With maritime transport heavily dependent on oil for propulsion, and with oil prices expected to sustain their current high levels, a new technical report by UNCTAD examines the effect of rising oil prices on maritime freight rates.
Oil is the major energy source powering the global economy, supplying 95% of all the energy used in world transport.
Maritime transport, which carries over 80% of the volume of global merchandise trade, relies heavily on oil for propulsion, and in view of the limitations imposed by existing technology and costs, it is not yet in a position to adopt effective energy substitutes.
With oil becoming increasingly scarce and more costly to produce, and with prices having already risen to close to $150 per barrel (pb) in July 2008, the question of how changes in oil prices affect shipping costs is of considerable interest.
For the trade of many developing countries, excessive international transport costs already pose a considerable obstacle.
To help improve understanding of oil prices as a determinant of transport costs, UNCTAD conducted an empirical analysis of the relationship between oil prices and maritime freight rates. While the analysis focused on container transport, it also covered some dry and wet bulk trades, namely, iron ore and crude oil.
The findings of the analysis, presented in a technical report entitled Oil Prices and Maritime Freight Rates: An Empirical Investigation, confirm that rising oil prices drive up maritime freight rates in all three trades examined, with estimated elasticities varying, depending on the market segment and the specification.
For container trade, the effect of oil prices on container freight rates is estimated to be larger in periods of sharply rising and more volatile oil prices, compared to periods of low and stable oil prices.
These results entail some potentially important implications for maritime transport and trade, if oil prices resume the spiralling trend observed in 2007 and 2008 and sustain high and possibly unprecedented levels.
In view of the heavy reliance of maritime transport on oil for propulsion, further analytical work on the effect of energy prices on maritime freight rates is urgently required, especially as rising fuel costs may lead to proportionately higher maritime transport costs for developing countries.
In this context, energy security and investments in alternative, greener energy and technology for cost-efficient and sustainable maritime transportation conducive to trade and development are of the essence.