Självständigt arbete (30 hp)
Författare Program/Kurs
Örlkn Peter Thomsson HOP
Handledare Antal ord: 19999
Dr. Peter Mattsson Beteckning Kurskod
Självständigt arbete masters-uppsats, krigsvetenskap
2HO013 MAHAN IN A NEW MILLENNIUM
Abstract:
In 1890, the American naval officer and scholar Alfred Thayer Mahan formulated as a theory that seapower brings prosperity. This thesis in War Science tests whether Mahan’s theory remains valid in the modern day. A multi-disciplinary approach is taken, wherein a financial event study method is employed for hypothesis testing.
Prosperity is the product of many factors that interact in complex systems. Consequently, isolating the positive contribution of seapower is difficult. Its influence is therefore inferred from its absence, in the form of failure to protect shipment of a key commodity. By the logic of the operationalisation, insufficient seapower results in attacks on shipping. Information of attacks is promptly reflected in asset prices on intensively traded financial markets. A negative change in a stock market index rep-resents a reduction in the value of the traded assets. This in turn implies a negative contribution to national prosperity.
Specifically, attacks on supertankers are used as empirical data. The ensuing impact is measured in first order effects on oil prices and second order effects on stock market returns. A strong correlation is found between attacks on supertankers and oil price shocks. A sufficiently strong impact is found on stock market returns to allow for arguing that Mahan’s theory retains validity. Given recent de-velopments in major power relations, Mahanian postulates may be more in fashion now than in the previous century.
The findings complement previous research on the benefits from seapower, naval presence and mar-itime security. In addition to general policy implications from exhibiting the significance of sea-power, an elaboration on the current security situation’s ramifications for small states. Thereby it situates seapower in its grand strategic context.
Key words:
A. Table of contents
1 PROLOGUE ... 3
2 INTRODUCTION ... 4
2.1 RESEARCH QUESTION AND PURPOSE ... 5
2.2 RESEARCH OVERVIEW ... 7
3 THEORY ... 10
3.1 ALFRED THAYER MAHAN (1840-1914) ... 10
3.2 SEAPOWER ... 11
3.3 THREE GENERATIONS OF PROTECTION OF SHIPPING ... 17
3.4 TRADE ... 19
3.5 ECONOMICS ... 20
4 METHOD ... 22
4.1 DEDUCTIVE THEORY TEST ... 22
4.2 SEQUENTIAL TEST BY EVENT STUDY ... 27
4.3 CASE SELECTION LOGIC ... 29
4.4 SOURCES ... 29
5 ANALYSIS ... 32
5.1 CASES ... 32
5.2 EVENT STUDY TESTS ... 35
6 DISCUSSION ... 38
6.1 FINDINGS ... 38
6.2 ETHICAL AND METHODOLOGICAL CONSIDERATIONS ... 42
6.3 LOOKING FORWARD ... 46
7 CONCLUSION – OLD IDEAS IN A NEW AGE ... 47
7.2 SUGGESTIONS FOR FUTURE RESEARCH ... 47
7.3 IMPLICATIONS FOR SMALL NAVIES ... 48
8 EPILOGUE ... 52
9 REFERENCES ... 53
10 DATA ... 62
11 APPENDICES ... 63
11.1 CASES ... 63
11.2 EVENT STUDY STATISTICS ... 64
11.3 INTERVIEW GUIDE ... 66
1 PROLOGUE
…huru nästan hvart och et folkslags styrka i Sjön är den rätta Thermometern, hvarefter man bör dömma om dess magt, välde och anseende i allmänhet, samt huru sant det är, som även i Themistoclis och Pompeji tid var en afgjord sak, at den, som vil ständigt vara Herre til lands, måste nödvändigt begynna med at vara det til sjöss.1
Bengt Ferner (1756, p. 4)
Including the work of a compatriot proved irresistible when stumbling upon this hidden treasure. The quote is from the acceptance speech to the Royal Swedish Academy of Sciences by Bengt Ferner in 1756, in which he gave a discourse on seapower. It could just as well have been titled The Influence of Seapower
upon History from Antiquity to the 18th Century since his elaboration, both in topic and structure, is
similar to that of Mahan (Ferner 1756, pp. 6–24). Ferner’s work precedes that of Mahan by almost a century and a half but has unfortunately failed to gain as wide recognition. This thesis leverages off the more prolific production of Mahan but any findings are meant to honour Ferner no less than his American successor.
1 …of how each and every people’s strength at sea is the correct thermometer by which to judge of its influence, power and
standing in general, as to how true it is, as also in the times of Themistocles and Pompey, it was a decided matter that he, who perennially wishes to be Master on land, must perforce begin by being such at sea. (Author’s translation)
2 INTRODUCTION
But this will require a protecting force on the sea. Otherwise the smallest powers in Europe, every one which possesses a single ship of the line may dictate to us, and enforce their demands by captures on our commerce. Some naval force then is necessary if we mean to be commercial.
Thomas Jefferson (1785)
In his letter to Monroe, Jefferson captured the very essence of why seapower2 was imperative for the
nascent United States, at the time only a minor power. His reasoning seems applicable across time and space. Seapower is closely linked to the ability to engage in commerce, in turn contributing to national wealth and power. The history of seapower is as old as shipping and many scholars have made compel-ling arguments on the merits of maritime power (Falk 2000, pp. 13–14). In The Influence of Sea Power
upon History 1660-1783, Alfred Thayer Mahan strove to provide:
[A]n estimate of the effect of sea power upon the course of history and the prosperity of nations. […] Therefore the history of sea power, while embracing in its broad sweep all that tends to make a people great upon the sea or by the sea, is largely a military history.
(Mahan 1890, pp. v–vi, 1)
Elaborating on the subject over 550 pages, in short he claims that seapower brings prosperity.3 Mahan’s
deliberate effort to argue for building a strong navy and making the US a maritime state received wide acclaim both domestically and abroad. Still, costly investments in a navy are recurrently questioned and even for affluent nations require proper justification (Aube 1882, p. 315; Xu 2012, pp. 46–51). Today, overseas trade remains of crucial importance to most nations’ economies and even sustenance. 90% of external and 40% of internal trade in the EU is seaborne (McCabe, Sanders & Speller 2019). Provided that the relation between seapower and prosperity can be supported, the economic repercussions of failure to protect shipping would form an argument for seapower, even for lesser powers.
A hundred years before Mahan, the correspondence above preceded the US-Swedish campaign in 1801-1802 against the Barbary pirates. This illustrates that even minor maritime powers have an interest in seapower and can achieve significant impact when operating concertedly (Garrity 2007, pp. 409–411).
2 The distinction between, and use of, the terms seapower and sea power is not consistent. Other than in verbatim quotes,
seapower is herein used to denote the concept, letting sea power be the naval analogy to land power to describe a state’s
characteristic.
3 Despite the striking similarities, Ferner’s work a century earlier may have been unknown to Mahan who achieved greater
success among influential decision-makers of his time such as Theodore Roosevelt and Kaiser Wilhelm II (Gat 2001, pp. 453–455).
2.1 R
ESEARCH QUESTION AND PURPOSESince existential wars are rare in the Western world, more strategic activity presumably takes place in peacetime, to avoid undesired armed conflict and to ensure the best conditions should war break out. Securing trade is a core interest in peace and a question of survival in times of war. While the necessity of seapower has retained the same fundamental logic over time, its ways and means have evolved. Mar-itime trade has also changed and is more complicated than when the theory was initially developed, why it may no longer be valid, identified already by Mahan (1890, pp. 84–85). The subject therefore merits revisiting, to assess the theory’s validity in a modern setting. This begs the question:
Is Mahan’s theory on seapower and prosperity still valid?
