The stocks of oil tanker companies are cheap…very, very cheap. But before moving into the heart of this investment observation, let’s gain a sliver of insight about the value of shipping itself.

The dividends of the old spice trade, for example, financed much of the architectural splendor of Venice, Italy. If you stroll the Piazza San Marco, a complex pattern of Istrian stone plays out beneath your feet. Nearby, grand palazzos and public squares show off a dazzling array of tall columns, carved marble, impressive domes and spires.

As William Bernstein tells us in his fascinating book, A Splendid Exchange, Venice’s dazzling look was built up “largely on profits from pepper, cinnamon, nutmeg, mace and clove.” Spices then were what oil is today. At its peak, cinnamon oil traded for its weight in gold. Venetian traders made fortunes. “Profits well in excess of 100% were routine,” Bernstein notes. “A typical Venetian galley carried 100-300 tons between Egypt and Italy and earned vast fortunes for the imaginative and the lucky.”

Even then, a salty sailing man could count the most important sea lanes on one weathered hand. All of trade boiled down to just a handful of key passageways. Amazingly, these same passageways are still vital to world trade.

The most valuable commodity shipped today, by far, is oil. Nearly half of the world’s tonnage deals with shipping petroleum in one form or another. And nearly two-thirds of all petroleum produced winds up in the hulls of the world’s maritime fleets. The biggest consumers of oil happen to be far away from the richest oil regions. The U.S., for example, imports about 70% of its oil – compared with 42% in 1990 and only 24% in 1973. In fact, the U.S., Europe and Japan account for about 75% of global crude oil imports.

As oil demand grows – and, with it, dependency on imported oil – pressure will build on a handful of key sea lanes. Two of them loom much larger than the rest, accounting for more than 60% of the total oil shipped. These sea lanes are like the world’s throat, funneling the oil that slakes the world’s thirst. If one of these lanes constricts or closes, the world chokes, so to speak. So it’s likely that future oil shocks could stem from problems in these key transit lanes, or “choke points.”

(The nearby graphic appears in Bernstein’s book. It originally appeared in an excellent paper by Jean-Paul Rodrigue, titled “Straits, Passages and Chokepoints: A Maritime Geo-Strategy of Petroleum Distribution.”)

Most of these choke points have ancient roots. The Bosporus, for example, is a little neck of a strait connecting the Black Sea with (ultimately) the Mediterranean Sea. It has been a prized maritime passage for nearly 3,000 years. At its narrowest point, it is only about 765 yards across. “It is packed around the clock with an unbroken line of tankers, freighters, long-distance ferries and luxury liners,” Bernstein reports. Lined for 18 miles on both sides with expensive homes, it reached its maximum capacity long ago. Collisions and spills are common. Delays are routine, especially when large oil tankers make their way down the strait, forcing the oncoming lane to close in stretches.

The Strait of Hormuz is the world’s most important choke point because of its access to Middle Eastern oil fields. It is also one of the most vulnerable. It lies within easy striking distance of a number of troubled countries, including Iran. It has been a source of trouble in the past, as Rodrigue reports:

“Security within the strait has often been compromised. Between 1984-1987, there was a ‘Tanker War’ between Iran and Iraq, during which each party, in their own belligerence (Iran-Iraq War of 1980-1988), began firing on tankers, even neutrals, bound for their respective ports. Shipping in the Persian Gulf dropped 25%, forcing the intervention of the United States to help secure oil shipping lanes.”

There are few alternatives for Gulf oil if it can’t go through the Strait of Hormuz. The strait’s importance in global oil trade seems hard to overstate.

The Strait of Malacca is critical, too, because the eastbound passageway services Japan and China. Interestingly, the U.S. 7th Fleet patrols the Strait of Malacca. As China’s dependency on imported oil grows, I wonder how it will feel about the U.S. fleet’s presence in such a critical waterway.

These choke points may also mean that shipping oil may yet enjoy a long stretch of prosperity. The strained capacity of these choke points may limit the ability of the industry to add much supply. That means the existing shipping infrastructure – pipelines, terminals, tankers and storage facilities – may command better returns than most expect. Some of these assets, such as oil tankers, for which there are a number of publicly traded companies, are easy to invest in.

Venetian traders of yore minted money carrying spices, then the world’s most precious commodities. So too today’s investors may carry away fortunes wading into the business of moving oil. Check in tomorrow as we examine one of the most interesting tanker stocks to buy right now…

Source: Have the Tanker’s Stopped Tanking?

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