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The game of oil shipping - a study of the market settings and the players' game

Morkved, Sofie Hagerup (2009)
Department of Economics
Abstract
This thesis investigates the game of oil shipping; both the market settings and how the players play the game. An important characteristic of the oil shipping market is cycles in the spot freight prices. The cycles are created by the imperfect adjustment mechanisms of supply within the relatively short run, and by that the demand is not perfectly predictable. By a mathematical investigation, I show that the relatively low freight rates are stable equilibriums, and similar to Beenstock & Vergottis (1993), that the relatively high freight rates are unstable equilibriums. This is furthermore important information for the players, especially the shipping companies; the booms do not last forever, rather, those are relatively short and may turn... (More)
This thesis investigates the game of oil shipping; both the market settings and how the players play the game. An important characteristic of the oil shipping market is cycles in the spot freight prices. The cycles are created by the imperfect adjustment mechanisms of supply within the relatively short run, and by that the demand is not perfectly predictable. By a mathematical investigation, I show that the relatively low freight rates are stable equilibriums, and similar to Beenstock & Vergottis (1993), that the relatively high freight rates are unstable equilibriums. This is furthermore important information for the players, especially the shipping companies; the booms do not last forever, rather, those are relatively short and may turn down suddenly. And accordingly, investments in ships with the cycles to peaking prices are risky and not optimal. The optimally might rather be anti-cyclical investment strategies, outlined in the thesis. However, if all the shipping companies invested against the tide, the price differences on ships would decrease and hence, also the possible profits in second-hand trading. The relatively high freight rates would though only be influenced by anti-cyclical investments if the shipping companies met sudden booming demand with accordingly supply in aggregate. This is however not very likely, because of the difficulties in forecasting demand shocks a few years ahead, when ships have to be ordered due to the time-lag in new-building. Additionally, for the banks and insurance companies which take part of the game, challenges with asymmetric information, moral hazard and adverse selection arise. How and possible solutions to this are examined in this thesis, and I also suggest further topics for more specific studies on this. (Less)
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@misc{1848557,
  abstract     = {This thesis investigates the game of oil shipping; both the market settings and how the players play the game. An important characteristic of the oil shipping market is cycles in the spot freight prices. The cycles are created by the imperfect adjustment mechanisms of supply within the relatively short run, and by that the demand is not perfectly predictable. By a mathematical investigation, I show that the relatively low freight rates are stable equilibriums, and similar to Beenstock & Vergottis (1993), that the relatively high freight rates are unstable equilibriums. This is furthermore important information for the players, especially the shipping companies; the booms do not last forever, rather, those are relatively short and may turn down suddenly. And accordingly, investments in ships with the cycles to peaking prices are risky and not optimal. The optimally might rather be anti-cyclical investment strategies, outlined in the thesis. However, if all the shipping companies invested against the tide, the price differences on ships would decrease and hence, also the possible profits in second-hand trading. The relatively high freight rates would though only be influenced by anti-cyclical investments if the shipping companies met sudden booming demand with accordingly supply in aggregate. This is however not very likely, because of the difficulties in forecasting demand shocks a few years ahead, when ships have to be ordered due to the time-lag in new-building. Additionally, for the banks and insurance companies which take part of the game, challenges with asymmetric information, moral hazard and adverse selection arise. How and possible solutions to this are examined in this thesis, and I also suggest further topics for more specific studies on this.},
  author       = {Morkved, Sofie Hagerup},
  keyword      = {oil shipping,shipping market,shipping cycles,shipping companies,shipping finance,Economics, econometrics, economic theory, economic systems, economic policy,Nationalekonomi, ekonometri, ekonomisk teori, ekonomiska system, ekonomisk politik},
  language     = {eng},
  note         = {Student Paper},
  title        = {The game of oil shipping - a study of the market settings and the players' game},
  year         = {2009},
}