How Oil Tankers Work

The Business of Oil Tankers

An oil tanker rides through Plaquemines Parish, Louisiana in 2008. Oil production suffered in the wake of Hurricanes Katrina and Rita in 2005.
An oil tanker rides through Plaquemines Parish, Louisiana in 2008. Oil production suffered in the wake of Hurricanes Katrina and Rita in 2005.
Mario Tama/Getty Images

Before an oil tanker takes on a single drop of cargo, the company that owns the ship enters into a highly detailed agreement called a charter. Several types of charters exist. There's the bareboat charter, in which a company that wants to use a ship agrees to pay all of the boat's operating expenses for a set amount of time, usually measured in years. Other options include the spot charter, in which the ship is contracted to deliver a specific amount of cargo between one port and another within an agreed time frame; and time charters, in which a party pays the ship's owner to use the ship for a specified amount of time.

In the shipping business, profits are made through shrewd understanding of the markets. For the most part, there's greater demand for tankers than there is capacity, so long-term charters of several months to several years are common [source: Platou Report].

A large tanker will typically carry a crew of about two dozen and can cost $100 million or more. After paying for expenses, VLCC-class ship owners can expect profits of at least $60,000 a day. That profit varies depending on several factors, including tanker availability and the strength of the oil market. During times of high oil demand, daily profit per tanker can skyrocket [sources: Strauss Center and Wright].

When the current global financial crisis took hold in 2008, it appeared that the oil industry-friendly era of fuel-guzzling cars, trucks and SUVs had ended. Fears about oil supplies running out and the dangers of climate change caused by burning fossil fuels has triggered a worldwide race to produce cars, trucks and even airplanes that can run on eco-friendly fuel sources.

So, what does the future of the oil tanker industry look like? Frontline, the biggest owner of oil tankers, warned in February 2009 of "weak fundamentals" facing its industry for the rest of the year. Still, earnings for tankers have held up well compared to ships that carry other goods -- collectively known as dry bulk and container ships.

Falling oil prices and tanker demand, for instance, helped to depress Frontline's fourth-quarter 2008 profit to $52.7 million. That's compared to $201 million a year earlier, when the oil market was much stronger [source: Wright]. In the long term, though, the industry seems optimistic about demand, since older, single-hulled ships are being scrapped and must be replaced to meet the need for oil around the world.

For more information on oil tankers, take a look at the links below.

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