results in a 1 percent increase in tonnage supplied. At P3, supply becomes highly inelastic: an 87 percent increase in freight rate results in only a 2 percent increase in the tonnage supplied. At P4 and higher, elasticity is close to zero; no more tankers can be pressed into service; charterers try to outbid each other, and the market turns into an auction. Freight rates can then reach very high levels.

When demand is at PO, freight rates are very low and the quantity of tanker tonnage supplied approaches 60 percent of total capacity. At this freight level, only the most efficient tankers operate and they do so at reduced speed, receiving a return at or below operating costs. Under these circumstances, combined carriers operate in the dry bulk trade.

When demand is at P1, freight rates are somewhat higher. Many tankers come out of lay-up, and a few combined carriers move to the oil trade. Capacity utilization rises to about 80 percent. Tankers continue to operate at slow speed, and although most tankers cover operating costs, none can cover capital costs.

When demand is at P2, freight rates are substantially higher. Almost all tankers come out of lay-up, and more combined carriers move to the oil trade. Most tankers operate at full speed, waiting time is cut down to a minimum, and capacity utilization rises to 95 percent. Most older tankers cover operating and capital costs; newer tankers cover only part of their capital costs.

When demand is at P3 and higher, freight rates rise to a still higher level. All combined carriers are now in the oil trade, and no further increase in the quantity of tonnage supplied is possible. All tankers operate at full speed, and owners are induced to defer dry-dockings and to reduce downtime to a minimum. The shortage causes many tankers to be utilized inefficiently. Capacity utilization is close to 100 percent, all tankers cover their full costs, and many realize a profit. If this condition continues for an extended period, charterers become concerned about tanker shortages and high freight rates. They seek to enter into long-term contracts and to commit for new tonnage. The tanker fleet can be expected to undergo expansion two or three years hence.

In contrast to the short-term stability of supply, demand is subject to significant shifts under the impetus of seasonal fluctuations in the oil trade. Seasonal variation in tanker demand has a powerful impact on freight rates. In 1988 and 1989, seasonality accounted for as much as a 10 percent variation in tanker demand, causing VLCC weekly time charter equivalents to vary from about $7,000 per day during the low quarter to about $27,000 per day during the high quarters, as shown in Figure G-3 (Stopford, 1990).

The committee reviewed the degree of seasonal variation in the pattern of oceanborne oil shipments and freight rates in the major oil trades (Gassman, 1996). Seasonal variation indices were computed to identify the periodicity of

Front Matter (R1-R20)

Executive Summary (1-9)

1 Introduction (10-17)

2 Ship Safety and Protection of the Marine Environment (18-41)

3 Operational Makeup of the Maritime Oil Transportation Industry (42-64)

4 Economic Impact of the Oil Pollution Act of 1990 on the International Tanker Fleet (65-96)

5 Domestic (Jones Act) Tanker Trade (97-114)

6 Design, Construction, Operation, and Maintenance of Double-Hall Vessels (115-141)

7 Conclusions and Recommendations (142-150)

Appendix A (151-157)

Appendix B (158-164)

Appendix C (165-169)

Appendix D (170-172)

Appendix E (173-175)

Appendix F (176-177)

Appendix G (178-181)

Appendix H (182-184)

Appendix I (185-186)

Appendix J (187-190)

Appendix K (191-242)

Appendix L (243-249)

Appendix M (250-262)

Acronyms and Glossary (263-266)