This Master’s thesis is focussed on seapower and it is pursued from a strategic vantage point. The topic is situated within the discipline of War Science, exploring the use of military force (Weissmann 2019). The purpose is to examine Mahan’s theory through a multi-disciplinary approach.
2.1.1 MAIN CONTRIBUTION
Testing Mahan’s claim represents an attempt to refine the theoretical frame of seapower. Exploring the strategic implications of modern seapower is meant to provide a theoretic contribution of increased gran-ularity for the body of theory on seapower. The multi-disciplinary approach with analytical tools from Economics complements previous research. It also caters for the interdependencies across the civil-mil-itary domain and across the conflict continuum, both particular characteristics of seapower.
Military operations abroad are often based on moral and security political grounds while economic rea-sons are merely alluded to. For example, the Swedish and Danish governments’ arguments for Operation ATALANTA in 2017 and the Strait of Hormuz in 2019, respectively, primarily raise moral and trade security reasons (Utrikesdepartementet 2017; Udenrigsministeriet & Forsvarsministeriet 2019). The main aspiration for policy implication of this thesis is to develop a broader understanding of the benefits of seapower, even for a small state. It can also shed light on dynamics behind employment of seapower in operations, nationally, or internationally for systemic benefit.
2.1.2 RESEARCH DESIGN
Figure 1 depicts the research design for the test. An inverse operationalisation is used; from failed pro-tection of shipping via the impact on oil prices to ensuing effects on stock markets, as a proxy for pros-perity. For the analysis, a theoretic framework (Héritier 2008, pp. 75–76) is built from seapower and Economics.
Figure 1: Research design. (Author)
2.1.3 DISPOSITION
The theories forming the foundation for this study are introduced in Chapter 2, namely: seapower, trade and Economics. Chapter 3 describes the methodological approaches, operationalisation, case selection logic and sources. In Chapter 4, the cases and the two sequential event study tests are presented. Chapter 5 discusses the findings as well as the ethical and methodological considerations. Finally, Chapter 6 presents concluding remarks with suggestions for future research and an elaboration on small state sea-power.
Figure 2: Disposition. (Author)
2.1.4 DELIMITATIONS
Seapower’s juxtaposition across the economic and military domains presents an opportunity for the multi-disciplinary approach taken here by the use of analytical tools from Economics. Other disciplines are delimited from the scope of this thesis. The temporal delimitation from 2002 through 2019 provides a research window of a recent period with adequate empirical data.
x
Finance assessmentTheory Micro & Macro
Independent:
Failed protection Intervening: Oil price Stock marketsDependent: Negative
operationalisation
Economics Trade
Event study 1 Event study 2
SEAPOWER
PROSPERITY
Results interpretation
5. Analysis • Cases
• Hypothesis test oil price • Hypothesis test stock markets 2. Introduction
• Research question • Purpose
• Research overview
3. Theory
• Mahan, Seapower and protection of shipping • Trade and Economics
4. Method
• Operationalisation • Event study methodology • Case selection and sources 6. Discussion
• Findings
• Validity and reliability • Methodological issues
7. Conclusion
• Suggested future research • Implications and derivations
2.2 R
ESEARCH OVERVIEWThis section seeks to offer a brief outline of the wider body of research to situate the topic of the thesis in relation to previous findings, in particular regarding combinations of seapower, oil prices and stock markets. The specific research question and its operationalisation appear to have seen limited previous research. It is nonetheless possible to paint a picture from articles from adjacent fields.
2.2.1 NAVAL POWER AND ECONOMY
Rahman (2010 and 2016) and Looney (2001 and 2003) are two research leaders who have performed quantitative analyses to assess the contribution of seapower. The former on the impact of seapower on 18th through 20th century trade, the latter on its economic impact in the post-Cold War era.
Rahman performed a series of regression analyses as well as dyadic analyses of seapower. He found that the addition of a ship of the line added 0.5-0.8% to a state’s trade, reducing the opponent’s trade equiv-alently. Similarly, adding a late 19th or early 20th century dreadnought contributed a 1.0% increase in
trade. Allegedly, in the midst of the naval competition induced by the German Tirpitz plan at the end of the 19th century, the Royal Navy was accorded funding equivalent to 10% of the British Gross Domestic
Product. This is a massive proportion, and yet economically justified according to Rahman’s findings (2010, pp. 30–46).
These findings are mirrored in another and more refined study on the same period, where the influence is studied with regard to global trade. The finding that seapower promoted one’s own trade was corrob-orated but it was also found that in addition to the established negative effect on the opponent’s trade, it also occurred at the cost of global trade (Glaser & Rahman 2016).
The effects of forward naval presence on oil prices and stock markets were investigated in two articles from 2001 and 2003, led by Looney. The choice of using the oil market as a proxy for economic impact is supported by scholars who have found that effects are transferred bidirectionally between the com-modity markets and financial markets (Zavadska, Morales & Coughlan 2020). By looking at a derivative instrument, oil futures, the first article found a link between naval presence and the development of oil futures price curves. These rose during the onset of the Kuwait War in 1990 and fell following announce-ments of the crisis response (Looney, Schrady & Brown 2001).
In a later article, studying the early effects of the second Iraq War, the effect on oil futures was ambiguous (Looney 2003). While the author proposed a number of explanations, one of these may be the most important, the old financial adage that markets prefer bad news over uncertainty. The article does not
seem to make a deeper analysis by looking at the prevailing conditions with a long antecedent to the invasion, which may have contaminated the reference period.
The articles led by Looney and Rahman all studied the effect of naval force generation and employment, examined through a range of sophisticated methods. They represent the closest fit to the research question of this thesis. However, persistent forward naval presence of the kind studied is reserved for a few major powers, limiting the extent of potential generalisation.
2.2.2 OIL PRICE SHOCKS AND STOCK MARKETS
Compared to the previous field, the research on oil price shocks and stock markets is richer. The link between oil prices and stock markets has been found to be dependent on local market characteristics and on the market regime (Ang & Timmermann 2011). Markets are more sensitive to an oil price shock in downward moving Bear markets with low mean returns and high volatility. They are less sensitive in upward moving Bull markets with high mean returns and low volatility (Jammazi & Nguyen 2015). This may be attributable to Bull markets having a greater capacity to absorb increased costs. The impact of oil shocks has furthermore been found to be more varied in Bear markets (Yıldırım, Erdoğan & Çevik 2018). In an analogy to Tolstoy’s Anna Karenina, all Bull markets seem alike, while each Bear market has its individual characteristics. This is possibly due more to their having elicited more study than out of truly being more varied than Bull markets.
The timing in a macroeconomic cycle appears to matter, with effects being more pronounced during weak growth or recessions (Raymond & Rich 1997). This can possibly have the same background as the market regime, although it must be borne in mind that financial markets and national accounts do not always move in concert.
A demand-driven increase in the oil price can also be interpreted as a signal of a positive economic cycle, thereby supporting rather than weighing down on market profit estimations that underpin stock market returns. This may have replaced the previous association between rising oil prices and recessions (Arouri, Foulquier & Fouquau 2011). Demand side effects are unlikely to be relevant for the analysis in this thesis, since attacks are supply side disturbances.
The mechanisms for market reactions are complicated. The dominant theory that oil shocks are trans-ferred via microeconomic pricing theory has been questioned, leading to a debate among economists. Critics instead suggest that macroeconomic effects of oil induced inflation and monetary policy are more
influential on market reactions (Segal 2007, 2011). This is not a trivial technicality as monetary political conditions have metamorphosed from the 1970s to today.
