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Belmont Club

The Hidden Hand

April 21st, 2012 - 2:56 pm

Why the consumer pays what he does at the pump or the store is not always obvious. Some costs have nothing to do with actually manufacturing a product. For example, merchandise shipped over the ocean must contain a tiny provision for costs associated with fending off pirates. A teeny bit of your gas bill goes to that. Did you know that a whole lot more goes to fighting off other kinds of pirates?

Stephen M. Carmel, the Senior Vice President of Maersk Line explained in a speech to the Second Fleet Intelligence Symposium in 2011, that the pirates who clamber aboard ships are a minor nuisance compared to the real pirates, the ones ashore. By that Carmel means the ever increasing tide of mandates and regulations, especially environmental ones.

First let me say right out of the gate I am no fan of pirates. Do not like them at all in fact, contrary to what many may perceive from my remarks on the topic. Pirates do impose a cost on our business that we would rather not bear if possible so it is something I worry about. But, while worrying about pirates I also worry about the effect of MARPOL Annex VI and the cost of complying with increasingly harsh emissions control requirements, something that will cost our industry roughly $6 Billion a year to comply with now and that figure will go up as tighter standards kick in in the 2014 time frame. I worry about the requirement to cold iron in LA, something that is very expensive and disruptive. And since while common for Navy ships to go on shore power, commercial ships never do it and are not fitted with a system to do so, a modification is required that will cost the equivalent of one ransom for each ship it is done on.

I worry about things like a proposal fronted by the World Bank, UNEP and others for a $50/ton carbon tax on ships bunkers, which will cost our industry about $17.1 Billion dollars per year. I worry about invasive species related ballast water mandates which will cost our industry approximately $15 Billion a year and I worry even more about California not going along with federal ballast water control mandates and instead implementing their own program at even greater cost to us. So tree huggers and environmentalists are costing us a heck of a lot more than pirates ever will, but interestingly I don’t see anyone agitating for the Navy to get underway to get the quasi-failed state of California under control. But if any of you are up for the mission I’d like to see it.

I worry about the cost of fuel where each dollar increase in bunkers costs our industry well over $300 million a year and over the last 2 years the cost of fuel has gone up about $120 / ton meaning something on the order of a $36 Billion per year increase in fuel costs for the industry. I worry about Ad Valorum tax – a protectionist tax designed to benefit US shipyards we must pay on repairs on our ships done outside the US. My company alone paid over $10 Million in Ad Valorum tax last year – so US shipyards are doing way more damage to us than pirates are. I’d ask for the Navy’s help on getting US yards under control but based on what I read about the Navy’s adventures in shipbuilding, you’re having a tough time with them too. Maybe we would jointly be better off partnering on a strategy to deal with that threat instead of pirates since it is worse for both of us.

I worry about bad policy such as the requirement for 100% scanning of containers imposed by congress in the “Implementing the requirements of the 9/11 commission Act”, a requirement which the European Commission estimates will cost the global economy 150 billion Euros or about 215 billion dollars per year were it to be implemented by all our trading partners. With that single act congress potentially does 20 times more damage to the global economy than pirates do by even the most ridiculous estimates of the cost of piracy, and in the process actually degrades maritime security rather than improves it.

And Carmel is only getting warmed up. But for those who don’t want to read the rest of it, the takeaway is this: the price added to your gas bill at the pump by pirates wearing eye-paches is tiny compared to the exactions you pay to those wearing suits.  Even the resurgence in real Horn of Africa piracy has become a business opportunity to insurers and even human rights lawyers.

Rather than pay for very expensive insurance it would probably be better to do something that ensures your ship does not get hijacked to begin with. That something would be armed security, which is so far at least, 100 percent effective. From personal experience hiring highly trained (in fact all ex- US SOF folks) as security on our ships I can back of the envelope it for you …

A team sufficient to protect the ship costs about $5000 per day all inclusive, for a total of $70,000. On a 2 Million BBL VLCC that means security to get it to the US costs about 3.5 cents per bbl. While it varies a little by grade of crude, a rule of thumb is that each BBL of crude will produce about 20 gallons of gas. That means piracy adds a little less than 2 tenths of a cent to the cost of a gallon of gas, or a nickel or so to a 25 gallon fill up. This as opposed to the approximately 43 cents per gallon or $10.75 in taxes you pay on a 25 gallon fill up. Once again that Pirates vs. Congress damage comparison sneaks in there and pirates seem the better bargain. If anyone is up for the mission of protecting us from Congress there’s another one I’d like to see.

Maybe the only thing worse than being successfully boarded by pirates is if they try it and find armed ex-SEALs ready to wipe them out. Then the real trouble will begin. For the ship will next be boarded by that sort of buccaneer against which no SEAL team can provide any defense: lawyers.

But there are a few things to remember when discussing the arming of ships that are worth mentioning. At my company we are very worried about liability, so only employ people we know can keep their heads under pressure, and are not prone to shooting people who should not be shot (an actually hitting the people that should be). So they are all former SEALS. We also limit the types of weapons they can have on board. The result is we, a responsible operator, have the best trained, but very expensive, operators in the world with a limited, but effective amount of weaponry the operators themselves chose. But that’s our choice, there is no international standard on the training or vetting of shooters, or even any requirement they are different than the normal crew. Nor is there any international standard on what types of weapons are considered appropriate. Nor, by the way, is there a US flag state standard for either shooters beyond having a TWIC card, something every AB has, nor limits on weapons and actually no useful guidance on training. That is all up to us.

What’s a guy to do? The gas has got to get through, but how to deal with the pirates in suits? Ezra Levant, who is the sort of Andrew Breitbart of Candada, observes, “if you can’t beat them, join them.” Levant, in the the video following shows that environmentalism has now become nothing more than just another lobbying group, a bunch of influence peddlers who makes millions to protect everyone from everyone. Everyone, that is, except themselves.

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Who knows, maybe there are a few shady environmental foundations in America, too. Nah. But when Adam Smith talked about “the hidden hand” which makes each participant in the marketplace maximize his own interests, he surely made theoretical room for modern bureaucratic entrepreneuralism. It is that business where you turn forms, procedures and lawyers who would produce nothing into a factory which produces vast amounts of cash flowing from the pocket of the consumer to the poccket of the guardians. We need them. Like President Obama once said, there wouldn’t be a Facebook or a Google today without government.  Now is not the time to give up. Was it over when the Germans bombed Pearl Harbor?

Meanwhile, back by special demand are the guys from the Moss Pawn shop, vendors of quality guns, who explain how to fill up a government form correctly in just a few easy steps.

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