The Market Structures of Crude Oil Tanker Shipping and Container Liner Shipping - Essay Example

THE MARKET STRUCTURES OF CRUDE OIL TANKER SHIPPING AND CONTAINER LINER SHIPPING Introduction Many economies run on energy that is supplied from electricity and crude oil to power their social and economic systems. Crude oil makes one of the most essential flow goods that are widely accepted and used in people’s daily social and economic activities as a raw material or energy resources. It is important to realize that the demand and supply for crude oil around the world often have low price elasticity. In this case, it has led to an economic impact globally through price fluctuations. This happens because in general, determining the changes in demand and supply balances is quite difficult even if it results in the price fluctuations (Zheng 2012, 67). Internationally, the crude oil tanker is said to be the shipping market that is thought to have perfect competition kind of market structure. In this case, the market is characterized by a huge number of oil producers who compete for the satisfaction of an equally large market. For this reason, the prices of the oil are set by the world’s demand and supply characteristics in the oil market. In this case, where the operating costs are kept as low as possible, then the companies enjoy massive benefits in terms of profits. In this case, costs are an important determinant for profits and success of companies in the oil industry. Alternatively, in the recent past, container liner shipping has had different experiences that have made it have certain tremendous undulation effects that are because of the implementation of the OSRA (Ocean Reform Shipping Act) agreement. In this agreement, liner operators are allowed to offer full liner services not necessarily by involving the various liner conferences. For this reason, the particular nature of the liner-shipping if often characterized by the powers and authorities of cartels that give fixed schedules, regular sailing, as well as tariffs in the course of trading (Schramm 2012, 49). In this case, it is often easier to change or switch from one liner-company to another. This paper examines the difference between the market structures of crude oil shipping tankers and container tanker shipping as characterized in the shipping industry. Market structure and Current trends in the world’s Container liner Shipping As noted from the foregone discussion, the particular market structures for container liner shipping are characterized by oligopolistic tendencies. In this case, the industry is dominated by the power of cartel, which determines the way the industry is to operate (Sheppard 2014, 32). In economics, market structures that have oligopolistic tendencies often make it difficult for new companies to join the industry and compete effectively with others already existing. Goods in the small and high volumes are often fixed to certain higher freight rates, while those with low value and high in volume area often charged low freight rates, something that makes them have remarkable refections in terms of the price elasticity of the freights (Cavusgi & Knight 2012, 54). It is important to realize that in the short run, these companies maximize their profits by engaging in operations that involve full loads. For this reason, they can effectively handle and manage their ships when they are physically full. In most case, oligopoly markets are often characterized by the game theory, which is used in the determination of prices and output for the industry’s demand and supply curves (Talley 2012, 29). In addition, it determines the alternative strategies that are effective in the effective practice of the shipping in the industry. Because of these attributes, the framework stipulated in the SCP (Structure-Conduct Perfomance) often determines the actual performance of this shipping liner (Miller 2012, 78). The SCP model is essential in setting the guidelines for effective shipping in the container liner shipping. The model postulates the kind of relationships that exist between the market relationships. It outlines the profitability of the firms, which is to be realized because of the average profits by sales from the concentrated oligopolies as well as other industries that are highly related to shipping. One of the hypotheses that have been held by SCP is that the particular exercises of the monopolistic power are supposed to increase as the concentration of the firms also increases (Zhang 2013, 45). In this case, the resulting situation becomes greater barriers to new firms that wish to enter the market and create their market share. In this case, it is evident that when markets deviate from their competitive structures to oligopolies, they tend to bring in profits that are more positive because they are at liberty to charge prices that are above their marginal costs. In addition, they also tend to behave like monopolistic market structures. Price and output determination in an oligopoly market (Mankiw, 2014) Currently, the actual performance as characterized by the operations in container liner shipping has not been very promising. This sector has been experiencing many losses because of the overcapacity mounts. In 2009, most of the firms in this shipping industry faced extremely huge losses as noted by the market leader Moller Maersk (Grammenos 2013, 38). The same was the case in other companies, which