Other scholars contend the primacy of microeconomics, qualifying it by adding the influence of structural factors (Lescaroux 2011). A comprehensive discussion of mechanisms between oil prices and stock mar-ket returns is found in Degiannakis, Filis & Arora (2018, pp. 89-98).
Over the past 50 years, oil consumption relative to Gross Domestic Product has more than halved, as seen in Figure 3. This reduces the factor of impact, regardless of the mechanism.
Figure 3: World oil consumption to real Gross Domestic Product. (Author, based on Arezki et al. 2017, p. 12)
Another issue is that of US shale oil production, which mitigates the impact of oil price shocks. The oil industry benefits from oil price increases and this carries spill-over effects for other industries (Çakır Melek 2018). The significance of economic structure, mainly if the country is a net importer or exporter of oil, is corroborated by Dhaoui & Saidi (2016) and Dhaoui, Goutte & Guesmi (2018).
In summary, the economic links and the impact of oil price shocks are unfortunately not as uncomplicated as hoped for in the interest of the analysis. Refined models of the micro- and macroeconomic linkages as well as market development, such as shale oil extraction, complicate the picture. This is compounded by the relative decrease in the importance of oil consumption as a proportion of Gross Domestic Product and of total energy consumption. Macroeconomic cycles and market regimes contribute their share, as do country-specific and structural factors. It is furthermore possible that both the first and second order effects, on oil prices and stock markets respectively, have become less pronounced over time. Nonethe-less, it appears to remain uncontested that oil supply disturbances lead to oil price hikes which in turn burden stock market returns.
0 0,2 0,4 0,6 0,8 1 1,2 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
World oil consumption, barrels
3 THEORY
The theoretic base for the analysis is seapower and its subtopic, protection of shipping, the first part below. The chapter’s second part crosses into the domain of the benefits from seapower – trade and economics – as an introduction to the link from grand and naval strategy to oil prices and financial mar-kets.
3.1 A
LFREDT
HAYERM
AHAN(1840-1914)
“Naval strategy has for its end to found, support, and increase, as well in peace as in war, the sea power of a country.”
Alfred Thayer Mahan (1890, p. 89)
It is clear that Mahan across his numerous works developed a deep understanding of seapower and trade in a wide strategic context by careful analysis and study of history. This may have been cultivated by his father, who was a professor at the U.S. Military Academy and a writer on military theory. The younger Mahan seems to have adopted elements from his father’s thinking before developing volumes on a wide range of subjects pertaining to seapower. Mahan’s work is often designated as a search for Jominian principles. While Mahan may have adopted Jomini’s analytical methods, Sumida’s thorough reading finds stronger association with Clausewitz’ thoughts, most importantly the necessity of the commander’s genius to manage the unpredictability of war. (Sumida 1997, pp. 9–25, 109–114)
Upon appointment to the U.S. Naval War College, Mahan set out to compile and analyse the history of naval warfare (Gat 2001, pp. 446–452). At this time, living standards were improving and international trade grew vibrantly. To this backdrop, Mahan argued for substantial investment in the U.S. Navy, build-ing his argument on Britain as the example in The Influence of Sea Power upon History (Sumida 1997, pp. 26–32; Armstrong 2013, pp. 1–14, 41–44). In addition to this, Mahan wrote a body of work on naval topics as tactics, strategy and force composition; but also on trade and grand strategy. His ideas are often portrayed one-dimensionally and he later refuted some of his earlier statements. However, his thoughts on international naval cooperation, on indirect strategy and on the necessity of trade for a modern state’s survival (Mahan 1902, pp. 143–145) all remain current and valid. This shows that his thinking was at the very least at par with his contemporaries. While elements of his thinking have become dated by techno-logical and political developments, the lion’s share appears to have aged with dignity. His thinking is possibly even more current now than only a decade ago.
3.2 S
EAPOWERBut thus much is certain, that he that commands the sea, is at great liberty, and may take as much and as little of the war as he will. Whereas those that be strongest by land are many times nevertheless in great straits.
Sir Francis Bacon (1908 [1597], p. 144)
Many benefits of the ability to exercise seapower are intuitive and seem widely accepted. Still, the idea of seapower and its definitions have long been debated. One of the most narrow definitions states that it is “…a military concept, that form of military power, that is deployed at or from the sea.” (Grove 1990, p. 3). This is similar to Friedman’s “…power centered on and projected from the sea…” (2001, p. 4). A more modern definition states “…a navy is the portion of military forces that operates in the fluid medi-ums that humans use for information, transportation, and exchange but cannot normally inhabit.” (Tangredi 2001, p. 473). Finally, a wider definition of seapower is suggested “…the political and military use of naval forces, in war and peace.” (Ångström & Widén 2015, p. 130).
Not only do the latter two offer more generous definitions that better suit the purposes of this thesis, they also have the merits of encompassing the full conflict spectrum, including the use of seapower in peace-time. Mahan emphasised the peculiarity that naval strategy surpasses the domain of war (Mahan 1902, pp. 139–143).
The integration of naval into military strategy has obvious advantages for synergy and coordination. However, as unfortunate side-effect, such a narrow understanding of seapower reduces it to an exclu-sively a military role, wherein it fails to be exploited to its full capacity in a wider context. Maritime strategy4, to which naval strategy also caters, encompasses both peace and war, consequently, so should
naval strategy. Supporting both military strategy and maritime strategy, naval forces are required for operations of great variety across the conflict continuum from policing to high-intensity operations (Wedin 2015, pp. 45–56, 89–117).
Due to its close connection to the economic domain as well as to national sustenance, seapower has wide strategic implications and interdependencies. Grand strategy, in Liddell Hart’s definition, includes the full range of state instruments. Even if it extends beyond, war is the its heart (Liddell Hart 1991, pp. 321– 322). Castex offers a wider concept of stratégie générale, encompassing all the state’s coordinated ef-forts: “…the art of managing all the powers of a nation starting from peacetime: it transcends, dominates, coordinates and disciplines all [domain] specific strategies” (author’s translation) in Vigarié (1995, p. 7).5 This furthermore includes domain interdependence, where maritime strategy interacts with
indus-trial, economic and diplomatic strategy. Landquist builds a similar framework on maritime and naval strategies’ multiple relations, across peace and war (2006 [1935], pp. 15–21). This is more pertinent in the modern conflict environment that includes threats to trade and to critical resource provision. For an antagonist, attacks on shipping have the attraction of achieving strong impact, by grey zone activities as well as acts of war (Försvarsmakten 2018, pp. 43–44). Figure 4 illustrates linkages from naval strategy.
Figure 4: Strategic interdependence. (Author)
4 Maritime strategy as per Castex, including maritime means and resources (in Wedin 2015, pp. 102–103), rather than
Cor-bett’s combination of land and naval strategy (Corbett 1918, pp. 13–14).
5 “...l’art de conduire dès le temps de paix toutes les forces d’une nation : elle dépasse, domine, coordonne et discipline toutes
les stratégies particulières.”
DIPLOMATIC MARITIME MILITARY INDUSTRIAL NAVAL AIR LAND SPACE CYBER ECONOMIC MORAL GENERAL STRATEGY
3.2.1 THE FUNCTIONS OF A NAVY
It follows then as certain as that night succeeds the day, that without a decisive naval force we can do nothing definitive, and with it every thing honorable and glorious.
George Washington (1781)
It is possible that in the letter to the Marquis de Lafayette, Washington’s wording of the utility of a navy is coloured by flattering acknowledgement of the French Navy’s contribution to the victory against Earl Cornwallis. The French expedition nonetheless exhibited all three functions – military, policing and dip-lomatic – later defined by Booth (1979, pp. 15–25).
