Globalization (and capitalism by default) are thought to be unalterable natural laws of economics, however it should be noted that these concepts of trade and commerce are only a couple of hundred years old, and coincidentally are heavily reliant on having a cheap energy source in order for them to execute in their full capacity. I wonder how tenuous globalization actually is? Is it a way of doing business that will fall by the wayside as soon as the variable of cheap energy is removed from the equation? I predict that IF we are seeing the end of cheap oil inputs into our economic system, huge globalized companies such as Wal-Mart that base their entire supply chain on cheap energy inputs and the transportation companies that have fuel as a huge chunk of their capital expenses (ie. airlines) will be the first victims to shrivel in the post-oil age.
Global trade patterns vulnerable to high oil
The price of oil is poised to climb so high that it may dramatically change the dynamic of global trade and force companies to look closer to home for imports and exports, says a new paper by CIBC World Markets economists Jeff Rubin and Benjamin Tal. North American traders will be lured back to Mexico and Latin America and away from China and Asia, at least for some types of goods, as oil makes shipping costs prohibitive. They predict that the price of crude will reach US$100 a barrel by the end of 2007 and that the price of shipping manufactured goods will rise accordingly. Indeed, transportation costs could rise to a point that they become a barrier to global trade, and it may already be happening, the economists say. “It would pretty well offset the trade liberalization efforts of the past four decades,” Rubin said yesterday. He estimates that $100-a-barrel oil would be tantamount to almost tripling current tariff rates, and would force companies to re-examine how they do business. Many importers and exporters are not prepared for major changes to their supply routes and they will face a “huge challenge” dealing with higher costs. While higher transport costs will affect the price of different goods in different ways, overall transport costs will be about 130% more expensive at $100 oil than when oil cost just $30 a barrel. “All of a sudden, proximity to major markets becomes far more important in determining comparative advantage,” the economists write. “Distance translates directly into costs.” In particular, goods that cost a lot to ship will be affected the most. History backs up the argument, the economists say, pointing to previous oil shocks that brought global trade to a standstill.
But others argue that such the predictions are too simplistic. Robert Hattin, who runs a packaging machinery company in Hamilton, says there's no doubt high energy prices are making shipping far more expensive. “Whether it's a pouch of Sudafed or a car, your freight costs are going to go up,” he said yesterday. But establishing a new trade pattern can't be done quickly or cheaply. And many Canadian companies do most of their business within North America, and so a shift in pricing to Asia is not going to make a huge difference to his bottom line, and wouldn't prompt him to set up a new supply route. Rather, companies like his will wait out the higher energy prices and try to absorb the extra costs. Indeed, much of the CIBC World Markets argument depends on businesses believing that oil will indeed continue to climb, and stay expensive for some time to come, said Bernie Wolf, director of the international MBA program at York University. “The world doesn't change on a dime,” he said. “You won't make shifts if you're not sure these changes are relatively permanent.” Only a few months ago, predictions of oil prices of $100 a barrel or more seemed out in left field, but have since become more mainstream as prices keep climbing. Goldman Sachs caused a stir in March when its analysts warned prices could spike to US$105.
(National Post, Wall Street Journal, Globe and Mail 050909)