The Price of Piracy

Ship seizures by Somali pirates are increasing the costs of trade and commodities at a time when the recession-stretched global economy can least afford it.

The stakes in this high seas drama are escalating.

Today, pirates made their ransom demand for a Saudi supertanker believed to be carrying more than $100 million of crude oil - about a quarter of Saudi Arabia's daily output --- that was destined for the United States.

"Negotiators are onboard the ship and on land," a member of the group that hijacked the Saudi tanker, said in an audio tape aired by Al Jazeera television, according to Bloomberg News. ``Once they agree on the ransom, it will be taken in cash to the oil tanker.'' The spokesman did not say how much money his group wants.

But it's clear that the demand will set a new floor for ransoms off the east African coast.

Last week, before the seizure of the Saudi tanker, Simon Beale, a director at Amlin Underwriting Ltd., told the insurance trade paper BestWeek Europe: "I believe that the average cost of demands used to be in the region of about $500,000. Now it's more than $2 million. The cost of ransoms is escalating and the insurance market is paying its proportion of these ransoms."

Some $30 million in ransom payments have been made this year. (Arrggh, an interactive! For a look at the worldwide state of piracy, click here.)

For shipping companies, it is not just the costs of ransoms, or higher insurance premiums, and increased security. Shippers are changing their routes as a result, going around the African cape instead of the Suez Canal. Longer routes mean more time, more fuel and higher costs for customers.

"The extra weeks of travel and fuel consumption would add considerably to the cost of transporting goods" at a time when the price of oil is already putting the squeeze on world trade," the British think tank, Chatham House, said in a report last month. "This would add considerably to the costs of manufactured goods and oil from Asia and the Middle East."

More than 90 attacks on ships have been recorded so far this year, according to the International Maritime Bureau.

But the risks for the pirates are growing as well as Western and Asian naval fleets step up operations in the region. The Indian navy said today that it sunk a Somali pirate "mother ship" after the ship opened fire on a warship in the Gulf of Aden, the BBC reports.