High-priced fuel, chokepoint congestion, long delays and embattled sea routes

As the maritime industry suffers from rising fuel prices, congested choke points, and war-hit sea routes, a global authority on maritime economics, Harvard professor Myrto Kalouptsidi sees an industry in a state of disruption through no fault of its own.

With ships still stuck in the Strait of Hormuz, to take just one of several examples, Ms Kalouptsidi explained how these disruptions reduce the effective capacity of the shipping sector. “When ships are delayed, diverted, or forced to travel longer distances, the same fleet can complete fewer voyages over a given period. Even without a large change in the physical number of ships and port infrastructure, the available supply of transportation services falls.”

She highlighted that these phenomena are especially important in maritime transportation, where port infrastructure expands slowly, new ships take time to build, and utilisation is often already high.

“The relevance for the shipping industry is direct and substantial”, she said. “Recent pressure on major chokepoints shows how disruptions in specific locations can translate into broader constraints on maritime transportation”, citing a series of events since late 2023 that include attacks in the Red Sea that led many ships to avoid the Suez Canal and reroute around the Cape of Good Hope, drought-related restrictions at the Panama Canal that reduced transit capacity, and the Black Sea being disrupted by the war in Ukraine.

One event leads to another: “Concerns around the Strait of Hormuz also highlight the vulnerability of energy shipping routes. Together, these examples show that chokepoint pressure is not isolated to one route; it can affect several parts of the global shipping network at once.”

Recognised for her deep research to unearth data in a notoriously tight-lipped industry, Professor Kalouptsidi, whose full title is Augustus Cobb Professor of International Economics, also describes how price shocks are transmitted globally for a wide variety of reasons when the shipping industry is under pressure.

“The price impact of chokepoint pressure, therefore, depends on whether the transportation sector is already close to capacity. If there is spare capacity, disruptions may mainly raise marginal costs through higher fuel use, insurance costs, or longer routes. But when ship or port constraints bind, the same disruption can lead to much sharper increases in freight rates. This is what makes recent episodes such as the post-Covid era, the Red Sea crisis, and the Middle East conflict especially relevant: they illustrate how geographic disruptions can become capacity shocks for the entire transport system.”

So, chokepoints are not just local logistics risks, she concluded. “They are a way in which geopolitical, climate, and infrastructure disruptions can reduce global transportation capacity. This makes the shipping industry and port infrastructure a key channel through which shocks to particular routes, ports, or canals can affect prices, and international trade more broadly.”

Asked about the knock-on effects on shipping movements of rising fuel prices, Ms Kaloupsidi sees a highly nuanced situation. “The effect does not occur mechanically or one-for-one”, she said. “Fuel is the main variable cost of ships, so higher prices make voyages more expensive, especially over longer distances. This can discourage some marginal trade flows and make distance more important for sourcing and destination choices.

“The effects would likely appear in three ways. Exporters may ship less when transport costs become high relative to the value of the cargo. Ships may also become less willing to ballast, or travel empty, to distant regions, making them more tied to their current location. Freight rates may rise, but not simply by the amount that fuel costs increase. Shipping prices also reflect how easy it is for ships to find cargo on the next leg of the trip and how many ships are available in a given region.”

Overall, though, ominously for the immediate future, she believes rising fuel prices are likely to make shipping less flexible: “Vessels will make fewer marginal trips, avoid costly empty repositioning, and favour routes where cargo is more likely to be available.”