In 2008, the world faced one of the biggest financial crisis in its history. Some of the biggest economies recorded negative growth rates at that time, and they are still trying to recover from the effects of this shock. As a part of this effort, governments started to become more protectionist in both politics and trade. Today’s trade war is nothing but the most important result of this approach. The energy sector is naturally a part of this war, perhaps the most important.
An increase in shale oil and shale gas production made the U.S. one of the biggest producers in the world. In the environment of the trade war, brought energy trades to the table. In the beginning, it was about decreasing oil prices and harm other producers’ economies. As the U.S. shifting from a buyer to a producer, they changed their energy strategy. In the later steps they took, they started to impose sanctions on oil producers like Iran and Venezuela. These sanctions were not only about harm their economies but also gained new customers. However, these sanctions do not only affect the mentioned countries but the whole world and a sector: insurance.
According to the International Maritime Organization (IMO) data, about 90% of the world trade is carried by sea, and it is, by far, the most cost-effective way to move en masse goods and raw materials around the world. Decreased oil prices made sea trade easier and favorable. On the other hand, usually, taxes on imports are not being implemented because of the potential reaction from the trading partner. Despite these two reasons in favor of maritime trade, there are inherent risks that occurred in recent days. For example, a few oil tankers had been attacked in the Middle East, which may affect world trade through different channels like insurance.
Ships carrying oil and other types of cargo have to buy specific insurances. Potential risks mentioned above will make sea trade more expensive due to high insurance premiums. They will negatively affect the world trade while increasing the effectiveness and profitability of insurance companies and insurers.
As a part of the trade war, the U.S. imposed a series of sanctions on the Chinese shipping company Cosco, which is one of the biggest in the world. The figure below shows Very Large Crude Carrier (VLCC) rates after these sanctions. A spike in geopolitical risk in the Middle East also helped this situation. The attack on the Iranian ship has added to risk premiums that were already high following the attack in Saudi Arabia last month.
It is a significant example of the adverse effects of a trade war. Recent attacks, sanctions, and increasing political tension between the sides of this trade war made insurance premiums explode. It also implies trade war will spread to the different sectors and directions in addition to oil, gas, technology. The whole world needs sea trade and insurances. Insurance rates will play an essential role in the era of a trade war.