Could Oil Prices Signal the End of ‘Globalization’?

[Maister]

‘Globalization’ is a term that’s fallen into overuse the past 15 years or so. International trade has of course been occurring around the globe for centuries, but the fact remains that both the nature and volume of that trade has changed considerably the last few decades and this is largely due to the availability of cheap oil.

At the time of writing, the price of oil has hit a record $146 a barrel and further increases seem not at all unlikely. Is it probable the continued climb in the price of oil might compel a global economic contraction and the same companies that abandoned developed nations to exploit cheap labor in third world countries 20 years ago may shift operations back ‘home’ due to the impact of increased production and transport costs?

 

[beach_bum]

grease in the wheels

You bring up some interesting points Maister. I agree that over the past 20 years, globalization of the world's economy has been fueled by cheaper fuel costs. Diesel is at over $5.00 a gallon in most of the US currently. The effect of this will be more independent economies and less dependence on outside resources, goods and services (unless those services are a call center in India ) In the US, we would use our own resources more wisely and more effectively. We might pay more for these resources, but in the long run, our economy will be better for it.

For planning's sake I hope that the government does not subsidize fuel in this country, the rise in fuel prices has made the public more conscious of their use of gas, the number of trips they take in their car and buying local products.

 

[WSU MUP Student]

IMO, to a slight degree, this has already begun. I know I have read articles locally about manufacturing companies who fled to Canada years ago because of the relatively cheap labor are already returning to the United States because the falling dollar combined with rising transportation costs associated with large heavy products like automobile parts, has once again made it more attractive to operate here.

Of course, I don't think that this has happened to a significant degree yet, but it has to start somewhere and I expect it to slowly continue, especially for the heavy products like those listed above. But until wages rise significantly in places like Cambodia or China, small things like t-shirts and childrens' toys are going to keep being made overseas. The same thing goes for things like call centers or programmers outsourced to India - I don't think we will see those businesses return for a long time (but it is probably likely that those that are still located in the States will have more incentive to remain here).

 

[Duke Of Dystopia]

NICE THREAD!

I don't believe it will stop the "globalization" process. I do believe it will shift the focus away from the basic labor factor, to balance out the locations of optimum resource procurement.

Labor is the largest cost a business has. If the raw materials are cheap, the largest savings in production can be had by reducing labor costs. Now, if the cost of raw materials goes way up, a number of scenarios for labor occur. All of which will be tried. Some will:

A) Cut the size of the labor force
B) In the long term, readjust where the location of manufacture occurs to cut transport costs
C) Increase efficiency through automation
D) Other scenarios I am sure others may add


No matter what method used, you can see this happening quickly. The Prius is now going to be made in the US within the next 18 months. Biofuels (I think switch grass not corn) is an emergent industry that has a vastly improved capability of supplanting gas with every dollar added to the cost of a gallon. Locating biofuels distillation outside of the US recudes its efficiency, so it will have to be a home grown high tech industry. Agricultural products become more competitive again versus other countries cheap labor edge.

Personally, I think the agriculture energy mix is maybe the most interesting thing to come along in a long while. A farmer may be able to make more money from growing tall grasses than corn or wheat. The price for corn and wheat increase as excess production is switched to tall grasses. The money spent on fuel production increasingly is focused within our national borders, increasing our standard of living. Water quality and pollutants can be drastically improved through lowered agricultural chemical demand and use. Global oil prices find equilibrium with energy/ag industry, and our economy and resources increase through not loosing our national wealth.

Huh, come to think of it, high gas prices may pave the way for a new American renaissance! :-D

The high cost of gas is annoying and hurtful in the short term. Long term, it will be beneficial to us as a nation. It will create a whole new energy industry, revalue technical skills, and conserve land through the markets for agricultural production.

 

[zman]

I have often wondered that if fuel prices rise high enough, would it initiate a reversal of labor location. Meaning: would it be more cost effective to bring manufacturing jobs back to the U.S.. Will rising prices for transporting goods in from China offset the higher wages for American labor?

 

[CJC]

I think we will see a slowdown in globalization of manufactured goods, though I don't necessarily think that will mean a huge explosion in new manufacturing in the US.

