly. This can
only be overcome by massive oil transportation infrastructures,
including pipelines, tankers and storage facilities.
4. Petroleum Transportation
The barrel is the standard unit of measure for oil production and
transportation even if it no longer has much reference in reality
(steel drums are sometimes used). Its usage has an unusual

origin. In the 1860s oil riggers were at a loss about where to store
the oil suddenly gushing out of new rigs.
Empty whiskey barrels were used as a palliative and a convenient
mean to store and move oil for the emerging industry. Barrels
have always been a convenient mode in a pre-motorized era since
they could handled by hand by rolling them.
By 1866, a standard barrel size of 42 US gallons (158.98 liters)
was agreed upon. Since then, the volume of international trade in
oil increased as a result of world economic growth.
The largest oil consumers are the most heavily industrialized
countries such as the United States Western Europe and Japan.
OECD countries account for about 75% of global crude oil imports.
Since oil consumption and production do not happen in the same
places, international oil trade is a necessity to compensate the
imbalances between supply and demand.
Unlike most other countries, a major portion of OPECs oil is
traded in international markets. Since the first oil tanker began
shipping oil in 1878 in the Caspian Sea, the capacity of the
world's maritime tanker fleet has grown substantially. As of 2005,
about 2.4 billion tons of petroleum were shipped by maritime
transportation, which is roughly 62% of all the petroleum
produced. The remaining 38% is either using pipelines
(dominantly), trains or trucks. Crude oil alone accounted for 1.86
billion tons.
The
dominant modes
of
petroleum
transportation are
complimentary, notably when the origins or destinations are
landlocked or when the distance can be reduced by the use of
land routes. The maritime circulation of petroleum follows a set
of maritime routes between regions where it is been extracted
and regions where it is been refined and consumed. More than
100 million tons of oil are shipped each day by tankers. About half
the petroleum shipped is loaded in the Middle East and then
shipped to Japan, the United States and Europe. Tankers bound to
Japan are using the Strait of Malacca while tankers bound to
Europe and the United States will either use the Suez Canal or the

Cape of Good Hope, pending the tanker's size and its specific the
destination.
International oil trade is often correlated with oil prices, as
it is the case for the United States. The world tanker fleet capacity
(excluding tankers owned or chartered on long-term basis for
military use by governments) was about 280 million deadweight
tons in 2002. There are roughly 3,500 tankers available on the
international oil transportation market. The cost of hiring a tanker
is known as the charter rate. It varies according to the size and
characteristics of the tanker, its origin, destination and the
availability of ships, although larger ships are preferred due to the
economies of scale they confer. About 435 VLCCs account for a
third of the oil being carried. Transportation costs account for a
small percentage of the total cost of gasoline at the pump. For
instance, oil carried from the Middle East to the United States
account for about 1 cent per liter at the pump. Transportation
costs have conventionally accounted for between 5 to 10% of the
added value of oil depending on the market being serviced.
The growth in oil prices since 2000 makes the transport costs an
even lower component of the total costs, sometimes lower than
5%. Demand for oil is thus not related (inelastic) to its transport
costs. Tanker flows have a high concentration level with different
tanker size used for different routes, namely for issues of distance
and port access constraints.
Larger tanker ships have required the setting of offshore terminals
and even the usage of tanker ships for storage. Tanker ships can
also be used as semi-permanent storage tanks. In 1990, about 5%
of the world's tanker capacity was being used for oil storage.
There
is
thus
a specialization
of
maritime
oil
transportation in terms of ship size according to markets. VLCCs
are mainly used from the Middle East in high volumes (more than
2 million barrels per ship) and over long distances (Europe and
Pacific Asia). Shorter journeys are generally serviced by smaller
tanker ships such as from Latin America (Venezuela and Mexico)
to the United States.

Transport costs have a significant impact on market selection. For

instance, three quarters of American oil imports are coming from
the Atlantic Basin (including Western Africa) with journeys of less
than 20 days. Accordingly, the great majority of Asian oil imports
are coming from the Middle East, a 3 weeks journey with the
halfway location of Singapore being one of the world's largest
refining
center.
In
addition,
due
to environmental andsecurity considerations,
single-hulled
tankers are gradually phased out to be replaced by double-hulled
tankers.