Globalization and Fuel Costs

This is another post in the 'peak oil & related' category--I also wanted to link together two seemingly unrelated articles that I read recently.

An article in today's New York Times ("Revived Paper Mill Brings a Town Back With It") was a rather heartening story of how local workers in upstate New York held on to a closed paper mill, and managed to find an investor to buy and reopen the place.

Eight years ago, a paper mill closed in this remote corner of the western Adirondacks, taking with it more than 100 jobs. Most of the 75 houses in this speck of a hamlet a two-hour drive from Canada soon fell into disrepair, their frames thrashed by weather and hardship.

It is a familiar story: industry leaves, jobs disappear, hardscrabble town is left adrift. Not Newton Falls. As if in a fairy tale, the shuttered mill has come back to life, thanks to a healthy dose of luck, a longtime paper executive’s willingness to take a chance, and the unbending commitment of two men to the place where they had labored for two decades.

It is not yet profitable (open less than a year), but it seems quite possible. I have to admit that it's nice to hear stories that manufacturing in the US can actually work--the distance we ship everything we own is a bit offensive. Also, it is one of those things that fundamentally bothers me about turning closed heavy industry into upscale lofts--all that it means is that we shipped the associated pollution overseas--it's not as if that pollution went away. In fact, it must be worse in places like China and India (fewer pollution/environemntal controls, etc.) See this Boston Globe article ("US castoffs resuming dirty career: Old plants, buses are sold to poorer nations")

But I am worried whether or not the economics will actually work at a plant like this--when a worker can get paid $90/month in China or $45/month in Vietnam (today's Marketplace figures)... how can the US possibly compete?

One thing that might make US industry viable again would be rising oil prices increasing shipping costs--making it no longer economically feasible to continue business as usual. This made me want to do some research--just how strong of an effect will rising fuel costs have on shipping everything from Guangzhou to Wal-Mart via container ship? Small or large?--for instance, I know that ships are one of the least fuel-intensive modes of transport (this Wikipedia table only compares US Domestic rail, water, truck, and air).

This research led me to this Toronto Star article, which in turn pointed me to a CIBC report ("Will Soaring Transport Costs Reverse Globalization?"). Man... the internet is great for porn.. uh, I mean research!

The authors found that increases in shipping costs have effectively created tarrifs so large they have pretty much wiped out all the "knocking down of trade barriers" done for globalization. In terms of fuel vs. transportation costs:

The duration of a typical sea voyage from China to North America is four weeks. Including inland costs, shipping a standard 40-foot container from Shanghai to the US eastern seaboard now costs $8,000. In 2000, when oil prices were $20 per barrel, it cost only $3,000 to ship the same container. But at $200 per barrel, it will soon cost $15,000 in transport costs to ship from China to the US eastern seaboard.

(I'm assuming they're talking about ship across the Pacific, and train across the US. In case it's not obvious, WTI = West Texas Intermediate, a type of crude oil used as a benchmark in oil pricing.)


The authors of the article addressed my question directly, actually:

To what extent will astronomical increases in transport costs alter the huge (but shrinking) wage differential between Chinese labor and North American labor remains to be seen. But we are already starting to see some change in capital-intensive manufacturing whose products carry a high ratio of freight costs to final selling prices.

Take the steel sector for example. With little over an hour and a half of labor time embodied in the production of a ton of steel, and relatively high freight costs, the global cost curve of the steel sector is changing rapidly. Given that most parts of China (and Asia in general) are short iron ore, getting the raw materials to the steel mill (mainly from Australia and Brazil) adds an additional and growing cost not typically incurred by US steel producers. Add to it the $90 freight cost of shipping a ton of hot-rolled steel sheet from China to the US, and the transport component is large enough to turn the global steel cost curve on its head. Even at today’s oil prices, rising transport costs have already more than offset China’s otherwise slim cost advantage, giving US steel a competitive advantage in its own market for the first time in over a decade.

They also point out that Mexico might see a resurgence:

Instead of finding cheap labor half-way around the world, the key will be to find the cheapest labor force within reasonable shipping distance to your market.

In that type of world, look for Mexico’s maquiladora plants to get another chance at bat when it comes to supplying the North American market. In a world where oil will soon cost over $200 per barrel, Mexico’s proximity to the rest of North America gives its costs a huge advantage.

I realize I'm not saying anything new here--James Howard Kunstler ("Home From Nowhere," etc.) has thoroughly explored this subject, figuring that in the extreme case, rising fuel costs might someday force us back to horse-and-buggy level locally-produced economies.

As a post-script note--if you haven't already read about it, check out the Simmons-Tierney bet, on the future of oil prices. I'm looking forward to seeing Tierney get punk'd in 2010.

As to the point of "economics will drive us to alternate fuels in due course"--the ultimate problem is that for the most part, transportation fuel = liquid fuel/oil--there isn't much in the way of substitutes, at least given current technology. By way of analogy, you're not going to tell a heroin addict going through withdrawal that cough syrup should keep him going without a problem.