I would expect there to be a reopening of the idea for an unmanned electric railway connecting to the manufacturing areas in northern Mexico and that the next ten years may be the time that NAFTA really starts to benefit Mexico.

A lot of what happens over the next few years depends on our willingness and speed at building nuclear, wind, and solar power facilities, as well as significantly upgrading our electric grid.

 

[Otis]

I'm not sure how much of an effect it will have. I read somewhere that it costs about a dime to ship a bottle of wine from Australia to the US. So let's triple that, to 30 cents. Add a dollar to the cost of the bottle of wine so everyone gets a cut, and you still won't see much difference. Fuel costs are only part of the cost of producing and shipping. I think the cost of labo(u)r will still be the driving force for some time, moreso than fuel.

Perhaps fuel costs will have a greater effect at the consumer end. The nearest Costco for me is about 60 miles away. That's about five gallons of gas round trip, or about $22.00. Costco will have to be a better bargain for me to continue to go there (although they do have cheap gas....hmm)

 

[Cardinal]

Nice answer, Duke.

Globalization will not stop, in the sense that ownership will continue to be international and that function that are not sensitive to transportation costa will continue to seek places where other costs are low. For those functions where transportation costs are significant, we can expect a regionalization of manufacturing to occur.

At the broadest level, this means multiple plants serving continental (not national) markets. If you are selling in North America, Asia, and Europe, you may choose to locate plants in Mexico, Pakistan, and Turkey rather than having a sinlg eplant in China. At a more local level, the supplier in the same metropolitan area is more likely to be able to offer a lower price than one half way across the country. This may lead to greater regional specilization in some industries, helping to reinforce cluster economies.

While rail is attractive as a lower-cost transportation mode for freight shipment, both infrastructure and train operations make it difficult to serve small users and anything but trans-continental service. As gas costs rise there is going to be more pressure to change this. Adding rail to existing industrial sites or relocating manufacturing to rail-served locations is not really feasible. Instead, we are likely to see development of small intermodal yard facilities in central locations (especially where served by multiple rail lines). Containers will be trucked to these locations where short line carriers or third party services will assemble larger ttrain segments for inter-regional shipment.

 

[WSU MUP Student]

There was an article in Sunday's New York Times that talked about this exact issue: Shipping Costs Start to Cromp Globalization.

Cliff Notes:

• The cost to send a 40 foot shipping container from China to the U.S. has risen about 150% in less than a decade - it currently costs about $8,000.
• High shipping costs are already starting to direct manufacturers of heavy/bulky items (e.g. steel, engines, furniture) to return some production to the U.S. or Mexico as opposed to India or China.
• Economists expect needless steps in the processing of products to be eliminated (e.g. no longer will chickens be raised in Georgia to be slaughtered and then sent to China to be packaged and then sent back to the U.S. to be consumed).

 

[Maister]

The heart of the steel industry in the USA was historically around Pennsylvania for good reasons. It was close to the Appalachian coal fields and the Great Lakes permitted inexpensive water transport of the iron ore found in Minnesota and the UP. Plus it was close/centrally located to manufacturing centers on the eastern seaboard and the midwest. I wonder if the rising cost of oil will prompt any sort of rebirth of the steel industry in this country?

 

[Brocktoon]

Globalization will only increase in the coming years even with higher transportation costs. With "flattening" of the world the best and brightest be able to engage in ways they have not be able to in the past. Looking at just manufacturing one misses most of what is really happening in globalization. Capital and skilled labor is more abundent and more able to move as is information and technology. IMO this is the major driver of globalization.

Many wring their hand at globalization and blame it for the loss of manufacturing jobs in the industrial Midwest and Northeast but in all reality technology has eliminated more than off-shoring.

Even if transportation costs keep going up the current cost of labor and land in the US is still higher than that of most developing countries. Some will shift back but I don't for see a renaissance in low end, no value added manufacturing in this country. The high end, high value products will continue, like as Cardinal stated about the Prius being made in the US in 18 months.

Since it is easier and will continue to be easier to gain information and transfer wealth across boarders, globalization will only spread. You need to only look at the level of FDI and its growth over the past 5 years to see that globalization has not slowed.

