Rising oil may fuel reverse globalization

As oil continues it's upward trajectory so have the costs of transporting goods and materials across oceans. In a globalized world reliant on shipping raw materials to one place to be made into finished goods and sent someplace else, this trend in costs is bound to make the economics of manufacturing in far off places questionable. This is especially true for low value to freight ratio products such as raw materials, furniture, apparel and machinery.

At $200 a barrel shipping a container from Shanghai to New York will cost $15,000 compared to $8,000 today and a mere $3,000 in 2000 when oil was $20 a barrel. This portends a fundamental realignment of trade which, has to some degree, already been set in motion--a number of US manufacturers have regained their footing and have restarted their production lines in the South East.

How much of manufacturing comes back from China remains to be seen. During the 1974 OPEC oil shock consumers bore the brunt of the additional costs but in time markets adjusted to substituting for goods that were sourced closer to home. In some capital intensive sectors such as steel, the US already has a competitive advantage as the cost of labor is a small part of the process.

Rather than finding the cheapest labor, producers are going to have to find places within reasonable distance to their markets. This may be a second opportunity for Mexico having earlier lost some of it's maquiladora production to Asia.

As an unintended consequence, shippers, just as the airlines, have reduced ship speeds to save fuel. Consequently there is less cargo space available at any given point in time--more ships are at sea rather than in port. The changing winds have also impacted the exporting of agricultural products from the US (California grows 80% of all worldwide almonds) leading to lower revenues to growers.

While liberalization and technology have facilitated globalization, transportation costs may once again change the economic landscape.