The defining role for a navy is the military one. Naval missions strive to exercise sea control and, when necessary, to perform operations from the sea. Added to this should be sea denial, normally striven for by the inferior power to reduce the opponent’s value of the sea (Landquist 2006 [1935], pp. 63–65; Till 2018, pp. 183–255). It is inherent to the nature of naval warfare that the sea as such cannot be permanently possessed.6 The primary objective is consequently to secure one’s own communications and deny those
of the enemy. Local and temporary control is the norm (Widén 2012, pp. 95–98).
In the policing role, the navy normally addresses non-state actors with the purpose of enforcing state sovereignty and maintaining good order at sea (Speller 2014, pp. 150–167). Often referred to as maritime
security, this has grown significantly in importance and definitional content following the 9/11 terrorist
attacks (Lundqvist 2010; Bueger 2015). Maritime security is a topic, as well as a product, of seapower and is often used to denote a wide range of activities from securing national interests in food and mineral extraction to safeguarding the sea from pirates and terrorists (Till 2018, pp. 306–327).
The diplomatic role is unique for the navy and sometimes overlooked. In the words of Oliver Cromwell “a man-o-war is the best ambassador” (Booth 1979, pp. 15–20, 26–47). This can be exemplified by the US naval visits to Turkey and Greece to stem expansion of the Soviet sphere of influence in the aftermath of World War 2 (Rose 2007, pp. 8–11). More recent examples are the resumed US-UK naval operations in Barents Sea in May 2020. Gunboat diplomacy, using naval presence as a signal, is well-known but naval diplomacy is more than that. Seapower can be exercised far from home and close to allies or po-tential antagonists. This can be signalling but it is also a way to award political and strategic decision-makers time and allow them to keep options open (Grove 1994, p. 470).
6 Often contrasted to a description of land strategy wherein conquest and possession of territory hold primacy. Both these
characterisations require nuancing. See for instance Jomini’s theories on lines of [land] operation (Gat 2001, pp. 117–121); or the concept of command of the sea as sea control in the form of possession.
3.2.2 SEAPOWER AND PROSPERITY
…for whosoever commands the sea commands the trade; whosoever commands the trade of the world commands the riches of the world, and consequently the world itself.
Sir Walter Raleigh (1829 [1650], p. 325)
As can be surmised from the quote, one of the key aspects of seapower is obtaining power by securing trade.7 Even if the core of human activity takes place on land, the sea represents many values, the
fore-most of which remains that of offering civilian and military lines of communication (Corbett 1918, pp. 13–14, 89–103; Grove 1990, pp. 31–45). In addition, over the past decades resource extraction has grown in importance, either marine life from the body of water or minerals from the seabed (Géré & Wedin 2016, pp. 282–283).
A state’s ability to reap the rewards of the sea is dependent on several factors. Scholars generally include at least geography, demography, history and tradition (Mahan 1890, pp. 25–89; Castex 1994, pp. 47–53). The state’s character and self-perception as a continental or maritime power also influences or even dic-tates its prioritisation of seapower and its prerogative to exploit its maritime position for strategic choices (Corbett 1918, pp. 28–29, 55; Wedin 2009a, p. 92).
The merits of seapower transcend the ideological divide. Gorshkov established that by historic example, naval forces have been instrumental for states to maintain their standing and status (Gorsjkov 1977, pp. 75–76). Engels claimed that seapower is a product of a state’s industrial power, rather than a precursor to it. A powerful navy thus epitomises the economic power of a nation (Engels 1975 [1894], pp. 154– 155, 160). This fits with the idea of the virtuous spiral by which seapower in extension is self-reinforcing (Till 2018, pp. 17–21). Engels is not necessarily in conflict with Mahan, it merely seems the starting point differs.
Figure 5: The virtuous spiral of seapower. (Author based on Till 2018)
7 Incidentally, this quote may not be entirely attributable to Raleigh, since the ancient Themistocles is claimed to have said
3.2.3 SECURING SEA LINES OF COMMUNICATION
…the success of all operations depends upon the disposition of the forces in such a manner as will best secure the base of operations and ensure safety and freedom of communication.
John Charles Ready Colomb (1867, p. 1)
In addition to his theory on seapower, the enduring legacy of Mahan are his thoughts on the primacy of concentration into a battle fleet to destroy that of the enemy, to obtain command of the sea through a decisive battle (Mahan 1902, pp. 168, 194–195). This is in concordance with the thoughts advanced by his British contemporary Philip Colomb (1899, pp. 32–43, 115–123). It also echoes the Clausewitzian central tenet of annihilating the enemy’s main army in a Hauptschlacht (Mahan 1902, pp. 168, 194–195; von Clausewitz 1991, pp. 45–46, 224–238; Sumida 1997, pp. 42–44).
The French admiral Castex at least initially emphasised the offence and annihilating the enemy’s battle fleet as much as Mahan, making Guerre de course, which he considered a peculiar approach, a lower priority (Castex 1994, pp. 72–75, 88–93, 311–315). Albeit reluctant to admit his theoretical affinity with his British counterpart, Castex later agreed with Corbett on the primacy of securing communications (Widén 2012, p. 97; Wedin 2015, pp. 28–35), possibly as a consequence of his continental power per-spective that did not offer hopes for dominance of the oceans.
Despite a continental strategic situation similar to that of France, Tirpitz rejected the ideas of the Jeune
école as well as Guerre de course (see 3.2.4) or its German equivalent, Kleinkrieg. Instead he argued for
building the Hochseeflotte, capable of challenging the Royal Navy, and a strategy to invite battle on German conditions (von Tirpitz 1920, pp. 306–311, 317–321). This is generally held as a warning ex-ample of a strategic misconception (Elvert 1994, pp. 18–23; Epkenhans 2008, pp. 40–43). The verdict of history may need nuancing as alternatives were scarce for Germany, locked in behind the North Sea (Colomb, J. C. R. 1867, pp. 8–9; Groos 1929, p. 167).
Corbett agreed with his predecessor Mahan about the ends: securing one’s own communications across the sea and denying those of the enemy. He disagreed about the ways and means, arguing that seeking a decisive battle fleet engagement entails a risk of expending excessive effort in vain and in the process failing to secure communications (Corbett 1918, pp. 158–172). He furthermore saw the need for a dif-ferentiation of ship types by task, with not only a battle fleet capable of securing sea control but also vessels suitable for exercising or disputing sea control (Widén 2012, pp. 105–109). In fairness it should be mentioned that this need for differentiation was recognised before him, by Philip Colomb.
Particularly pertinent for the subject of this thesis is the thinking of John Colomb, brother of Philip Co-lomb, since he formulated as a principle the necessity of protecting commerce also in peacetime (CoCo-lomb, J. C. R. 1867, p. 17). The conceptual distinction between naval and land forces, the focus on controlling communications rather than territory, may also stem from John Colomb but is often attributed to Corbett, the more influential of the two (Widén 2012, p. 96). Moreover, both of these thinkers appear sceptical to the prospects of decisive battles. The concept of prioritising the flag state’s naval vessels for securing its seaborne commerce was embraced even in countries lacking sufficient resources to fully enact this, in Sweden as late as 1935 (R:son Svensson 2019, pp. 75–76).
3.2.4 GUERRE DE COURSE
…tomber sans pitié sur le faible et fuir sans fausse honte de toute sa vitesse devant le fort, telle en est la formule.8
Gabriel Charmes (1885, p. 141)
Considering the decisive battle an unaffordable risk for an inferior navy, the proponents of the Jeune
école, centred on small but agile ships and a defensive strategy, instead suggested to engage in Guerre de course. Its essence is captured in the quote above. Unable to exercise sea control, the weaker part may
take recourse to sea denial, with the objective of denying the opponent the advantages which itself cannot enjoy. Falling upon the enemy’s merchant vessels in this regard does not only imply attacking an easy prey but also a strategic indirect approach (Gat 2001, pp. 678–680). It aims at strategic effect by cutting necessary trade and imports (Hobson, Kristiansen & Röksund 2004, pp. 119–138).
