The freight rate volatility in tanker markets is illustrated by the characteristic shape of the supply curve, sometimes referred to as a ''hockey stick" (Stopford, 1990). Figure G-2 shows a conceptual representation tracing the tanker capacity that owners are willing to supply at a given freight rate (Hettena and Ruchlin, 1969). Capacity utilization can be expressed as a percentage (as in Figure G-2) or given in cargo tonne-miles or in DWT requirements.

The supply curve is constructed by aggregating the capacity of individual tanker units and arranging them, in ascending order, according to their marginal cost. The marginal cost of a tanker, also called the "lay-up equivalent," is the tanker's operating cost minus the cost of lay-up. For a tanker owner it is the point of economic indifference between keeping the tanker in operation and laying it up. In the short run, the actual revenue falls well below the operating cost because the tanker owner usually resists a costly and disruptive lay-up in the expectation, or hope, that the market will soon recover.

It becomes apparent that the supply curve consists of a number of segments characterized by different elasticities that can be simplified as follows. If demand intersects supply at a point in the neighborhood of PO, elasticity is very high: a 5 percent increase in freight rate results in a 25 percent increase in the tonnage supplied. If demand is at P1, elasticity is close to unity: a 5 percent increase in freight rate results in a 5 percent increase in the tonnage supplied. If demand increases to P2, supply becomes inelastic: a 5 percent increase in freight rates

FIGURE G-2 Conceptual VLCC supply function.