In today’s letter, I’m going to tell you about that heavily relied upon (though rarely acknowledged or appreciated) force underpinning the global economy that I’ve been referring to over the last couple of days.
More importantly, I’ll tell you why this great pillar which the world leans so heavily upon can no longer be taken for granted. If it recedes even mildly, there’ll be major implications for investors. If it is withdrawn big time, there’ll be implications for everybody.
If you’re reading this, I’m going to assume you’ve read parts I and II; if you haven’t yet, please refer to Tuesday and Wednesday’s letters.
At the beginning of this series, I asked “What do horse asses, a 1.5 mile tunnel in Staffordshire, the Space Shuttle, and the price of oil all have in common?”
We explained the stories of the first three in parts I and II, exploring how historical details lingering in the background have caused lasting real impacts on the modern world and economy. Providing several clues, I wondered if you could figure out a similar historical detail, a force still lingering in the background that affects the price of oil. A force which is beginning to change, though few investors expect it.
I got several emails that “inertia”, “gravity” and “friction” was the force in question, going after the clue “How can oil tankers be so big and slow?” head on. But unless something really wild happens at CERN, I’m pretty sure the laws of physics aren’t in danger of receding anytime soon.
Some came closer to the mark, with answers like the US dollar and control over the Suez and Panama canals, however the answer is somewhat blunter.
The answer
When you think about it, oil tankers are massive sitting ducks, carrying one of the most vital cargoes in the world. How is it that these things can afford to traipse across the high seas at a snail’s pace, almost without a care?
The same applies to container ships, though oil tankers are even more important, as without energy, civilisation as we know it stops. Shutting down a country’s access to oil, as the Japanese proved in WWII, is casus belli – a cause for war in itself.
Why is it that by their very design, these vessels have not been built to evade and outrun any predators, despite carrying such hugely precious cargo?
Because if you wind the clock back, they didn’t used to be. Merchant ships prior to WWII were designed so that a convoy of ships could scatter, (or a single ship could hare off), and hopefully escape those looking for loot, be they pirates or opposing nations. To reduce the risk of being looted, they sacrificed fuel efficiency and cargo capacity.
Merchant ships since WWII have quite clearly not been designed with predators in mind. These vulnerable titans are longer than skyscrapers are tall, and have turning circles measured in miles. A single supertanker today (“Ultra Large Crude Carriers”, or ULCCs) can carry more oil than the entire UK consumes in two days. The majority of the time, they travel alone, and they’ve been built not with speed in mind, but fuel efficiency.
So you now have a vehicle that is literally the size of the Empire State Building – where exactly are you gonna park the damn thing? Ports prior to WWII sure as hell weren’t equipped to take these goliaths into their harbours. So just as the ships got massive but fewer in number, the ports did too, and so they both facilitated a steady and immense decline in the cost of transporting oil and goods overseas.
It’s the force that removed the risk of predators, and allowed these almost unimaginable examples of “economy of scale” to occur, that is the answer to the riddle.
Just as the ancient horses’ asses (may have) affected the space shuttle, and some 18th century accountants determined the dimensions of narrowboats, another party after WWII determined the price of global trade, and made it very cheap. And they’re starting to have second thoughts about that.
It’s the US Navy.
I know, I know. The Royal Navy – Britannia – used to rule the waves. But it’s not us any more, and it hasn’t been since the end of WWII.
With Bretton Woods in 1944, and the rise of the US as a superpower, the US began using its Navy protecting the world’s shipping lanes for free, to get other countries on side against the Soviets. It was a great trade for Western governments post WWII – they barely had to spend anything on a Navy or defence in general, as papa US would spend more than enough for all of them. Instead they could focus on rebuilding their war-torn countries, which the US would help with as well.
This continued after the Cold War was won, and the Soviet Navy was retired leaving the US Navy unrivalled upon the high seas. Global trade flourished ever more broadly, and globalisation hit the accelerator like never before…
… until the Americans realised that while the rest of the world was benefiting from the US Navy for free, they were paying for it. And this whole globalisation thing no longer seemed to be working to their benefit. As we’ll examine tomorrow, the US is now beginning to withdraw – and if/as it does, the consequences are huge, upending 70 years of established behaviour and expectations for markets and the world.
Remove the protection of the US Navy from the world’s shipping lanes, and all of what I described above goes into reverse; the return of predators to the high seas flips it all on its head. The ships are now too big, and too slow. The ports are now needlessly large, but too few in number. And the cost of shipping energy and goods overseas is now radically mispriced. Costs must go up, and increasing the cost of energy, let alone goods shipped overseas, means increasing the cost of everything for everyone who can’t produce or source it locally.
We’ll explore this, and its implications for investors tomorrow, in the final instalment of Ancient Horses’ Asses.
Thanks to all who wrote in with their answers. To the individual who asked how many Capital & Conflict readers know their locomotive history, the answer is a lot. Thanks to your replies, I now feel much more informed on Messrs Brunel and Stephenson and their impact on railway development.
But I’m afraid none of you guessed it was the US Navy. That bottle of Belgian beer for the winner remains unclaimed. But have no fear – this has been a lot of fun for me, and if the vast pile of answers in my inbox is any guide, for you too, so I’ll do another of these in future Capital & Conflicts…
Until tomorrow,
Boaz Shoshan
Editor, Capital & Conflict
Category: Market updates