In World War I, blockades and Guerre de course caused severe difficulties for the belligerents as well as for neutral Sweden (Åhlund 1992, pp. 92–93; Landquist 2006 [1935], pp. 68–71). Today, shipping is a target for terrorists, as seen in the attack on the Limburg off Aden in 2002 (Greenberg, Chalk, Willis, Khilko & Ortiz 2006, pp. 15–19; Graham 2015, pp. 27–28) where Al Qaida sought to achieve the same strategic effect as by Guerre de course. Increased trade dependence, just-in-time delivery optimisation and lower self-sustaining capacity has made the modern state more vulnerable to disruptions to shipping. A recent corollary is the situation of Sweden, which during the COVID-19 Crisis, lacked necessary re-serves of medical supplies and saw shipments intercepted in transit by a fellow EU member. As a con-trast, Finland relied on strategic reserves of critical resources. Still, in the long run both states are vul-nerable to trade disruptions as full self-sustainment is near impossible.
8 “…attack the weak without mercy and sail away at full speed from the stronger without shame, that is the formula.” (author’s
3.3 T
HREE GENERATIONS OF PROTECTION OF SHIPPINGWar Science scholars stress that history should be studied neither in isolation, nor prescriptively, but as a fundament for addressing future situations (von Clausewitz 1991, pp. 43–44, 588). Mahan likewise considered it a medium for communicating and cultivating strategic skills (Mahan 1890, pp. 21, 83–84). The evolution of protection of shipping is categorised into three generations, as a theoretic background.
3.3.1 FIRST GENERATION:SEMINAL THINKING ON PROTECTION OF SHIPPING
Denn was ist Deutschland ohne Flotte? Ein armer, alter, schwacher Mann, den Dänemark mit zwanzig Schiffen verderben, hungern lassen kann.9
As quoted by Jürgen Elvert (1994, p. 13)
The verse is from a German newspaper in 1848, describing the dire helplessness under Danish blockade. Although born the year after, this seems to have been as formative for Alfred von Tirpitz as the Napole-onic Wars were for Carl von Clausewitz, possibly a cause for the Tirpitz plan described above. In the era of industrialisation, securing and denying trade was a topic elaborated upon by thinkers in maritime as well as continental states. A crude sketch of the ideal aspired for in the classical version of protection of shipping required a grey vessel escorting a white vessel, both flying the same flag with owner, crew and cargo all from the same state and in the nation’s interest (Colomb, J. C. R. 1867, pp. 17–27; Mahan 1890, pp. 26–27). This had strong implications for nations incapable of securing their overseas trade (Callwell 1905, pp. 60–61, 176–177), as shown by Glaser & Rahman (2016).
3.3.2 SECOND GENERATION:HEGEMONIC PROTECTION OF SHIPPING
The allied victory in World War II settled the naval competition that had preceded the war. The US emerged as the major naval power, establishing its Pax Americana while the Soviet Union prioritised nuclear arms and the air force (Chrusjtjov 1971, pp. 503–509; Rose 2007, pp. 38–42). The period can be denoted as under US dominance10 (Ignatieff 2005, pp. 9–12; Walt 2005, pp. 19–23). Without discounting
major navies as the British and French, this lasted through the Cold War and the Soviet Navy could never
9 “What is Germany without a navy? A poor, old, weak man, which Denmark with twenty ships can ruin and starve” (Author’s
translation)
10 Dominance is used here to denominate a measure in relation to other navies, not to be understood in operational terms such
fully measure up to the U.S. Navy (Vigarié 1995, pp. 59–63, 393–397; Falk 2000, pp. 3–4). Gorshkov11
drew up ambitious plans (Gorsjkov 1977, pp. 206–283, 316; Polmar, Brooks & Feodoroff 2019, pp. 157– 171), but the Soviet empire was already waning. Even without naval power parity, the Eastern Bloc saw some benefits. The US hegemonic maritime security was useful in peacetime but a concern for a con-tender in wartime. This is consistent with empirical findings by Levy & Thompson (2010, pp. 16–19, 30–36, 40). Maritime powers have more potential but also more need for seeking hegemony. Conversely, continental states are likely less dependent on the sea. However, already Mahan considered hegemonic control untenable (Sumida 1997, pp. 82–92).
3.3.3 THIRD GENERATION:COOPERATIVE PROTECTION OF SHIPPING
With 90 percent of global trade by volume transported by sea, shipping lanes and the freedom to navigate them have become the critical elements of the world's economic infrastructure. As a result, the security of these commons is now a core issue for all nations, regardless of size or capability. (Greenert & Foggo 2015, pp. 30–31)
With the demise of superpower confrontation, the U.S. Navy’s dominance was reinforced but yet insuf-ficient to meet growing challenges to maritime security. Not only had trade and globalisation grown but so had piracy and terrorism, while the number of naval ships to uphold security had shrunk since the end of the Cold War (Tangredi 2001). A new strategy was developed in the generally benign and cooperative global security situation (Till 2015, pp. 146–149). The most influential document was the so-called 1,000
Ship Navy (Dunford, Greenert & Zukunft 2015). In this, the US Chief of Naval Operations proposed
broad international cooperation, mainly for the lower range of the conflict spectrum.
Protection of shipping is now a common good provided by states operating together as a loosely coordi-nated system (Rubel 2012, pp. 166–167; Smith 2015, p. 19). A ship, its operator and its crew may be of several different nationalities. The cargo can belong to a broad palette of owners and repeatedly change ownership underway (Rubel 2012, pp. 169–170; McKnight, Koebler & Fage 2015). Maintaining trade is shared fundamental interest among a world community of post-modern navies (Till 2018, pp. 48–54). Both US and Chinese scholars and professionals have advocated increased cooperation for maritime security (Shi 2012, pp. 66–68, 72–81; Xu 2012, pp. 42, 56–59; Smith 2015, pp. 16–24). The successful international operations off Somalia (Sörenson 2018) testify of consensus on the mutual benefit. How-ever, this may already be fracturing with the advent of renewed major power competition.
11 Сергей Георгиевич Горшков transcribed as Sergey Georgiyevich Gorshkov in English and Sergej Georgijevitj Gorsjkov
3.4 T
RADESeneca thinks this is Nature’s greatest service, that by the wind she united the widely scattered peoples, and yet did so to distribute all her products over the earth that commercial intercourse was a necessity to mankind.
Hugo Grotius (2000 [1633], p. 13)
Albeit better known for his thinking on law and Mare Liberum, the 17th century Dutchman Hugo Grotius
succinctly captures the essence of why trade is necessary. Trade has been a precursor to prosperity through five millennia, spreading in a westerly movement from Mesopotamia in 3000 BC via Europe and North America to Asia today (Stopford 2008, pp. 5–46). Contrary to Philip Colomb’s claim (1899, pp. 2, 5) seaborne trade preceded naval war but their relation is close. “…commerce thus on the one hand deters from war, on the other hand it engenders conflict, fostering ambitions and strifes which tend to-wards armed collision. Thus it has continuously been from the beginning of sea power.” (Mahan 1902, p. 145) With a tint of his political view, Engels even attributes the emergence of modern navies to colo-nial trade (Engels 1958 [1861], pp. 674–675).
Improvements in transportation technology contributed to the vibrant growth in trade and wealth from the age of industrialisation (Kenwood & Lougheed 1999, pp. 12–15, 297–340; Findlay & O’Rourke 2007, pp. 378–387, 402–407). This growth has continued into the modern day. Shipping represents al-most the entire volume of interregional transportation of goods and a substantial part of short distance transports. Over the last half of the 20th century, shipped cargo increased fifteen fold, see Figure 6.
