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November 1, 2004

Riches Up the Yantze: Taking Much More Stock of Shipping News

By Kathryn M. Welling

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It was an article of faith when I was growing up in the Fifties: Dig a hole deep enough in your back yard and you'd get to China. Now it seems that China - and its belated industrialization - is at the bottom of every story on economic and energy policy. But could the gradual addition of China's billions to the global economy really be soaking up virtually every barrel of crude pumped from the ground - and pressing the pedal to the metal of oil prices in the process? Have we finally reached the Malthusian limits of Hubbert's curve? Or, are other forces at work, jacking up quotes on petroleum products to record levels? Processes beyond the "terror premium?" But could we perhaps "simply" be witnessing an orgy of speculation? And it this speculative binge being fuelled by official and unofficial stockpiling, not to mention notoriously untransparent and often inefficient supply and transportation systems? I took my wonderings and musings about the oil market to shipping industry specialist Jay C. Goodgal, who runs a clutch of Pound Ridge, N.Y.-based firms and partnerships sporting "Castalia." Investing in or advising global shippers is central to their games. I interviewed Jay twice in the pages of Barron's, once in 1996 and once in 1998. Both interviews were spectacularly mis-timed.

I have to ask, given our track record. Why agree to talk to me?

That's a good question. Why did you call? Every time you write about me, the shipping market craters. I hope this does not continue the streak.

Seriously, I'm hoping you can tell me what you are seeing in the shipping markets. Especially in the tanker business. Is oil demand as robust as the China bulls would have it? Or is piracy of some sort or another entering the picture?

Literally, of course, piracy is up. But that kind of piracy is not a significant impediment to transporting commodities around the world. No. What's really changed is the nature of demand in the shipping business. It started way back in June of 1992, when China, India and the rest of Asia started to expand dramatically.

That's ancient history -

We are seeing the market impact of China absorbing all of what used to be the world's "excess" crude oil supplies - and many other commodities. China is moving to a high-technology fuel, oil, gasoline and gas. Demand for petroleum is surging in China. It is transitioning to a much cleaner, but higher-priced fuel as its industrial growth gives it the ability to afford it. While long-term this demand from China bodes very well for the shipping industry, it also means that as a society we in the West will have to adjust to higher petroleum prices, long term. Not that there won't be lots of volatility in the pricing, but the long-term macro trend is clearly up.

Let's focus on that volatility, before we get into the nitty gritty on shippers.