complained that the year was not one of the best in their trading activities. For this reason, some of the companies decided to contribute some amounts in order to help those companies that were adversely affected by the reduction in profits to remain afloat. Some of the companies decided to put their large ships into active use so that they could try to benefit from economies of scale. Alternatively, other intervention strategies agreed included reducing their operating costs as much as possible in order to maximize on their returns. Market structure and current trends in crude oil tanker shipping The Crude Oil shipping tanker market has often been said to have a perfect competition kind of market structure (Leggett & Dunn, 2012, 81). In this case, the price for the oil sold is largely controlled by the world’s oil market, through the interactions of demand and supply forces. For this reason, the price takes in this market structure are the buyers and suppliers; they often do not have the ability to change their prices at their own volition. Price determination in a perfect competition market structure (Levi, 2014) At the equilibrium price, buyers are willing and able to buy the oil, while for sellers; they are also willing and able to sell their products. In this case, sellers that may want to sell their product below the equilibrium price may get higher turnover but with huge losses. On the other hand, those that are tempted to increase the prices for their goods in order to make some marginal profits end up losing customers who will prefer buying from supplier at the equilibrium price or those who have added advantages when they buy from them like after-sale services. In this industry, the products sold are largely homogeneous although few differences exist in terms of quality and other features that suppliers offer in order to attract buyers into their products. Another important feature of this industry is that freedom for entry and exit of firms is available. In this case, firms that feel they are not getting maximum returns from their services are often free to leave the industry, while those that want to exploit the opportunities in this market are also at liberty to join the industry provided they meet the requirements. Compared to the Container liner shipping, the crude oil shipping has minimal or no government interference. In this case, firms are very free to decide on the way they structure and carry their trading activities for them to make profits (Vanoutrive 2013, 64). However, they often find themselves being cautious of the strategies they develop because of the competition posed by the many firms existing in the market. For this reason, they are always to ensure that they make develop their trading strategies in a manner that attracts clients and assures them of the much-needed competitive advantages and market position (Alderton 2010, 13). It is important to note that the power of actions of oil majors does not have to be overlooked in the crude oil market. This is because; they often play a leading role in contributing towards maximization (Cubbage & Brooks 2013, 46). This is the reason why in most case, OPEC is sometimes regarded as being in liaison with some of the major cartel in this industry especially when it comes to setting the prices of oil in the world market (Sheppard 2013, 57). Currently, international trends in the markets for crude oil are shifting downwards. This has been characterized by the fall in the production of oil especially in the North Sea, which is the chief source of oil for most countries Western Europe (Goldrein & Hannaford 2012, 42). It is important to note that the demand for oil in these regions has reduced tremendously because of the global economic recession, as well as the shifting preference from crude oil by countries that want to cut down on the global emissions. These factors have been effective in affecting the prices and profits being accrued by oil companies in these regions Conclusion These two industries have been essential in ensuring that the world can run and power its system on energy arising from oil. In addition, the fact that many companies have been trying to exploit the opportunities in this resource has also been essential in influencing the prices for the product (Renne 2013, 67). In this case, the world stands to benefit from the reduced prices when the companies manage to set their operations. The OPEC and other important players in the oil industry need to be effective in checking on the operations of these companies so that they do not end up exploiting their customers (Pollard & Higgins 2013, 56). This will also be vital in influencing the demand for the product. Although it is also important that countries and firms consider alternative forms of energy so that they can reduce on carbon emissions, which is the chief cause of global warming and its adverse effects. Bibliography Alderton, P. 2010. Reeds Sea Transport Operation and Economics. A & C Black, London. Cavusgil, S., & Knight, G. 2012. International business: The new realities (2nd ed.). Prentice Hall/Pearson, Upper Saddle River, N.J. Cubbage, C., & Brooks, D. 2013. Corporate security in the Asia-Pacific region: Crisis, crime, fraud and misconduct. CRC Press, Boca Raton, Fla. Grammenos, C. 2013. The Handbook of Maritime Economics and Business (2nd ed.). Hoboken: Taylor and Francis. 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