Tuesday, 15 March 2016

Changing incentives and piracy at sea

In ECON100 and ECON110, we discuss rational (and in ECON110, quasi-rational) decision-makers, who make decisions based on costs and benefits. If the costs and/or benefits change, that provides incentives for people to change their behaviour. If the costs of an activity rise, or the benefits received from that activity fall, then people will engage in less of that activity.

Which brings me to pirates. Quartz reports:
Over the past six months, the price of oil has plunged due to a global oversupply. And for some pirates, it’s just not worth stealing it any more.
“With oil at a low bottom price of below $30 per barrel, piracy is no longer such a profitable business as it was when prices hit $106 a barrel a few years ago,” said Florentina Adenike Ukonga, the executive secretary of the Gulf of Guinea Commission—a regional body that exists to promote cooperation between West African states, many of which export oil via tanker—in an interview with Bloomberg.
Piracy is costly - speedboats, guns, ammunition, manpower, not to mention the possibility of being killed or captured by the authorities. So, when the benefits of hijacking an oil tanker fall substantially, you'll avoid tankers and look for other targets. Meaning fewer hijacking attempts on oil tankers.

However, overall we should expect less hijacking of other ships (not just oil tankers), because the costs of piracy have been increasing. There are now many more armed guards on-board ships to protect them, and there are many more international naval ships patrolling areas of pirate activity. This increases the chances of being killed or captured, and so increases the probability-weighted costs of pirate activity. The increase in costs of pirate activity probably goes a long way towards explaining the overall decline in pirate attacks on shipping between 2010 and 2014 (per this report by the ICC International Maritime Bureau).

[HT: Marginal Revolution]

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