Export industries, shipping, and the price of oil

The high price of oil and uncertainty about future supplies may have broad macroeconomic impact in the near future. One major area where that could prove true is in terms of where in the world manufacturing takes place. While shipping is generally a small fraction of total costs, the profit margins of some producers – especially in Asia – are small enough that further increases in shipping prices may eliminate their competitive advantage over producers closer to rich markets, such as those in Central America and Eastern Europe:

The cost of shipping a standard 40-foot container from Shanghai to America’s east coast, for example, has jumped from $3,000 in 2000 to about $8,000 today. The extra cost of transporting goods halfway around the world, Messrs Rubin and Tal wrote, is wiping out the often slim margins of Chinese exporters. What is more, if oil and shipping prices stay high, many Western companies that now outsource their manufacturing to China might decide that it makes more sense to shift production closer to their customers at home.

Of course, much will depend on near-term developments in energy prices. Continued economic malaise in Europe and North America could help to keep oil prices moderated (though it is hardly good for exporters, either). A return to a world where economic growth is strong in both developing and developed states, at the same time as hydrocarbon supplies are constrained, may well produce a partial reversal of the globalization trend. The same market forces that made low wages and economies of scale the dominant consideration for placing production may shift towards favouring reduction of energy and transport expenses instead.

Author: Milan

In the spring of 2005, I graduated from the University of British Columbia with a degree in International Relations and a general focus in the area of environmental politics. In the fall of 2005, I began reading for an M.Phil in IR at Wadham College, Oxford. Outside school, I am very interested in photography, writing, and the outdoors. I am writing this blog to keep in touch with friends and family around the world, provide a more personal view of graduate student life in Oxford, and pass on some lessons I've learned here. View all posts by Milan