Talk given by Alex Evans to a UK government cross-Whitehall session on the four key multilateral processes culminating in 2015: trade, climate, Sustainable Development Goals, and finance for development. (May 2012)
As regular readers will know, I’ve been banging on for a long time about the need for a comprehensive database that tells us exactly how exposed international trade is to peak oil – or, for that matter, to the maritime sector being brought into the international climate regime and made subject to really severe emission controls.
After all, the bunker fuels used to power container ships and bulk carriers are much less easily substitutable than other kinds of fossil fuels. You can replace coal-fired power stations with renewables or nuclear; you can replace petrol-fuelled cars with ones that run on electricity or hydrogen. But ships? That’s another story. As a UK government study published just before Copenhagen found, for instance, “it will be extremely challenging, and expensive, to reduce emissions of carbon dioxide from shipping and aviation … there are a number of options available in each sector, but currently most of these are not economically viable”.
But if we don’t have readily available substitutes for marine bunker fuels, then what happens to maritime trade – to globalisation itself, in other words – if oil costs start really soaring again, or governments start to get serious about carbon pricing?
In particular, as I asked in The Feeding of the Nine Billion, what happens to the import bills of countries that depend on food imports from overseas (like most of the fragile states in West Africa, for example)? And what does it mean for China – whose advantages on wage costs could easily end up offset by increased transport costs, as actually happened when oil costs went into triple digits?
Although a number of analysts have been asking that question ever since the oil price spiked in 2008 (most notably Jeff Rubin – see the link above and also this), what we’ve all lacked is a really serious database that works out the costs of maritime trade, and how exposed these are to energy prices. Until now.
For it turns out that the OECD have been compiling a large new Maritime Transport Costs database. Although they didn’t make a lot of noise about it, they also posted a working paper (pdf) on their website a few months back – which confirms the significance of the issue (emphasis added):
Maritime transport costs represent a high proportion of the imported value of agricultural products — 10% on average, which is a similar level of magnitude as agricultural tariffs. This study shows that a doubling in the cost of shipping is associated with a 42% drop in trade on average in agricultural goods overall. The tendency to source imports from countries with low transport costs is therefore strong. Trade in some products is particularly affected by changes in maritime transport costs, in particular cereals and oilseeds, which are shipped in bulk.
Most valuably of all, the database goes into massive levels of detail on fuel costs in particular – making it a truly indispensable part of the toolkit for working out what happens to globalisation in a world of emission controls and peak oil. So, where can you access the database?
Answer: you can’t. For news reaches me that its publication is being blocked, by one OECD member state alone – namely, the United States. For, it is said, reasons of national security. How do you like them apples? (Locally grown, I suppose.)
The FT has a big splash this morning on how concerns about future climate policy and the global downturn are both driving a move away from global supply chains and towards more regional ones.
Companies are increasingly looking closer to home for their components, meaning that for their US or European operations they are more likely to use Mexico and eastern Europe than China, as previously. “A future where energy is more expensive and less plentifully available will lead to more regional supply chains,” Gerard Kleisterlee, chief executive of Philips, one of Europe’s biggest companies, told the Financial Times.
Mr Kleisterlee said businesses needed to find ways to build an economy on a sustainable basis ahead of the Copenhagen summit on climate change later this year, with “a review of global logistics and transport” one of the important steps. He said that until now cheap transport costs had meant “Mexico wasn’t competitive with China for supplying the US”. But he now forecasts that companies such as Philips will use countries such as Ukraine for supplying Europe rather than Asia.
Nor are climate regulation and the downturn the only drivers towards a more regional world – there’s also the prospect of a return to very expensive oil in the near future. If you’re wondering what that means for global supply chains, look no further than what started to happen during 2007:
…competitiveness in steel had already shifted away from Chinese exports and back to North American producers. Soaring transport costs – first on importing iron ore to China from Australia or from halfway around the world in Brazil, and then on exporting finished steel overseas to North America – added as much as an additional $90 onto the cost of what was then $600 per ton of hot rolled steel. That more than offset the Chinese wage advantage on what, thanks to technological change, had become as little as an hour and a half of labor time for that ton of steel.
For the first time in over a decade, made-in-America steel had become cheaper than Chinese imports in the US marketplace. Long before the recession blew up the US steel market, Chinese exports to the US fell 20% between July 2007 and March 2008 – and US steel production was up 10% over the same period. All of a sudden American steel producers were winning back their home market. Who would have thought that tripil digit oil prices could breathe new life into America’s rust belt?
That’s Jeff Rubin, in his very highly recommended new book on what peak oil will mean for globalisation (regular readers will remember his CIBC World Markets research paper on Could Soaring Transport Costs Reverse Globalisation a little over a year ago) – go buy it.
If I were the Chinese government, I’d be worried. First you see your export sector getting hammered by triple digit oil prices. Then even when they crash to less than half of their pre-spike levels (though n.b. still way above their pre-2000 average of 10 or 20 dollars a barrel, even in the biggest recession since 1929), you find that the downturn’s still driving a shift towards regionalisation in trade.
Time to start investing heavily in a more endogenous growth model, perhaps…