Will Globalization Be Slowed By Rising Energy Costs?

Energy is the backbone of our civilization, and the clear enabler of globalization of business and our great agricultural and manufacturing productivity.  Cheap energy has allowed us to be comfortable and prolific, increasing the world population rapidly during the past century, and making my enjoyment of the apple on my desk, which came from several thousand miles away, possible.    This is just one of the myriad benefits of globalization that would never have occurred without cheap energy, and I admit to enjoying it.  Unfortunately, the era of cheap energy must come to an end, but how might that come about?

Many indications of the future are visible and reported on today.  While globalization has shifted huge numbers of jobs to “low cost countries” and enabled mass movement of products and raw materials over long distances, at costs low enough to make the moves profitable, fossil fuels will inevitably become increasingly scarce and prices will be driven higher, taking the profit back out of the global movements of goods.  This will redistribute jobs to both new markets and the older and more developed areas where globalization previously took them away.  Thus, the rust belt of the United States, for example, will likely see some (but not all) of its lost manufacturing jobs returning over time.  Steel for sale in U.S. markets is reported to already have become more profitable to make in the U.S. than China (pg. 5), for example.

Sustainability combined with increasing scarcity of fossil fuels will localize the products we use.  Unfortunately, the steady (and sometimes rapid) run-up of energy prices will result in the eventual moth-balling of many ocean freighters, but their steel will help feed the once again less-centralized mills of the world, and the oil they consume will find ready customers.  I expect before long I will no longer be eating New Zealand apples one week and South African oranges the next, but will instead be eating high quality U.S. fruit, and my local orchard may see a profitability it hasn’t known for decades. 

The developed countries will be driven to serious efforts to develop alternative energy sources.  As fossil fuels run out, the developed countries (including China and probably India) will marshal their resources to make a big push for fusion power, among other sources, and might actually achieve it within the next 20-50 years.  This will maintain most of the economic differences between the developed and undeveloped countries, who will scramble for fossil fuel and less costly alternatives for decades more.   Energy shortages will plague the developed countries in the interim, and cause significant economic fluctuations, but politicians will scramble to fund alternative energy research when it becomes especially evident that falling standards of living in North America will endanger their jobs, and that may accelerate the realization of alternative energy sources. 

In the near term, globalization will slow and adjust downward, and the move towards a “level playing field”, economically speaking, will be slowed with it.  In the long term, globalization will slow until much larger and sustainable alternative energy sources are in place, and may not return to its current level again for decades, and possibly more than a century.

Interesting Reading:
CIBC Research Piece On Energy Costs – Globalization Is Reversible, May 29, 2008,  Jeff Rubin, www.democraticunderground.com
Will Soaring Transport Costs Reverse Globalization, May 27, 2008, Jeff Rubin, Strategecon, CIBC World Markets Inc.
Will Energy Costs Drive Business Back to U.S.?, June 13, 2008, Nathan Bomey, Michigan Business Innovation, www.mlive.com


8 responses to “Will Globalization Be Slowed By Rising Energy Costs?

  1. I don’t see international trade volume reducing on account of the oil price hike. It only means that imported goods would be slightly more costly, but aren’t we ready to pay that extra dollar for a New Zealand apple? I would like to get your views on globalization in our corporate blog (mahindrauniverse.com).

  2. Thanks for your comment, Aditya.

    I think you may be underestimating the impact of fuel costs on global shipments. I recently read a statement by an American businessman that the cost of shipping a container of goods from China to New York City has already risen from about $4000 to around $5600, a huge increase. I believe the trend will continue and eventually produce much higher prices. As was observed, such a price increase isn’t a factor if you are shipping a container of diamonds, but for other less valuable goods it will have a real impact.

    Low value-density products will be affected first, of course. As a result, I see long-dormant local production of some commodities being revived in the next decade. I also don’t see oil prices on a long-term downward trend until the demand has started to fall, and that appears to be a long way off.

  3. Globalization is linked to more than just energy used to produce goods, it is also linked to low cost labor, availability of local resources to produce the goods, and end user knowledge about true costs versus price (I.E. taking into account shipping as well as part cost.)

    An aspect of globalization that has reached a critical point here in the U.S. is available skilled labor who are able and willing to work in manufacturing. Many of the new graduates are uninterested in working in manufacturing because of the preception that the work is “low return” on their personal investment of time and effort. New graduates see lay-offs all the time in the media, and so think that manfuacturing is a dead end job.

    Additionally, much of the skills, such as toolmaking and machining, are losing workers rapidly due to retirements. Toolmaker skills are rarely taught in formal education, and there is no method of passing on the knowledge that these workers have.

