TO:		Barry Garelick

Russ Smith

FROM:	Michael Gallaher

	Martin Ross

DATE:	April 24, 2006

SUBJECT:	RTI Estimates of Growth in Bunker Fuel Consumption

This memorandum discusses specific features and assumptions in the RTI
analysis of bunker fuels that control estimated growth rates in demand. 
As discussed in the previously-distributed memo, the focus of RTI’s
forecasts are on fuel demands going forward over the next fifteen years.
 In the analysis, three features of the model used to estimate these
forecasts can potentially impact growth rates in fuel demand:

any improvements in engine efficiency,

changes in vessel size or speed that affect fuel efficiency per ton of
cargo, and

the Global Insights projections of international trade that form the
basis of the analysis.

While engine efficiency has improved over time, most noticeably in the
early 1980s, there are tradeoffs between improving fuel efficiency and
reducing emissions.  During this study, engine manufacturers indicated
to RTI that fuel efficiencies are likely to remain constant for the next
fifteen years, particularly as shippers focus on meeting new NOx
emissions requirements (the features of the model related to engine
efficiency are shown in the “Shipping Analysis” portion of Figure
1-1 in the previous memo – also reproduced below).  Similarly,
although the RTI analysis considers how vessel sizes, especially those
of container ships on the Asia to North America trade routes, may
increase over time, these changes are not the driving force in the
fuel-demand growth (this model feature partially determines the average
cargo per voyage in the “Trade Analysis” portion of the figure).

The overriding feature in the RTI analysis that controls estimated
growth in bunker fuel demand is the Global Insights trade forecast
(which largely determines the number of voyages necessary in a year to
ship the required amount of cargo – shown in the “Trade Analysis”
portion of the figure).  It is RTI’s understanding that in ongoing,
unpublished work for the California Air Resources Board (CARB), Dr.
James Corbett has calculated an installed-power growth rate for the
historical period of 1996 through 2003 of around 6.6% per year for ships
entering and leaving the United States.  This finding is somewhat
similar to Global Insights’ data on growth in imports to the United
States over this time period, which shown 5.5% growth per year across
all types of imports (Cell C14 in the “GII Trade Forecasts” tab) –
exports declined in total over the same period.  At any particular point
over this time horizon, the year-to-year growth in commodity trade, and
associated fuel use by vessels estimated by RTI, can be quite variable,
depending on economic conditions and Global Insights’ analysis of
trade flows (e.g., changes in U.S. exports of bulk goods – shown in
Row 20 in the “GII Trade Forecasts” tab).  

Although for completeness RTI has presented fuel consumption estimates
for the years prior to 2005, based on the historical trade data, the
focus of the analysis is on fuel demands going forward over the next 15
years.  As such, the modeling is based on today's industry conditions
(e.g., utilization rates) in conjunction with Global Insights’
forecasts of future trade flows.  Any past events in the shipping
industry that altered growth in installed power or the ratio of
installed power to overall shipping activity (possibly as the result of
temporary business fluctuations) are not evaluated/removed from these
historical fuel-consumption “estimates”.  Moving forward into the
future, it is assumed that current conditions in the shipping industry,
in conjunction with the Global Insights’ forecasts, provide the most
accurate method of estimating future bunker-fuel demands.

The historical growth in import trade discussed above is significantly
higher than Global Insights’ projections of future growth in these
trade flows.  Over the time period from 2005 to 2020, average annual
growth in imports is expected to be around 1.7% per year (Cell E14 in
the “GII Trade Forecasts” tab), while growth in exports is 1.6% per
year (Cell E25).   Growth in imports ranges from a low of 0.7% per year
for crude oil to a high of 5.1% per year for containers.  Export growth,
especially for containers, is generally lower than imports.  It should
be noted that import growth in container ships is a significant driver
in fuel consumption, however, since these vessels carry fewer tons per
ship (the units of the Global Insights trade data are tons) and the
number of ships needed will depend on the greater of either imports or
exports.