Figure 6: Maritime trade 1950–2005. (Author, based on Stopford 2008, p. 38)
To a great extent this is an effect of a transport economies that has rendered the cost so small that freight has become subordinate to manufacturing cost (Stopford 2008, pp. 50–52, 73–80). In turn this has re-sulted in South East Asia becoming the ‘factory of the world’.
0 1 2 3 4 5 6 7 8 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 Bi lli on to nn es of ca rg o
3.5 E
CONOMICSVad är ekonomi? En vetenskap uppfunnen av överklassen för att komma åt frukterna av underklassens arbete.12
August Strindberg (1913, p. 184)
The discipline of Economics is often subject to normative or even pejorative statements on relative power, as seen in the quote. This is to be expected as Economics provides the theory on currencies and markets. However, both power and Economics are malleable concepts. Within this thesis a descriptive approach is taken to make use of the analytical capabilities of Economics. With seapower in focus, eco-nomic theory is merely used to provide test instruments. It is hence elaborated upon to a lesser extent but with the intention of including relevant aspects for the analysis.
The discipline of Economics encompasses a wide range of topics stretching from state fiscal policy and central bank monetary policy to trillion dollar financial markets and everyday petty transactions. The overarching definition is that of managing scarce resources, often including some sort of exchange and currency. (Blanchard 1997, pp. 40–56, 77–97; Katz & Rosen 1998, pp. 2–3) The discipline comprises several fields, three of which are Finance, Microeconomics and Macroeconomics.
In broad terms Finance is concerned with the functioning of markets for trading financial instruments. These have a first or second order relation to an underlying real asset. The market serves the purpose of enabling an exchange of goods, services, lending and risk, to attribute value and optimise distribution among market actors. Money is used as currency. (Kohn 1994, pp. 10–23, 28) For the benefit of this thesis the most pertinent financial transactions are those of trading in goods and risk, in the form of effects in pricing commodities and aggregated market indices.
Microeconomics is closely related to Finance. It studies the interactions that can be aggregated into fi-nancial markets and institutions. Its focus is the behaviour of decision-making units, such as individuals, households or firms. It also looks at the combined effects of such decisions, stopping short of the long-term effects as inflation and unemployment, which belong to Macroeconomics. (Katz & Rosen 1998, pp. 2–3, 21–23, 197–203) Macroeconomics can be considered a massive aggregation of markets, time per-spectives and interdependencies with a focus on phenomena such as inflation or unemployment (Blanchard 1997, pp. 1–4, 40–204). Consequently, Macroeconomics and measures of national prosperity are aggregates, for which financial markets provide measures.
12 What is Economics? A science invented by the upper classes to gain access to the fruit of the labour of the lower classes.
The relevance of economic factors for naval and military affairs is not always recognised, although it is quite straightforward to view them through a strategic ends-ways-means perspective (as in Edström & Gyllensporre 2014, pp. 17–24). They can be part of the ends of a war, in the sense that winning, or at least not losing, economically valuable assets are normally part of the strategic objectives of the war. They can be part of the ways, inasmuch as embargoes, sanctions and other economic instruments are part of the grand strategic toolbox (Vigarié 1995, pp. 6–7; Wedin 2009b, pp. 21–22). Finally, in a more ab-stract sense, they can be means, as being part of the resource base from which to build a war effort (Beaufre 2009, pp. 23–24).
3.5.1 ECONOMIC MECHANISMS
As described above, the economic mechanisms in question are complex. Nonetheless, the first order effect to be expected from an attack that of a price increase in the commodity due to the specific and expected disturbance of supply. Diligence requires mentioning substitution and cross-price effects that may complicate the picture. For instance, since oil is relatively homogeneous, substitution and cross-price effects can be seen between oil qualities as West Texas Intermediate (WTI) and Brent (Jammazi & Nguyen 2015). This notwithstanding, the basic relation for the analysis remains.
The second order effects are two-fold. Primarily: reactions in financial markets to future returns expec-tations of financially traded instruments. For corporations, as underlying assets, input cost plays an in-strumental part in determining corporate profitability (Katz & Rosen 1998, pp. 10–17, 58–62, 299–311). Secondarily: long-term effects on inflation and state finances.
3.5.2 FINANCIAL MARKETS
A fundamental principle of financial markets is that to be efficient, securities prices must reflect all rel-evant information so that investors can make informed decisions. This is commonly known as the Effi-cient Market Hypothesis. It has three defined forms based in the information reflected in the price: weak with all historic information; semi-strong with all publicly available current information; and strong when adding privileged information. From the outset it has been held in high esteem with strong empir-ical evidence (Fama 1970, pp. 383–384, 413–416; Brealey & Myers 1996, pp. 329–331). Intensively traded markets generally exhibit at the least semi-strong form.
4 METHOD
Below, the theory test outline is described, along with the operationalisation and hypotheses generation. Following this, the event study method, the case selection logic and the sources are introduced.
4.1 D
EDUCTIVE THEORY TESTThis thesis employs a deductive theory testing method on Mahan’s postulated influence of seapower, built into a theoretic framework in Figure 7. The postulation is developed into a causal theory from which a null-hypothesis is formulated. This is then empirically tested by a case study with quantitative analysis (Kellstedt & Whitten 2013, pp. 3–5, 17–19). A typological approach is taken to allow for employing of theories and methods from Economics as analytical tools (George & Bennett 2005, pp. 235–239, 253). The research design is intended to obtain a limited number of cases for a structured and focussed com-parison to test the theory (ibid. pp. 67–72, 75–88, 115–123). The cases are Most Likely cases and thus also crucial cases for the theory (Levy 2008, pp. 12–13). Building from an operationalisation and hy-pothesis generation, the causal mechanism of the theory is investigated, with the intention of producing a generalisable result (George & Bennett 2005, pp. 21–22; Schmitter 2008, pp. 263–266).
Figure 7: Theoretic framework. (Author) Protection of shipping Secure lines of communication Diplomatic role
SEAPOWER
PROSPERITY
Policing roleMilitary role Sea Control
Trade marketsGoods Financial
markets National accounts
4.1.1 OPERATIONALISATION
The history of Sea Power is largely, though by no means solely, a narrative of contests between nations, of mutual rivalries, of violence frequently culminating in war. The profound influence of sea commerce upon the wealth and strength of countries was clearly seen long before the true principles which governed its growth and prosperity were detected.
(Mahan 1890, p. 1)
Even with some criticism for being overly case dependent and deterministic, the basic relationship be-tween seapower and prosperity in Mahan’s theory appears uncontroversial among scholars (Gat 2001, pp. 451–454). Nonetheless, seapower is but one of many factors contributing to national wealth (Sala-i-Martín et al. 2015, pp. 43–44). This makes it difficult to isolate its effect for a causal relationship. How-ever, it may conversely be possible to infer the importance of seapower by examining the economic consequences of the absence of protection of shipping.
4.1.2 LOGIC OF OPERATIONALISATION
To operationalise the theory, it is necessary to reduce the generalised formulation to a null-hypothesis testable for falsification (Popper 2005 [1935], pp. 8–20, 61–67, 248–267) in an effort to examine if the theory can be corroborated based on a case study as empirical experience. In the desired situation, sea-power is present and sufficient to effectively protect shipping, deterring any would-be aggressors. As is often the case with protective measures, success renders them invisible, but failure becomes strikingly obvious. Isolating the positive contribution is deemed unfeasible why this thesis conversely tests the negative influence from failure to protect shipping. It is therefore sought to estimate the influence of seapower and protection of shipping by exploring the consequences of significant disturbances.
