Last Sunday's New York Times carried an interesting article on the implications of high energy prices for the sustained globalization of supply chains. The reporter described how rising shipping costs were forcing manufacturers and retailers to rethink fundamental aspects of their business models, ultimately threatening the continuing expansion of world trade. Higher oil prices are responsible for much of the rise in freight rates, particularly for products carried by sea and air. Marine and aviation fuels are taxed very lightly, so they are more sensitive to changes in oil prices than motor fuels. But while airlines are hoping--perhaps in vain--for long-term fuel price relief from biofuels, cargo ship operators are likely to experience more competition from other uses for bunker fuel, and may need to seek solutions involving more exotic energy sources.
Earlier this year, I mentioned an idea for deploying small, high-tech sails to reduce the fuel consumption of cargo ships. But if world oil supplies fall seriously short of meeting potential demand in the years ahead--an easy prospect to imagine, given the rate at which Chinese and Indian consumers are buying automobiles--ocean freight lines may need to look elsewhere for their primary energy source, not just for ways to supplement it. In 2004, the residual fuel burned by ships and power plants accounted for 1 out of every 8 barrels of global oil demand. If competition for crude oil increases, refiners may be more interested in turning the long, complex molecules in fuel oil into higher-value products such as diesel and jet fuel, rather than selling them as-is. Thanks to heavy investment in upgrading hardware, US refineries produce less than a quarter of the "resid" volumes they did in the late 1970s, and their scope for further "resid destruction" is limited. Globally, however, upgrading 10 million barrels per day of resid output could ultimately prove more attractive than producing the same quantity of hydrocarbons from oil sands, shale, or coal-to-liquids. Where would that leave the shipping industry?
Two large-scale alternatives come to mind, assuming that biofuels will remain focused on the highest-value fuels segments, substituting for gasoline, diesel and jet fuel. Between the late 1970s and early 1990s, nuclear power and coal displaced most petroleum liquids from the US power generation sector. Either could provide a long-term substitute for residual fuel in ocean-going vessels. Nuclear power has obvious advantages in terms of its low emissions and extensive experience in naval fleets, plus a few civilian icebreakers. Unfortunately, the disadvantages will appear equally obvious to nuclear critics, in terms of the risks of proliferation and terrorism, which at sea may be less manageable than onshore. However, if it proved cost-effective, this is one way that nuclear power could directly displace more oil, and it might be achieved faster than we could build a new generation of land-based nuclear power plants.
A return to coal for ships' fuel might seem an odd and untimely suggestion, in light of concerns about greenhouse gases and the other emissions from burning coal. However, if this were done using small onboard gasification units fueling efficient gas turbines, rather than coal-fired boilers, the CO2 output from such a system might be no worse than from today's ships. And with the right equipment, sulfate and nitrate emissions that contribute significantly to urban air pollution in busy ports could also be scrubbed, at least for limited durations. The practicality of such an approach would have to be demonstrated, but the underlying driving force is clear. Despite the recent spike in coal prices, the BTUs in thermal coal still cost less than half as much as those in bunker fuel, at current prices.
A global retrenchment in trade due to the impact of high energy costs on freight rates would affect shipowners as much as their customers. A generation ago, the world's cargo fleets converted from steam turbines burning the lowest-quality bunker fuel available to the powerful, reliable marine diesel engines that dominate today's commercial shipping. The cost of operating these engines--and thus global shipping rates--depends on the price of the heavy fuel oils they consume. Although shipping firms lack a practical alternative fuel today, there's no reason the next generation of ships couldn't be built around entirely different energy sources. That would be on a par with the shift from coal to oil early last century, and far less dramatic than the switch from sail to steam.