The fuel-demand forecasts that are the focus of the RTI analysis are
shown in the “RTI Fuel Forecasts” tab of the Excel file.  The main
growth rates of interest are those shaded in yellow - these show an
overall annual growth in fuel consumption of 3.4% per year for the
2005-2020 time horizon (compared to growth in trade of around 1.7% per
year, where the higher growth in fuel consumption is driven by growth in
container trade).  Total growth in container trade of 4.5% per year in
the Global Insights forecasts (Cell E30 in the “GII Trade Forecasts”
tab) gives an average growth in fuel use by container ships of around
5.5% per year (Cell E7 in the “RTI Fuel Forecasts” tab).  Here,
growth in fuel consumption by container ships is higher than the average
growth in container trade, which partially reflects slow growth in
container exports - since ships will leave the U.S. with an incomplete
load if no export goods are available.  Growth in fuel consumption by
all other types of vessels is significantly lower, which reduces total
growth across types of cargo.

Tables 1 and 2 below shows estimates of the lengths of international
voyages used in the analysis.  Table 1 presents average lengths across
types of non-container vessels (these times are cargo specific and vary
slightly based on the speed of the vessels – speeds are taken from Dr.
Corbett’s work).   Two sources were used for non-container trades and
voyage times in this table:

Worldscale Association. New Worldwide Tanker Nominal Freight Scale,
“Worldscale”. 2002. London: Worldscale Association.

Maritime Chain. 2005.
http://www.maritimechain.com/port/port_distance.asp.

The Worldscale tables, based on underlying BP Shipping Marine Distance
Tables, are the industry standard for measuring port-to-port distances,
particularly for tanker traffic.  The reported distances account for
common routes through channels, canals, or straits.  This distance
information was supplemented by data from Maritime Chain, a web service
that provides port-to-port distances along with some information about
which channels, canals, or straits must be passed on the voyage.  This
distance information is then combined with Dr. Corbett’s speed
parameters to determine the length of a voyage in days.

Voyage times for container trade are based on information from
Containerization International and calculations by David St. Amand. 
This resource provides voyage information for all major container
services.  Based on the frequency of the service, number of vessels
assigned to that service, and the number of days in operation per year,
we estimated the average length of voyages for the particular bilateral
trade routes in the Global Insights trade forecasts. 

Degerlund, J. (ed). 2005. Containerization International Yearbook 2005.
London: TF Informa UK Ltd.

Table 1.  Length of Voyages for Non-Container Cargo Ships (approx.
average)

Table 2.  Length of Voyages for Container-Ship Trade Routes

References

U.S. Energy Information Administration (EIA) at Department of Energy
(DOE). 2004.  Annual Energy Outlook 2004.  DOE/EIA-0383(2004). 
<http://www.eia.doe.gov/oiaf/archive/aeo04/index.html>. 

U.S. Energy Information Administration (EIA) at Department of Energy
(DOE). 2006.  Annual Energy Outlook 2006.  DOE/EIA-0383(2006). 
<http://www.eia.doe.gov/oiaf/aeo/index.html>. 

Figure 1-1. Method for Estimating Bunker Fuel Demand

 Although past forecasts by the Energy Information Administration, which
are based in part on Global Insights trade projections, have shown
significant growth in crude oil imports (see, for example, EIA [2004],
which has import growth of more 2.6% per year from 2005 to 2020), Table
1 in the most recent forecast from EIA (EIA, 2006) shows crude oil
imports growing at only around 0.6% per year.  

 Based on a discussion with Dr. Corbett, RTI reexamined the fuel-demand
model to ensure that it calculates fuel consumption by container ships
based on growth in import shipments, rather than relying on lower growth
in net trade flows (imports and exports).  The model is estimating fuel
use properly.  If the model were run based on growth in net trade in
containers, the growth rate in total fuel use by these vessels would
drop from 5.5% to 4.9%, which is roughly equivalent to the difference
between import growth and total trade growth (Cells E7 and E30 in the
“GII Trade Forecasts” tab, respectively).

Barry Garelick and Russ Smith

April 24, 2006

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