The Somali Piracy Industy

Has anyone noticed the recent surge in piracy activity off the coast of Africa? What does this phenomenon suggest about human nature and how might it impact your 401k? As usual, let’s start with some basic assumptions. First, let’s acknowledge that piracy on the high seas is a perfectly natural human activity as old as the shipping industry. Like any other industry, it is an enterprise that thrives under certain environmental, economic, and cultural conditions. Piracy is most profitable under favorable climatic conditions. I can’t recall an episode of “Deadliest Catch” where the captains had to negotiate with pirates. The International Pirates Union now refuses to work in that part of the world. The weather on the North Sea is too cold and the seas are dauntingly dangerous. Moreover, fans of the T.V. show know that these burley and (obviously fearless) crab fishermen only get paid if they bring home a catch, and therefore are not likely to be easily intimidated into giving up their valued cargo. Even if pirates managed to successfully commandeer a vessel, the cargo is vulnerable to spoilage. It is notoriously difficult to sell pirated crabs, even on the black market. In 2007, the two competing franchises that operated in the North Sea filed for bankruptcy protection under Chapter 11, and are now receiving federal bailout assistance. President Obama fired both CEOs (Blackbeard and Captain Hook) shortly after their profanity laced tirade before the U.S. Senate. Although North Sea operations are now defunct, the pirate industry is now thriving off the coast of Somalia. The weather is predictably pleasant and the calm waters of the Indian Ocean make it relatively easy for pirates to identify ships from a distance. Somali pirates know that their most valued cargo ships (food and oil) are unarmed and that the unionized crew members would much sooner give up their cargo than resist. Crews also know that their cargo is insured by AIG, and that they will get a paycheck, even if their shiment is hijacked. Well-trained pirates also know that maritime merchants would rather pay a ransom, than deal with high-priced lawyers and tight-fisted insurance underwriters. Somali pirates have little fear of having operations interrupted by the recent arrival of naval patrols. It is impossible to protect a million square miles of ocean and the “rules of engagement” tend to favor the pirating industry. The Somali government is heavily invested in piracy and subsidizes the industry by providing not only a safe haven for swashbucklers, but also access to well-maintained smuggling routes and money-laundering services. Advanced technology is also fueling the bull market in piracy. Cell phones and Global Positioning Systems now make it much easier for pirates to coordinate their attacks, and inexpensive, high-speed boats shorten the commute to and from work. Low gas prices also pad the bottom line. A healthy black market in state-of-the-art weaponry provides pirates with an endless supply of AK47s, surface to air missiles, torpedoes, plastic explosives, and helicopters. Indeed, the piracy industry has been so successful that it has been entering other lucrative markets such as hostage-taking, illegal weapon sales, money-laundering, and extortion. What can the maritime industry do to protect itself from pirates? Experts agree that it must somehow raise the costs of piracy. They could alter their shipping routes, which would require a longer commute for would-be pirates. Shippers could also increase costs by installing radar technologies that could warn the merchant crews up approaching vessels; equip ships with torpedoes, and arm crew members with AK 47s. Unfortunately, this strategy would only precipitate an expensive arms race with the pirates, which would increase the value of their investments in illegal weapons. Pundits of the piracy industry argue that the recent death of three Somali pirates in an ill-advised confrontation with a freighter protected by a brave captain, a crew armed with ice picks, and a U.S. Navy warship portends a dark future for the industry. However, in light of AIGs recent decision to underwrite the pirate industry, most financial advisors now agree that piracy stocks offer a recession-proof, tax-free, addition to your 401k.