Contractual Barriers and Energy Efficiency in the Crude Oil Supply Chain

Abstract

We show how the concept of demurrage - a core principle of commercial shipping contracts - is at odds with efficient and environmentally friendly vessel operation and represents barriers to improving energy efficiency in maritime transportation. Because demurrage rates are higher than freight earnings in poor markets, shipowners order their ships to “rush-to-wait”, resulting in higher fuel consumption and ship-to-air emissions. We propose a new speed optimization model where demurrage is properly accounted for and show that the observed behaviour is rational for a profit-maximizing shipowner. Using a numerical example for Aframax crude oil tankers, we illustrate the economic effects of demurrage on vessel earnings and optimal speed.