Pirates Are Real--and Causing Problems for International Business

Sources: Borderless Boarders, Financial Times; Piracy Set to Escalate Shipping Costs, Financial TImes; Shipping Avoids Suez on Piracy Fears, Financial Times

The recent hijacking of the Sirius Star, a Saudi-owned oil tanker, by Somali pirates in the Gulf of Aden has thrown the spotlight on the growing problem and has caused many shipping companies to divert vessels on longer routes around the Cape of Good Hope, which will cause extra shipping and insurance costs that will ultimately be passed off to customers.

According to the International Maritime Bureau, there have been ninety-five pirate attacks on vessels off Somalia this year. Most of the vessels seized by the pirates have been taken in the Gulf of Aden near the Suez Canal.

Earlier this week, Norway’s Odfjell, one of the largest operators of chemical tankers, became the first tanker owner to publicly announce that it was going to avoid the Suez Canal. Taiwan’s TMT followed suit, ordering its vessels to avoid the Suez Canal and stay at least 2,000 miles off of the Somali coast. On Thursday, Europe’s biggest ship owner, Moller-Maersk, also decided to divert its tankers to the longer route around the Cape of Good Hope.

The re-routing will increase sailing days—possibly up to twenty additional days—delaying the delivery date and forcing consumers to bear additional costs for international deliveries. The crisis could also push up charter rates for tankers because the extra voyage time reduces the number of vessels available. Further, the special risk insurance needed for vessels entering the Gulf of Aden or the Suez Canal has already escalated from $500 per voyage to $20,000 per voyage.

In addition to the added costs passed onto consumers by shipping companies, the government of Egypt is facing a loss in revenue from the Suez Canal, which is its third largest source of foreign currency revenues. In response to this threat, six Arab countries that share the Red Sea met in Cairo to come up with a united response, but no definitive response seems to have come from the meeting. The rest of the world has also been unable to effectively respond to the situation, as the waters in which the pirates operate are too large for international forces to patrol effectively—the Gulf of Aden is 2.5 square nautical miles. Legal obstacles also make it difficult for navies to arrest or prosecute pirates, so captured pirates are often just returned to Somalia—one of the world’s most unstable states—where they can simply resume their work.

Discussion: How should the international community respond to this “piracy threat?” What will happen if insurance companies refuse to insure tankers traveling in the Gulf of Aden or the Suez Canal? Should companies negotiate with pirates, or refuse to speak with them? If they negotiate, who should bear the costs of the ransom? How big of an effect do you think that the threat of piracy will have on international business?