Can We Trace and Estimate the Technical Progress in Shipping Industry by Using the Cobb-Douglas Production Function?

Abstract

This paper had an ambition: to estimate the impact of Technical Progress embodied in vessels. Given that technical progress is estimated in physical terms, we went a step further to estimate it also in $ terms, and this found equal to 8.2% p.a. The monetary technical progress is more meaningful to managers. First, we found the existence of economies of scale in tankers using the generalized Cobb-Douglas production function: , where α + β set > 1; the parameter α set equal to 0.15 and the parameter β set equal to 0.94, based on actual data. The paper presented a historical account of the events since 1945, which we held responsible for the diffusion of a subsequent technical progress. Technical progress in ships-most of it is called to solve technical problems. Ships were regressing round 10,000 dwt, at relatively low speeds, after the 2 nd World War, and they consumed a lot of fuel oil , but who cared (?) as oil was very cheap. Sea trade did not stay at low levels, but increased by leaps and bounds after the 2 nd World War. Ships soon multiplied their size by 6 times initially and then by more than 10 times. Tank(ers), suitable to reap economies of scale, increased by 10 times, and eventually held the titles: VLCC & ULCC, passing over various adventures! During 1945-1973, all maritime variables were increasing , and even Onassis, an empirical shipowner and uneducated, understood well the arithmetic of scale economies, even before the 2 nd World War by building the 1 st super-tanker (1938)! Then, suddenly, and unexpectedly, Suez Canal closed (1956). Ships had to travel a lot more sea miles… as a result they became even bigger than proper for the future trade. Ships fell into the trap, however, believing that Suez Canal will open after a very long time — even Onassis believed this. Shipowners run to build giant ships! And all were going well till end-1973, for 16 years. Onassis and other tanker shipowners became rich during this time. OPEC, however, decided to change history (in end-1973) and to put an end in the story that oil is very cheap. The “trap” worked, as ships had become already bigger, faster, and covered longer distances, before fuel oil price increased about 10 times reaching $200 per ton from $20! Ships broadcast an SOS to… technical progress “telling” please: find a “cheaper oil and newer engines consuming less”! Technical progress responded… Today, a lot of discussion is going-on not for a cheaper fuel-oil, or a better main engine, but for a fuel oil… which will respect environment, e.g., LNG or hydrogen or else? Will shipping technical progress take revenge, in 2022 and thereafter on OPEC, on behalf of shipowners, by making ships free from oil ? A new history for shipping is going to be written again…but this time will be a revolution , after Pandemic is over after 2022.