The cases are selected to represent trade of a key commodity as a constituent of prosperity. The class of cases is failed protection of shipping. This provides events that can be temporally and spatially defined, facilitating the analysis of potential consequences. Specifically, the cases to be studied are disruptions of oil transportation at sea. The rationale is that attacks oil tankers have the potential for far-reaching rami-fications.
As a proxy for prosperity, the second order effect is measured in changes in stock market indices. Stock markets quickly process information on influential events to reflect the development in how the market values the shares of companies on intensively traded markets. Although this is only a part of a state’s economy it is a reasonable proxy for assessing changes in national wealth for market liberal states. The causal mechanism is overlaid the theoretic framework in Figure 8, below.
Figure 8: Theoretic framework with causal mechanism overlaid. (Author)
The independent variable consists of attacks. These testify of insufficient seapower and resulting failure to protect shipping.
The intervening variable forms an integral part of the causal mechanism, linking from the employment, rather unsuccessful employment, of seapower to its strategic implications. The first order effect of an attack is that of the price evolutions for oil, measured in daily closing prices. Even a materially minor and local attack can have global impact, as found by Komiss & Huntzinger (2011, pp. 29–44).
The dependent variable is that of stock market reactions as measured by daily closing quotes of market indices. As a second order effect of an attack, increased oil prices reduce profit expectations of traded companies and share prices fall. The linkages that transfer the impulse induced by an attack are complex, but this should not be understood as prohibiting for the possibility to explore causality (George & Bennett 2005, pp. 135–147).
According to the Efficient Market Hypothesis the effects of attacks will immediately be reflected in prices on both the intervening and the dependent variables.
Protection of shipping Secure lines of communication Diplomatic role
SEAPOWER
PROSPERITY
Policing roleMilitary role Sea Control
Trade Goods markets Financial markets National accounts Independent:
Attacks Intervening: Oil price Dependent: Market indices
Failure to protect Transport risk
Ins uf fic ie nt se apo w er GDP Mi cr o Ma cr o
4.1.3 HYPOTHESIS GENERATION
The theory requires a test by which it can be falsified on an empirical basis. The null-hypothesis to be tested is formulated from the basis of the research question’s implicit hypothesis that Seapower
contrib-utes to prosperity. It is tested by examining the presence of effects from failure to protect shipping: H0: Seapower does not contribute to prosperity.
This overarching hypothesis builds upon two requirements to be tested by separate supporting null-hy-potheses. The first of these concerns effects on oil as a key commodity:
H0,1: Attacks on oil shipping do not have a positive impact on the oil price.
Provided this first supporting null-hypothesis can be falsified, the second supporting null-hypothesis tests whether attacks on oil shipping via oil price shocks carries over to stock market returns:
H0,2: Oil price shocks induced by attacks do not have a negative impact on stock market returns.
Testing of the second supporting hypothesis is contingent on falsification of the first supporting null-hypothesis. Consequently, falsification of the overarching null-hypothesis requires that both supporting null-hypotheses can be falsified.
The objective of the hypotheses testing is to investigate if the overarching null-hypothesis can be falsified by reasonable support for the proposition. If an effect can be discerned, the tests can be considered suc-cessful, thereby corroborating Mahan’s theory. This produces a range of outcomes as in Table 1, in four fields of which only the one with both supporting null-hypotheses represents a successful test.
Table 1: Hypotheses testing range of outcomes.
OIL MARKET REACTION
Negative or neutral Positive
STOC K M AR KET REA CTION Pos iti ve or n eutra l H0,1 Cannot be falsified H0,2 Irrelevant H0 Cannot be falsified H0,1 Falsified H0,2 Cannot be falsified H0 Cannot be falsified Neg ativ e H0,1 Cannot be falsified H0,2 Irrelevant H0 Cannot be falsified H0,1 Falsified H0,2 Falsified H0 Falsified
The contingency requirements are depicted in Figure 9 below, where the hypotheses have been integrated into the research design. First, H0,1 must be falsified for H0,2 to be relevant. Secondly, both supporting
null-hypotheses must be falsified to allow for falsifying the null-hypothesis.
Figure 9: Integrated research design and hypotheses flow chart. (Author)
Finance supportedMahan Micro & Macro
Independent:
Failed protection Intervening: Oil price Stock marketsDependent: Negative
operationalisation
Economics Trade
Event study 1 Event study 2
SEAPOWER
PROSPERITY
Event: Attack on supertanker H0,1 Oil price unaffected H0,2 Stock markets unaffected YES NO NO H0,1not falsifiedH0,2irrelevant H0,2not falsified
H0 falsified
YE
S YES
4.2 S
EQUENTIAL TEST BY EVENT STUDYEvent studies are frequently employed in financial analyses to gauge the impact on returns from a sig-nificant event. An event study is performed in such a way that metrics of a variable within a specific period, event window, are compared to corresponding metrics in relation to a non-event, in an estimation window. The difference between the observed returns in the event window and the estimation window are called Abnormal Returns. By this definition, an event without effect is expected to exhibit zero Ab-normal Returns. Given sufficient data, the AbAb-normal Returns can be statistically tested for significance. (McKenzie, Thomsen & Dixon 2004, pp. 534–538)
Five choices need to be made when employing the event study method (Krivin, Patton, Rose & Tabak 2003, pp. 2–3):
1. The duration of the estimation window.
2. The asset to be compared to and measured in the estimation window. 3. Determination of the event window.
4. The frequency of data point collection. 5. The specification of price measurement.
The estimation window is set to 20 days, days t = –20 through t = –1, to calculate the non-event average return, capturing the prevailing market regime prior to the event.
Information on events occurring at sea is sometimes delayed and markets are not always active. The event window is therefore set to the first trading day after the event is known to markets, t = 0, and the following trading day, t = +1. This is meant to eliminate time zone effects and to ensure that the full effects of the event is captured but not diluted by other trading information in the markets. Previous findings show that oil price developments are quickly reflected by stock markets (Jones & Kaul 1996). Average returns are used for the reference estimation period, in a Constant Mean Return model. This choice stems from this being the most accessible model, but also from the characteristics of the measured assets, since these cannot be compared to market indices as easily as individual stocks. All return calcu-lations are lognormal to allow for cumulating by addition. Cumulative Abnormal Returns (CAR) are summed for each case by adding the two daily Abnormal Returns in the event window. In this study, returns on oil prices and on stock market indices are measured.
The estimation and event windows are depicted in Figure 10 with schematic data to offer an illustrative example of the method. In the estimation window, the schematic data show an average return of 0.50%. Comparing to the event window returns of 1.85% and 1.15%, this results Abnormal Returns of 1.35% and 0.65%, respectively, and a Cumulative Abnormal Return of 2.00%.
Figure 10: Schematic event study time-line. (Author)
Based on the CARs obtained, a Cumulative Average Abnormal Return (CAAR) is calculated across the cases. The CAAR is subsequently analysed against the supporting hypotheses to test for significance of the results. In essence this means testing whether the CAAR exhibits characteristics that allow for statis-tically inferring that the deviation from the expected zero Abnormal Return is not random.
Student’s t-test is employed for the parametric test (Gujarati 1995, pp. 121–128, 256). The use of Stu-dent’s t-test is meant to facilitate statistical inference on whether the mean of the observations (in this case CAAR) differs from that of the population, when the distribution of the population is unknown and small sample size is small (Dyckman, Philbrick & Stephan 1984, pp. 9–12, 26–28).
In addition, Cowan’s standardised sign test, a non-parametric test, is conducted to support the parametric test (Cowan 1992). The latter explores the relation between positive and negative observations to infer the likelihood of the dominant side being a correct representation of the population.
