In the soon-to-come world of triple-digit oil prices, distance will cost money. All of a sudden geography will become a lot more important to trade patterns than it has been in the ever-shrinking global economy.
That's about to have a profound impact on where we source goods. The cost of shipping goods from Mexico or Central America to US markets is half the cost of shipping them from China, where most of them come from today.
How important those transport costs are in relation to total costs, and, hence, competitiveness, depends on one factor -- the price of oil. Because no matter whether you move goods around the world by air, ship, rail or truck, you're burning the same fuel.
Oil prices have diverted trade before, and they will again. After the first OPEC oil shocks, the share of non-petroleum US imports that came through transoceanic trade fell by six percentage points, while the share of imports from Latin America and the Caribbean rose by an equivalent amount. That shift, involving billions of dollars of trade diversion, occurred in little over half a decade.
In my book, Why Your World Is About To Get A Whole Lot Smaller, I argued that soaring transport costs driven by triple-digit oil prices will reverse the globalizing trends in our economy that occurred in the age of cheap oil.
New research by the United Nations Economic Commission for Latin America and the Caribbean (ECLAC) tested my hypothesis by looking at the impact of different oil prices on regional competitiveness for eight industries.
In all eight industries studied (the production of baseballs, beer, circuit breakers, cotton clothing, gaskets and seals, optical fiber cables, orange juice and tobacco), researchers found that the import share in the American market from producers in Mexico, Central America and the Dominican Republic increased with higher oil prices.
As oil prices rose from $60 to $150 per barrel, the shift in US market share toward those countries steadily increased as transport costs became more and more important in determining relative competitiveness. In the case of cotton clothing, market share rose from 50 per cent to over 80 per cent. Increases in market share by nearer Central American suppliers came largely at the expense of market share held by distant Asian suppliers.
If the trade diversion suggested by past oil shocks and the recent analysis by ECLAC holds, much of the huge trade imbalance between China and the US could rapidly unwind, as transport costs shift sourcing much closer to home. At the same time, Mexico's maquiladora plants may soon get another opportunity to shine as increasingly important suppliers to the American market.
While Mexico and Central America can't compete with China for the lowest wage rates, they may not have to. Soaring transport costs may soon become the great equalizer, bringing factories much closer to the markets they serve.
Pipe dream? Why not try it. Sure can't be any worse for our economy than what the so-called experts have done.
Note that Warren Buffet owns BNSF one of the five key rail systems in the US (UP, CSX, KCSo and NS are the others - Amtrak has no rails of their own, they have to lease time on the freight rail networks). Both BNSF and UP are in the process of double tracking their east/west mainlines so their capacity will be ten times what it is now. In the long term, even though the US rail system still uses diesel instead of electricity, they will be the most cost effective way to transport people and freight
As trucks become too expensive to use very much, Walmart's cost structures will be blown out of the water. The concept of "just-in-time" shipping to stores with partially loaded trucks and not having any back stock will get turned on its head.
Once teh era of cheap portable energy is over, we will live in a vastly different world.
It's not peak oil in and of itself. It's the fear of Peak oil.
Check out the real global numbers. New discoveries have NOT kept pace with the number of fields starting to die off. That is, the world is no longer able to replace oil fields that are depleted. There is a net loss of global oil reserves.
Oil shale is mostly unrecoverable and what is recoverable, REQUIRES oil prices to be well over US$100/bbl to be worth the effort.
As for deep sea drilling, yes it is somewhat technically feasible, but again the COST is astronomical and again the price of oil has to be well above US$100/bbl to be worth the effort.
The real PROBLEM with Global Peak Oil is NOT that oil will suddenly become completely unavailable, BUT it is the fact that the cost to produce what oil can be found, will be astronomically high. The world will never totally run out of oil, BUT is has already run out of cheap oil (this is why we drill in such terrible places as deep water and frozen tundra) and from now on, oil-based energy will only go up in price with increasing velocity, making oil usable ONLY for extremely high value things.
Global Peak Oil is ultimately an economic issue, not a technological issue, but it does mean that the entire earth will have to rapidly convert from oil-based energy to other sources of energy (most solar in its derivatives), very, very quickly.
IEA is not entirely trustworthy on the matter either, though they are becoming more realistic since their whistle blower outed their "methodology". As there are "Lies, damned lies, and statistics", please don't ask me to argue using IEA data as the basis for what our realistic reserves are. Who knows? and who can you trust?
I trust production data myself.
What concerns me most is that what is left of conventional oil is in dangerous places like Africa and the ME. What we have left in safe places is non-conventional and expensive to extract.
Bottom line- we may have many years of oil use ahead, but the expense and danger of our dependence will continue to bite us hard in the near future in any number of possible ways.
While there is still quite a bit of gas in the US, gas wells have a "slight" problem. Unlike oil wells which have a known, fairly predictable usage pattern, gas wells can (and do) quit working almost overnight. That is one day they have good pressure and a short time later, they don't. So the bottom line is there may not be as much gas as everyone thinks. In addition, while rail locos can be converted to use gas relatively easily, individual cars, trucks and planes can NOT.
The realistic situation is the US has wasted over 40 years that could have been used to rebuild the US infrastructure to plan for the inevitability of global peak oil. The US oil production peaked in 1970 and ALL the global oil fields from that era have peaked in exactly the same way, very close to the time the model predicted they would. There are now only a small number of fields on the earth that are NOT past peak production and virtually ALL the world's fields are predicted to be past peak by 2020.
We have millions of unemployed - abandoned factory buildings - raw materials and can grow more - why not use our tax dollars to put our own people to work, renovate and upgrade the factories, plan ahead for more raw materials from smaller outlets?