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What The Tensions In Iran Mean For The Shipping Industry

  • by: Maxime Robert
  • On: 1, Aug 2019
4 min read

The current heightened tensions in Iran are the results of decades of political and economic forces boiling over, and while the ultimate outcome of past and future events is still uncertain, this will certainly have an immediate knock-on effect on the shipping industry.

Iran is one of the world’s leading suppliers of oil, and the Strait of Hormuz is perhaps the most crucial lifeline for its transportation around the world. This is of course where the initial conflicts took place, where boats have been seized, drones shot down, and unarmed sailors held at gunpoint by UK marines.

Over the last few months, UK and US forces have been deployed to the region in the interest of ‘protecting ships and ensuring smooth trade’, all while bringing Iran and the US closer to open warfare than they’ve been in years.

It is a risky time for ships operating in the area. Here’s what is likely to happen over the coming weeks and months.

How Tensions In Iran Will Impact The Shipping Industry:

  • Military Ships Will Provide Additional Security While Escalating Tensions

The most immediate change will be the addition of military ships guarding oil tankers in the region. While this may help keep them safe, it will likely further escalate the chances of actual combat breaking out.

The previous foreign secretary, Jeremy Hunt, had proposed a European-led taskforce to provide additional security in the region. While some European leaders welcomed the idea, Iran has unsurprisingly rejected the proposal.

Experts in the shipping industry claim that even if this were to happen, it would not be enough to ensure all ships would be kept safe in the event of more drastic military action.

  • Shipping Insurance In The Region Will Be Raised

Risk insurance for British-flagged ships has gone up by tens of thousands of pounds per trip.

The cost for a very large cruise carrier (VLCC), a supertanker that carries anywhere between 200,000 to 400,000 tonnes has risen by around £400,000.

During the Iran-Iraq tanker wars in the 1980’s, insurance for ships in the strait skyrocketed by as much as 400%, and many experts suggest that we may see similar numbers if the situation isn’t resolved peacefully.

  • Tanker Traffic Will Drop

If these kinds of hostile actions continue, shipping companies may not want to run the risk of sailing in such dangerous waters.

Traffic in the region has already dropped 22% in less than a month, and BP has stopped sending British flagged ships through the strait.

Unless the situations improves, ships will be forced to find alternative routes, or oil companies may have to move their product over land for an increased cost, which will in turn bump up the cost of oil.

  • Tankers Will Try To Sneak Through The Strait

Another, more alarming occurrence is that several ships have tried to move through the strait with their AIS (Automatic Identification System) transmitters turned off. Maritime law requires all ships to have an active transmitter which broadcasts its location and name, allowing it to be seen on other ships’ navigations systems.

Ships can turn them off, effectively ‘going dark’ to try to avoid detection. This is of course extremely suspicious, and will only heighten tension on both sides. Ships engaging in this activity are sailing at high speeds, attempting to move through the strait unnoticed. This will likely result in collisions, and possible oil spills.

  • Ships May Re-register Under Different Names And Flags

In order to avoid scrutiny, ships will likely re-register their names and countries. The process is remarkably simple, and can take as little as fifteen minutes.

Under marine law, every ship must have a name and be registered with a country. However, ships can register under virtually any country they wish. In the industry, the term ‘flag of convenience’ has been used since the 1950s to describe the practice of switching flags to whatever is most convenient at the time.

Roughly 40% of the global fleet is registered in Panama, Liberia, or the Marshall Islands. These three countries combined officially own just 169 ships. Greece officially owns a huge amount of the global fleet, yet has very few ship registered under it because of its high tax.

Around 265 ships are registered under the Mongolian flag – a country which is entirely landlocked.

Already many UK flagged ships in the region have changed country to try to avoid altercations. Stena Impero, the Swedish-owned tanker that was seized by Iran, was sailing under the British flag. It’s possible that if they hadn’t been, they wouldn’t have had any problems.

When a ship registers with a country, it assumes its nationality must abide by its laws. In return, the country is theoretically responsible for the vessel and its crew regardless of their nationalities, hence why the UK is now engaged in what could end up as a full-scale war.

Regardless of what might happen, the future of shipping in the Middle East will certainly be tense, with businesses trying to maintain profitability and protect their assets.

Learn how technology is changing the oil industry, or read how data will make shipping more efficient.

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