    Added in in the global workplace that has little restrictions on the environment and safety that we take for granted here in the U.S. Hereas I would never want to work in a China plant where the worked is actually inside a machine placed an insert into a giant punch press then ducking down to avoid being crushed, it is a common practice in many factories in underdeveloped countries. If the worker is injured, he is shipped back to the country village without any compensation.

    So, to summarize, the energy crisis may slightly slow down the surge of imported goods coming into the U.S. (along with the decreasing value of the dollar) but it won’t stem the tide of cheap goods that the U.S. consumer has come to demand.

  4. Thanks for your comment, Barbara.

    I was trying to make the point, perhaps not clearly enough, that there is a point where energy cost trumps the labor cost advantage, and evidence that in some industries it is already beginning. I don’t expect the end user to be concerned about anything except the cost they face, however.

    I agree that the current situation dissuades college graduates from seeking work in manufacturing, and that many young people are not interested in such jobs. When jobs are scarce, however, and such a job is available, there is increased incentive to take it. The economics of the situation will change people’s minds like nothing else.

    As for skilled workers in the tool and die area, I have been pleased to see at least some of the community colleges picking up the slack – perhaps not enough yet, but definitely paying attention to this. I am optimistic that the skills won’t be lost and will return.

    Given that part of the “low-cost country” advantage is in the negligence towards safety, the decentralization of manufacturing (and a resurgence in the U.S. – just begun) means that those costs are trumping the lack-of-safety advantage along with the rest. In addition, Chinese factories are already seeing workers walking out to protest unsafe conditions as well as low wages. Even as the Chinese outsource to SE Asian countries and elsewhere, it is only a matter of time before those workers recognize their power also. As I’ve said in past entries, “What goes around comes around.”

    Unfortunately, the U.S. consumer is already facing rising prices, and as many (including me) have predicted, our standard of living is likely to decline until alternative energy sources are more available and cost effective, and until we make significant lifestyle adjustments (learn to conserve more).

    I share your concern, but the times are changing rapidly. It will be interesting to see how things progress.
    Thanks again for your comment. – Tim

  5. A more efficient and cost effective renewable energy system is needed. R2
    A more efficient and cost effective renewable energy system is needed.
    To accelerate the implementation of renewable electric generation with added incentives and a FASTER PAYBACK – ROI. (A method of storing energy, would accelerate the use of renewable energy) A greater tax credit, accelerated depreciation, funding scientific research and pay as you save utility billing. (Reduce and or eliminates the tax on implementing energy efficiency, eliminate increase in Real estate Taxes for energy efficiency improvement). Tax incentive and rebates have to be tripled.
    In California, you also have the impediment, that when there are an interruption of power supply by the Utility you the consumer cannot use your renewable energy system to provide power.
    In today’s technology there is automatic switching equipment that would disconnect the consumer from the grid, which would permit renewable generation for the consumer even during power interruption. Energy storage technology must advance substantially. “Energy conservation through energy storage”.
    New competition for the world’s limited oil and natural gas supplies is increasing global demand like never before. Reserves are dwindling. These and other factors are forcing energy prices to skyrocket here at home. It’s affecting not just the fuel for our cars and homes, it is affecting food prices and it’s driving up electricity costs, too. A new world is emerging. The energy decisions our nation makes today will have huge implications into the next century. We must expedite the implementation of renewable energy.
    A synchronous system with batteries allows the blending of a PV with grid power, but also offers the advantage of “islanding” in case of a power failure. A synchronous system automatically disconnects the utility power from the house and operates like an off-grid home during power failures. This system, however, is more costly and loses some of the efficiency advantages of a battery-less system.
    We’re surrounded by energy — sun, wind, water. The problem is harnessing it in an economical way.
    Jay Draiman, Northridge, CA
    June 30, 2008

    Jay Draiman Energy Development Specialist provides expertise in all sectors of the energy and utility industry.
    Over 20 years experience. Specializing in: Energy Audit, Telecom audit, Utility bills audit and review for refunds or better rates, Demand Management, Energy Efficiency review and implementation, Renewable Energy, Lighting Retrofit, Solar Energy, Wind Energy, Fuel-Cell, Thermal imaging, Rainwater harvesting, Energy conservation, Ice Storage, Water conservation methods, Energy and telecom audit and procurement
    Much is at stake when policy makers, regulators, and corporate executives face the challenges of evolving energy markets and efficiency.


  6. Great comment, Jay. You present a lot of great ideas. Most of them require government action, which is why I reiterate that we each need to be telling our representatives what we want … repeatedly.
    I especially appreciate your mention of the things we should be demanding: a greater tax credit, accelerated depreciation, funding scientific research and pay as you save utility billing, for example.
    Thanks again – Tim

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