A few years ago I was sitting in the pub at Simon Fraser University with the usual suspects…a gang of mostly political science graduate and undergraduate students for our weekly 4-hour lunch consisting of political debate and movie reviews.
I can’t remember the details but I had just been learning about peak oil. Petrochemicals have a large role in the fertilizers that enable the population of the industrialized [OECD, minority] world to eat food to the degree that supports our massive population. Apparently there was something in Harpers about that some time ago. I’m still scared to read it.
And since most of us at the lunch were generally political economists, we often discussed how to derail the global trade regime: IMF/WB/WTO. Since Hugo Chavez has spayed and neutered the IMF by paying off most of Latin America’s loans to it and since the WTO Doha “Development” (sic) round of negotiations has stalled leading to neoliberal defections toward regional trade initiatives, the regime may be collapsing on its own, thank you very much.
But one thing came up that day at lunch when I was trying to address how to cripple neoliberal globalization, and that was how peak oil will make prohibitive the costs of transporting materials around the world to be processed by workers in jobs outsourced from the industrialized world into products shipped to us in containers on those big boats. The economics of it all depends on a price of oil that is not quite so high as today’s $135/barrel. Or not even so high as the $70 barrel 2 years ago [yes, the cost of a barrel of oil has doubled in the last 24 months].
When peak oil grabs us by the throat and prices rise, the global supply chain will become less cost effective. Our runners and bananas will begin to have costs that assert them as the luxuries they really are. Economics will become more local, both in food from bioregions, but also products and services.
One friend at lunch that day said they’d just find another way to power the big boats. Nuclear power perhaps. Or maybe clean (sic) coal. Ok, he didn’t mention clean coal, but both it and atomic manipulation are somewhat impractical for varying reasons.
So we’re left with the end of globalization that comes not from policy decisions based on educating the populace to demand our representatives (sic) alter the global trade regime. It comes from the end of cheap fossil fuels.
My friend’s nuclear answer sounded plausible, but I had a hard time being truly swayed by its possibility.
So yesterday I read at Report on Business [see below] that I was on the right track.
And while the piece mentions that NAFTA could encourage outsourcing to Mexico instead of Asia, and by implication that a fully mercantilist, protectionist Canada may not be imminent, our latest globalization prime minister did recently scuttle a deal to sell off MDA’s Radarsat to an American firm. In the end, realists are realists.
And while we may not all be ready to go out and buy our yurts and embrace a bioregional lifestyle outside of metropolitan centres, we are one step closer. And if oil hits $200/barrel this Christmas, we’ll have to re-assess the situation with a little more intensity.
Oil’s cargo cushion
The soaring cost of fuel is whittling away at the cheap-labour advantage enjoyed by Asian exporters, giving Canadian firms a welcome edge in their fight to win back business from Asian competitors.
Two bank economists argue in a report released Tuesday that because of higher fuel costs, shipping a standard 40-foot container from Shanghai to the east coast of North America now costs $8,000 (U.S.), up from $3,000 in 2000 when oil was just $20 a barrel.
That higher cost is passed on to North American consumers, making goods from China and other Asian places more costly compared to the offerings of domestic North American producers.
Some Canadian manufacturers are already noticing the effect.
“It’s helped us because it’s harder for the Asians and others to ship over here,” said Barry Zekelman, chief executive officer of Atlas Tube Inc. of Harrow, Ont.
He said that after taking 30 to 40 per cent of the North American market for some steel tubing products, the Chinese have now “virtually disappeared” – partly, though not exclusively, because of the costs of transporting a heavy product such as steel across the Pacific.
Jeffrey Rubin and Benjamin Tal of CIBC World Markets Inc. say higher oil prices are reversing the world-is-flat effect, in which lower trade barriers and new technologies like the Internet made it cheaper to move goods and services from developing Asia to the markets of the rich world.
“In a world of triple-digit oil prices, distance costs money,” they write. “And while trade liberalization and technology may have flattened the world, rising transport prices will once again make it rounder.”
Mr. Rubin and Mr. Tal say the steel sector is a prime example of the world-is-round effect.
Chinese steel exports to the United States are falling by more than 20 per cent year over year. China’s costs have risen because Chinese producers have to bring in their iron ore from faraway places such as Australia and Brazil, then ship the finished steel to the United States. As a result, U.S. steel producers actually have an advantage over Chinese rivals.
“Rising transport costs have already more than offset China’s otherwise slim cost advantage, giving U.S. steel a competitive advantage in its own market for the first time in over a decade,” the economists write.
They say higher transport costs are affecting other “freight-intensive” sectors such as furniture and industrial machinery, too. These goods now account for 42 per cent of total Chinese exports to the United States, down from 52 per cent in 2004.
In fact, if oil prices had not risen so quickly and transport costs had not soared so dramatically, growth in Chinese exports since 2004 would have been 30 per cent stronger than the actual figure.
Of course, the rising cost of goods from China is hardly happy news for many Canadian companies that source parts from Chinese factories, sell imported goods from China or have their products assembled by Chinese workers.
They suggest that “instead of finding cheap labour half way around the world, the key will be to find the cheapest labour force within reasonable shipping distance of your market.”
While Canadian companies could benefit, the bigger winner will be Mexico, they say. “Look for Mexico’s maquiladora plants to get another chance at bat when it comes to supplying the North American market,” they write.
Shipping costs to and from Asia have risen so much that they have eclipsed tariffs as a barrier to global trade, Mr. Rubin and Mr. Tal say, calling the cost of moving goods “the largest barrier to global trade today.”
“In fact,” they say, “in tariff-equivalent terms, the explosion in global transport costs has effectively offset all the trade liberalization efforts of the last three decades.”
When oil was $20 a barrel, transport costs were equivalent to a 3-per-cent tariff rate; now it’s above 9 per cent.
Aggravating the problem is the fact that modern new container ships travel faster than old bulk carriers and so use up more fuel, doubling fuel consumption per unit of freight over the past 15 years.
“This is an environment in which shipping from the Pacific Rim may not make sense any more,” Mr. Tal said in an interview.
“If you’re thinking, ‘maybe we should bring in a container from China,’ you should think again.”