The EXXON Valdez ran aground on Bligh Reef just after midnight on March 24, 1989, and approximately 10 million gallons of crude oil gushed into the pure waters of Prince William Sound from eight ruptured cargo tanks. Clean-up costs have exceeded $2 billion, and lawsuits seeking billions more in damages have been filed. The EXXON Valdez disaster has provided ample economic motivation to prompt the investigation of the linkages and trade-offs between risk reduction, contingency planning, and pollution response and to force the investment of significant resources in each of these areas. Management scientists can find better ways to assess risks in complex systems and to communicate these risks to policy makers and the public. We must use our knowledge and technology to minimize risks and to assist those who will manage the response organizations and will make decisions in a hostile and turbulent environment when low-probability, high-impact events occur.

Since the pioneering work of Koopmans (1939) and Mossin (1968) in Maritime Economics, the market for new vessels, the market for second-hand vessels, the freight rate market and finally the market for scrap have been considered as different markets where price is formed under the laws of supply and demand. In this paper, we consider the prices of new vessels and the charter rates as sufficient statistics for the value of second-hand vessels. Using modern finance theory, we derive a closed formula for the prices of second-hand vessels taking into consideration their Real Option value. We introduce two explanatory variables for second-hand prices and derive equilibrium prices in a partial equilibrium framework. Our model fits the data and provides some structural insight into the functional form of second-hand prices. Maritime Economics & Logistics (2003) 5, 251–267. doi:10.1057/palgrave.mel.9100084

Managers can improve their investment decisions in a cyclical market, such as the tanker market, by using system-dynamics models. We developed and implemented a system-dynamics model for the tanker market for Niver Lines. We combine entry, exit, and lay-up decisions, and determine the flow of transportation supply. Then, we compare supply and demand and calibrate the system. We derived time-charter rates from the interaction of supply and demand using historical data from 1980 through 2002. Our results reveal the key factors that affect tanker rates and unforeseen dynamics. The model is a powerful tool for modeling the impact of changes in various factors on time-charter rates.

No abstract

Investment success in a cyclical market, such as the international bulk shipping market, can be dramatically enhanced by a cost-based buy-low, sell-high investment strategy. We developed an estimator of relative price level for a general asset using net present value techniques and publicly available information on costs and revenues. The estimator compares market price with a cost-based nominal price and thus identifies relative highs and lows in a market. As a test, we used the estimator on historical data to simulate how investment decisions could have been made in the bulk shipping market. Investment strategies using the estimator to time acquisitions and sales perform significantly better than a “blind” investment strategy (where ships are acquired and sold at fixed time intervals).