 

[wahday]

The heart of the steel industry in the USA was historically around Pennsylvania for good reasons. It was close to the Appalachian coal fields and the Great Lakes permitted inexpensive water transport of the iron ore found in Minnesota and the UP. Plus it was close/centrally located to manufacturing centers on the eastern seaboard and the midwest. I wonder if the rising cost of oil will prompt any sort of rebirth of the steel industry in this country?

This also makes me think of the proximity of other complimentary industries like tire manufacturing in places such as Akron OH (my wife's home town).

It seems that this industrial idea of proximity of complimentary industries has, over time, deconstructed, fueled in part by cheap transportation costs and cheap labor.

So, what factors would make spreading the production process around the globe less profitable than having industries in the same region? I would think rising transportation costs AND rising labor together would be the main thing that would pull these processes back together again. But so long as China works for nothing and they keep using those GINORMOUS ships to move items, it still may be cheaper to do things as they currently are.

On the other hand, with things like medicine, toys, etc. becoming contaminated by poisonous additives in poorly regulated places like China, many companies may feel bringing the process closer to home could help with quality control and consumer confidence. Just a thought.

I personally don't see steel or other heavy industrial activities having a rebirth here, but I can see other industries (especially info technology) seeking to gain from this type of regional clustering of activities. Its a good arrangement in many ways beyond transportation costs.

 

[Richi]

Don't assume that skilled labor in other countries will always be far less expensive than it is here. As an economy such as China's grows a middle class, expect them to insist on being compensated better. Then the lower skilled labor force will demand more or there will be civil unrest. (I'm not betting against massive civil unrest - even civil war in China within the next secade.) And many times the lower cost of production also contains the results of lower regulations. Some of those regs do impact labor costs (health care, OSHA type stuff) and other times the costs cover just the general welfare of the population. As the middle class grows, they will start insisting on clean air and water and control of hazardious wastes, etc. Then that aspect of the cost of doing buisness will reduce the advantage of external production. Coupled with the increased cost of transportation, this could greatly aid a shift in production back "home" (where ever that is).

 

[Monamogolo]

Don't forget the role of CAPTIAL and trade barriers!

Without playing down the importance of differences in labour:mechanisation ratios and transport costs, globalisation is driven very much by the flow of financial capital, the legal rights (and encouragement) to invest in other countries, and the tearing down of trade barriers.
Globalisation, for example, isn't just about Toyota's Asian factories having lower production costs, and utilising relatively cheap shipping costs to send cars to North America, it's about Toyota building factories in the US for the US; it's about VW manufacturing IN China for the Chinese market, and Montesanto wanting to produce hybrid seeds IN India for Indian farmers so they can sell agricultural chemicals. It's about Japan, China and other countries owning stock in Fanny and Fred and being hit by foreclosures in the US.
Globalisation will definitely continue, because freer trade is seen by most leading economists as crucial for continued economic growth globally.
Mother nature MAY throw a spanner in the works, but I very much doubt that oil costs will do more than cause a hiccup. The Germans are already experimenting with huge tankers/freighter being puller by high flown para-glider-like sails. Inventors will find a way to deal with transport costs.

 

[Bear Up North]

My company is sourcing many products from overseas. In the last seven or so years the number of inbound containers landing at my receiving docks has gone from a few a month to 20 to 30 a week. Indirect labor cost not discussed: Containers are floor-loaded......no pallets to speed the unloading process.....every inch of interior cube is used. I have employees assigned full time to manually unload those containers. (Products not in containers are almost always on pallets, making the unload process a forkliftable breeze.)

Some of the products we sell are manufactured by overseas suppliers.....and they sell those same products to ohers (including our competition). Many of our products are manufactured for my company, using my company's molds, making a product that only my company sells. The vast majority of my company's products require resin (petroleum-based). This drives up costs, no matter if made overseas or made stateside.

Our imports are from China, Sri Lanka, Indonesia, India, Italy, Poland, and other places. China was dominant but higher costs in that country have us sourcing other places, such as Vietnam. Shipping costs are similar.

There are newer generations of the big containers entering the stream. These "big boxes" contain more products than a normal-sized container. As they enter my realm, we will have some unique unloading circumstances, relating to dock safety and unloading procedures.

We do have a number of stateside suppliers that were not "quote competitive" a few years ago, but with higher transport costs from overseas, they now are.

Bear