Globalization Already Reversing by High Oil Prices

Posted: May 27th, 2008 by: h2

Who said it’s all bad news? Globalization was always a totally false construct, built on a foundation of dirt cheap oil prices (around $10 a barrel until only 10 years or so ago), caused by a very temporary global oil glut.

So to see a story about globalization already collapsing at oil prices around 120 a barrel current really makes my day a bit more cheerful. Read on to see how rising oil prices are already impacting the US locally as well.

To summarize some other postings here, ship bunker oil, fuel oil, is from what I can gather basically Number 6 distillate, the heaviest, crappiest stuff, left over after they refine out gasoline, diesel, heating oil, and jet fuel. Read this nice overview in wikipedia if you want to learn the specifics. Check out this sample of current Los Angeles bunker fuel prices.

Noting there that all categories of bunker fuel prices are rising right along with crude oil futures, the following article now should be fairly easy to understand:

The rising price of oil is making international trade of heavy cargo prohibitively expensive, and acting as an incentive for importers to find products such as steel closer to home, new research by CIBC World Markets shows.

If oil prices continue to rise, the soaring cost of global transport will act like a major tariff barrier and lead to a substantial slow down in international trade, they argue.

“Globalization is reversible,” they state.
High oil prices will hurt trade, report says, Globe and Mail, May 27, 2008

These days, the cost of oil is the equivalent of imposing a tariff rate of about nine per cent on goods coming into the United States. At $150 a barrel, transport costs act like a tariff of 11 per cent. And at $200, all the trade liberalization efforts of the past 30 years are reversed, Mr. Rubin said.

Oil prices now account for about half of total freight costs, and for the past three years, for every $1 increase in world oil, there has been a corresponding one per cent increase in transport costs.

“Unless that container is chock full of diamonds, its shipping costs have suddenly inflated the cost of whatever is inside,” Mr. Rubin said. “And those inflated costs get passed onto the Consumer Price Index when you buy that good at your local retailer. As oil prices keep rising, pretty soon those transport costs start cancelling out the East Asian wage advantage.”

More fundamentally, the soaring oil price will prompt a major rethinking of how production is organized, Mr. Rubin argues, and could even lead to a revival of North American manufacturing.

Already, U.S. imports of Chinese steel are declining dramatically, while domestic production is rising at rates not seen for years, they say.

“In a world of triple-digit oil prices, distance costs money,” they say in a paper released Tuesday. “And while trade liberalization and technology may have flattened the world, rising transport prices will once again make it rounder.”

At first glance, such developments may seem to favour a renaissance of the moribund steel mills and boarded up furniture plants of Canada. But high oil prices won’t eliminate importers’ search for cheap labour. Instead, they’re eyeing Mexico.
High oil prices will hurt trade, report says, Globe and Mail, May 27, 2008

And so on it goes, until the transportation costs rise so fast that most long distance truck based commodity transport simply becomes completely non-viable, irregardless of the cost of labor.

Not to mention the CO2 costs of this entire structure. The more I look at this question, the more obvious that our future is going to be a localized one, no matter how we feel about it. How we get there however, is going to be another question altogether.

I don’t know about you, but among the bigger countries, I don’t see any real signs of movement, change, adaptation, just a blind prayer thrown out into the ‘market’ for salvation. That’s the same market, in case you missed it, that brought us to this point in the first place. Maybe it’s time to try something else now, that idea has had its run now, and it’s not working at all. Unless you consider global ecosystem destruction, overpopulation, etc, as working.

IEA (Internation Energy Agency) Offers No Hope that Oil Will Get Cheaper

In case you think this is all just a temporary bump, which I really can’t blame most people for wanting to believe, the IEA came out quite clearly and stated that in fact, no, things are going to continue on as they are. Coupled with their recent decision to re-evaluate the entire global oil reserve number that they’ve been using for the last decades, I’d say they are learning fast that the game is done.

It would be “very, very optimistic” to assume oil prices will fall much in the next few years, the chief economist at the International Energy Agency (IEA) said in a interview with German TV published on Tuesday. “The markets are very tight now and the result of this tightness is the very high prices,” IEA chief economist Fatih Birol was quoted as saying by German state broadcaster ZDF.

“And when we look a couple of years ahead, we should be very, very optimistic if we would believe that the current oil prices will go substantially down,” he said.
Reuters, May 27 2008

Pardon me while I dry the tears from my eyes. The idea of global movements of raw materials to producer, say iron ore to China, then processed material on to another location, across global distances, as a matter of the normal course of production, was always absurd, especially when shipping commodities like steel that can be made anywhere.

And let’s keep in mind some other things, like the rapidly rising cost of steel making coal, a higher quality coal than power plant coal, and one becoming increasingly hard to find.

And of course, then we can look at the ships themselves that drag all this stuff around the planet, which are themselves made out of huge plates of steel. The wheel goes round and round, and then it’s time to slow down and take a look at where you actually are.

And it’s not just Global Shipping, the Entire Cheap Oil Model is Cracking

Oil’s relentless price rise has pushed U.S. drivers off the road, curbed consumers’ appetite for expensive goods, forced airlines into their deepest cuts in years and threatened car makers with a flood of red ink.

It all points to a dramatic shift in the U.S. economy as oil’s surge above $130 per barrel forces already cash-strapped households and companies to rethink business as usual, and the changes are likely to be lasting, even if energy prices retreat.

Now, with wages stagnating and fuel prices rising more rapidly, consumers can no longer absorb the pressures.

That is reflected in slumping consumer confidence and a steep drop in spending on non-essentials.

“We’re back at a level of (fuel) expenditures that’s similar to what we had in the late 1970s,” Hamilton said.

Trips to suburban strip malls are becoming less popular as Americans balk at driving an extra 10 or 15 miles just to save a dollar or two at a national chain store.

The economic implications are huge.

Consumer spending accounts for some two-thirds of U.S. economic activity, and there is no denying the slowdown.

The retail category showing the sharpest gain is gasoline stations, evidence of the higher prices. When consumers curb spending, companies retrench, manufacturing falters, and employment dips.

“When gas prices hit $4 a gallon, you’re going to see America come to a screeching halt because for two weeks, consumers aren’t going to shop for anything except groceries,” said Britt Beemer, head of America’s Research Group, which surveys consumers on spending behavior.
Oil’s Surge Causing Major Changes in US Economy, Reuters, 23 May 2008

The ripple affects of energy price rises are hitting incredibly fast, it’s just a matter of time before the core structures of the US economy start to crack, with consumer spending being a core part of the economy (I thought you had to make things to make money, with the exception of finance, which only sends money to a relative handful of individuals).

The Model was Always Flawed

And now its flaws are starting grow more obvious. When you cut out these discretionary spending trips, aka ‘shopping’ for shopping’s sake, something very real happens to the US economy, just like it does to the global economy.

For a country that knows no other way to be, to live, and which has no clue how to do anything at all real any longer, the results have every potential to be extraordinarily nasty.

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