4.3 C
ASE SELECTION LOGICEmploying a typological approach, the cases selected represent severe disruptions to oil shipping to bear relevance for the analysis (George & Bennett 2005, pp. 83–84). Specifically, for sufficient impact the cases are highly valuable supertankers13 and attacks resulting in at least a temporary elimination from
the market of a ship and its cargo. Only successful hijackings and potentially total losses are considered. Supertankers are the work horses of the oil circulation, carrying crude oil from sources to refineries (Stopford 2008, pp. 39–41, 75–76).
The selection criteria to be fulfilled are:
1. Event type: Severe disruption, hijacking, seizure or serious damage from attack. 2. Vessel type: Crude carrying tanker.
3. Vessel size: Supertanker, deadweight in excess of 200,000 tonnes.
This represents but a limited part of the property space, which would theoretically also include other disruptions, types and sizes of vessels. Although potentially interesting for research, those parts of the property space fall outside the scope for this thesis.
4.4 S
OURCESTo ensure proper reliability, plurality of sources was sought to build the theoretical framework and to obtain empirical data (Yin 2018, pp. 46–47). A balance was striven for, with diversity across eras and regions between sources for sources on theory. Technical matters and data were extracted from the most adequate and current sources (Schwartz-Shea & Yanow 2012, pp. 95–99). To reduce the risk of bias in data selection or analysis the data and analysis are presented with transparency for facilitating reviewing (George & Bennett 2005, pp. 105–106; Hopkin 2010, pp. 297–299; John 2010, pp. 268–271).
4.4.1 SOURCES FOR THEORY AND METHOD
The sources used to describe and compare theories and postulations vary between primary sources, as in the original works by practitioners and theorists on strategy and seapower, and secondary sources, for instance, monographs. These works are either of an older date or compiled from such work. Recent stud-ies and articles have been included to complement and update the theoretic basis. For elements from
13 Supertankers are Very and Ultra Large Crude Carriers (VLCC and ULCC), vessels over 200,000 tonnes and 320,000 tonnes
Economics, sources are mainly subject-specific books and journal articles. In combination these form the structure for the typological theory developed for the analysis.
These sources were complemented by a broad reading of articles across the naval, maritime and economic domains. An informational unstructured interview with a shipbroker (see section 11.3) and an e-mail conversation with industry organisation INTERTANKO were used for verification (Moore 2014, pp. 117–121; Confidential 2020). These were used as an inductive element in building the typological theory and to verify the construct validity of the analysis. They also served as an effort at plurality of strategies to gauge the plausibility of findings by statistical methods (Ruffa & Soeters 2014, pp. 221–222).
4.4.2 SOURCES FOR THE ANALYSIS
Information on threats and attacks was obtained via compilations obtained from the International Mari-time Organization, (IMO) in MariMari-time Safety Committee 4, Piracy Matters (MSC.4) and from the START Global Terrorism Database. Additional data on attacks was found in academic literature and news reporting.
Data on vessels, primarily deadweight, was collected via two Internet information services; Baltic Ship-ping and Marine Traffic.
Data on times of reporting of incidents was obtained by using the time stamp of news agencies reports as a proxy for when the information is made available to markets. There are several alternative sources available, some of which may on occasion be quicker at reporting. The function of reporting time is to identify the event window, which as described above, is when the information can be traded upon. Con-sequently, for each event the report with the earliest time was selected.
For the financial part of the analysis, quotes on daily closings on oil prices and stock market indices were obtained from Nasdaq OMX, Deutsche Börse, Euronext, London Stock Exchange, NASDAQ and the websites www.finance.yahoo.com and www.investing.com. For all these sources the provision of precise and accurate financial reporting is instrumental, why they are considered sufficiently reliable for the purposes of this thesis.
• Brent futures are contracts for future delivery of oil. Since commodities require physical delivery, futures contracts are a means for trading risk. This makes them suitable to gauge the impact of disturbances to the supply chain. Brent has been found to be an adequate proxy for oil price volatility and superior to the alternative West Texas Intermediate (Baumeister & Kilian 2016; Zavadska, Morales & Coughlan 2020).
• OMX Stockholm 30, is an index representing the 30 most traded shares in the stock exchange of Nasdaq OMX Stockholm (Nasdaq Index Services Team 2019a).
• DAX includes the 30 largest and most traded shares at the Frankfurt Stock Exchange (DAX 2020).
• CAC 40 is an index of the 40 most traded shares at the Paris Euronext stock exchange (Euronext 2019).
• FTSE 100 represents the top 100 shares traded at the London Stock Exchange (FTSE Russel 2020).
• NASDAQ Composite is an index of all traded stocks on the NASDAQ Stock Market in New York (Nasdaq Index Services Team 2019b).
The indices were selected for their representation. OMX Stockholm 30 as a trade dependent small state. DAX, CAC 40 and FTSE 100 as European G7 economies; the first two are primarily continental powers, the third is a maritime power. NASDAQ Composite represents the US, a maritime super power.
5 ANALYSIS
Starting with the cases that fulfil the criteria for the analysis, this chapter presents the event study tests on the two supporting null-hypotheses. The latter are assessed using a parametric and a non-parametric test to obtain statistical significance levels.
Through the ages, seaborne trade has been threatened by thieves, robbers, pirates and states; recently also by terrorists (Kaye & Bautista 2011, p. 3). During the analysed period, there were 5,712 reported acts of piracy and 110 maritime terrorist attacks (the total number for 2019 is not available). Figure 11 is a graphic of these two primary threats to shipping besides armed conflict.
Figure 11: Piracy and terrorism 2002–2019.
(Author, based on IMO MSC.4 circulars and START Global Terrorism Database)
5.1 C
ASESAs described above, the cases included are those of hijacking, seizure or attacks on supertankers, which according to the causal theory are expected to induce oil price increases and stock market index drops. From a grand list of 45 attacks (see section 11.1), the net list of eight cases of incidents that met the criteria developed from the theory is exhibited in Table 2.
Table 2: Net list of cases.
0 5 10 15 20 25 30 0 100 200 300 400 500 600 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14 20 15 20 16 20 17 20 18 20 19
Maritime terrorism attacks
Piracy attacks
Maritime terrorism Piracy Total
Vessel name Deadweight Incident date Incident type
Limburg 299,364 2002-10-06 Sabotaged
Sirius Star 319,430 2008-11-15 Hijacked
Maran Centaurus 300,204 2009-11-29 Hijacked
M.Star 314,016 2010-07-29 Sabotaged*
Irene SL 319,247 2011-02-09 Hijacked
Abqaiq 302,986 2018-04-03 Attacked
2 unnamed Saudi tankers “VLCC” 2018-07-25 Attacked
Figure 12 shows the geographic locations of the incidents.
Figure 12: Map of cases. (Author)
5.1.1 LIMBURG,6OCTOBER 2002
A suicide boat struck the almost fully loaded Limburg that was loitering off the port of Aden. The attack killed one crew member and caused a fire and an oil spill. It was later claimed by Al Qaida as an effort to strike at the economic blood flow of the Western world (START 2019). Reported late at night of Sunday 6 October (Bittermann, Starr, MacVicar & Malveaux 2002).
5.1.2 SIRIUS STAR,15NOVEMBER 2008
The hijacking by Somali pirates of a crude carrying supertanker raised the awareness of the resurgence of modern piracy (Maritime Safety Committee 4 2009a). The ship was subsequently released following the ransom payment of an undisclosed amount. Reported in the evening of Monday 17 November (Kasolowsky & Webb 2008).
Maran Centaurus Sirius Star Limburg 2 unnamed Abqaiq M.Star Amjad Irene SL
