The price of oil goes up. The price of oil goes down. On July 11, 2008, oil sold for a record $146 per barrel. Just over two months later, on Sept. 15, oil plunged through the $100 mark for the first time since last February and was changing hands at $95 per barrel. That drop in price reflects a change of $51 — or 35% — in just 66 days.

Can you invest for the long haul in a climate like this? It would help to find something that doesn’t swing wildly in just a couple of months. In the world of oil, there’s at least one thing that doesn’t change. That is, much of the world’s oil moves by tanker ship.

In fact about 62% of the world’s oil — over two billion barrels per year — is transported via tanker ships. As the accompanying map shows, the tanker routes of the world are pretty much where you would expect. Most of the exported oil moves out of the Middle East and West Africa toward North America, Europe and Asia. The rest of the world’s oil moves by pipeline, mostly through Eurasia and Russia.

The Life of a Tanker Ship

Here’s the general process. Large tankers load up with crude oil. Then the ships sail across the sea to their destinations. They discharge the cargo. The tankers take on ballast and begin the voyage back to pick up another load. This is the life of a tanker ship.

Let’s go into a bit more detail. The cost to hire a tanker is called the charter rate. This rate varies according to the size and the characteristic of each tanker and the general availability of ships. That is, in a tight market, shipowners can command higher charter rates.

There are about 4,000 tankers available for hire in the international market. Of course, there are many different sizes and types of tankers. Panamax vessels are suited for transiting through the relatively narrow locks of the Panama Canal. Suezmax tankers are optimized to transit the Suez Canal.

Still other tankers — large vessels called “very large crude carriers” (VLCCs) — are more suitable for long hauls over open water. VLCCs are used mainly to ship oil from the Middle East in large volumes, more than two million barrels per vessel.

This description barely scratches the surface. But you can see that the tanker industry is complex. Yet as long as people continue to use oil — a safe bet — there will be some consistency to the tanker business. Load. Sail. Unload. Turn around. Sail back. Do it again.

Thus, my investment idea for this month’s issue of Outstanding Investments focuses on a well-managed tanker company with a market cap of just over $1 billion.

Until we meet again,
Byron King

October 28, 2008

Byron King

Prior to joining Penny Sleuth, Byron received his Juris Doctor from the University of Pittsburgh School of Law, was a cum laude graduate of Harvard University, served on the staff of the Chief of Naval Operations and as a field historian with the Navy. Our resident energy and oil expert, Byron is the editor of Outstanding Investments and Energy and Scarcity Investor.

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