In the soon-to-come world of triple-digit oil prices, distance will cost money. All of a sudden geography will become a lot more important to trade patterns than it has been in the ever-shrinking global economy.

That’s about to have a profound impact on where we source goods. The cost of shipping goods from Mexico or Central America to US markets is half the cost of shipping them from China, where most of them come from today.

How important those transport costs are in relation to total costs, and, hence, competitiveness, depends on one factor—the price of oil. Because no matter whether you move goods around the world by air, ship, rail or truck, you’re burning the same fuel.

Oil prices have diverted trade before, and they will again. After the first OPEC oil shocks, the share of non-petroleum US imports that came through transoceanic trade fell by 6 percentage points, while the share of imports from Latin America and the Caribbean rose by an equivalent amount. That shift, involving billions of dollars of trade diversion, occurred in little over half a decade.

In my book, Why Your World Is About To Get A Whole Lot Smaller, I argued that soaring transport costs driven by triple-digit oil prices will reverse the globalizing trends in our economy that occurred in the age of cheap oil.

New research by the United Nations Economic Commission for Latin America and the Caribbean (ECLAC) commissioned by the Canadian Foundation for the Americas tested my hypothesis by looking at the impact of different oil prices on regional competitiveness for eight industries.

In all eight industries studied (the production of baseballs, beer, circuit breakers, cotton clothing, gaskets and seals, optical fiber cables, orange juice and tobacco), researchers found that the import share in the American market from producers in Mexico, Central America and the Dominican Republic increased with higher oil prices.

As oil prices rose from $60 to $150 per barrel, the shift in US market share toward those countries steadily increased as transport costs became more and more important in determining relative competitiveness. In the case of cotton clothing, market share rose from 50 per cent to over 80 per cent. Increases in market share by nearer Central American suppliers came largely at the expense of market share held by distant Asian suppliers.

If the trade diversion suggested by past oil shocks and the recent analysis by ECLAC holds, much of the huge trade imbalance between China and the US could rapidly unwind, as transport costs shift sourcing much closer to home. At the same time, Mexico’s maquiladora plants may soon get another opportunity to shine as increasingly important suppliers to the American market.

While Mexico and Central America can’t compete with China for the lowest wage rates, they may not have to. Soaring transport costs may soon become the great equalizer, bringing factories much closer to the markets they serve.

  • milleniumgreen
  • Mrs Robinson

    All of the above may occur but the oil prices may not be quite as astronomic as projected except for brief market panics. China is now embarked on a new 5 year plan to burn more coal to reduce oil dependence. India gets twice the energy it uses from coal rather than oil right now and might not change much as it has vast unexploited coal reserves (versus the world which gets only 30% of its energy from coal).

    Burning more coal is the answer and once the AGW CO2 scare has collapsed as it will in the next little while, the US etc. better get burning too (witness collapse of the carbon trading exchange with carbon trading at 5 cents!).

    So my advice is invest in coal worldwide as the answer to world poverty.

    If you don't like that idea, invest in plastics.

  • Mrs Robinson

    Get rid of windmills and solar panels. They are a scourge upon the earth. Get oil from coal.

  • All fired up

    Did you not call for $200.00 a barrel OIL something like 10 years ago ?

    What happened the last time OIL spiked up to even $150.00 for a day…The world cannot handle prices much above where they are right now and OIL is under $87.00 a barrel.

    So how do you think the world will deal with paying double what we pay now….ANSWER .

    It won't……………..$200 a barrel oil…AWWWWWWW Yeh maybe in 20 years.

  • Mrs Robinson

    I've never seen a futuristic projection that didn't collapse in a few years because of unforeseen circumstances. The Club of Rome composed of visionary luminaries comes to mind ca.1970.

    In this case a couple of flies in the ointment would be the hypothesis of abionic oil being true and the imminent collapse of the green scare industry leading to a surge in exploration and development. $100 oil only if QE5 comes true, and for no other reason.

  • dave

    i think an 85 dollar price is about average for now and maybe forward. you don't see too many people complaining at this price level. But just a few years ago (ie 2000-2004) 85 dollars would seem sky high. I think the market has slowly accepted an upward path to oil prices. Look at the massive roll out by auto makers this year to small cars. They used to make much larger gas guzzling tanks. But there are limits to this upside. too high and we will be pushed back into a recession. So it seems we are in a period where we are adjusting to these longer term higher prices. Smaller cars, fewer long distance trips, and perhaps sourcing food and goods closer to home.

  • Ctabares

    I just bought the book “Why your World is about to get a Whole lot Smaller”. Finally I found some answers to my personal doubts and theories about the crisis in global economy. I believe Jeff is right. I almost had reached the same conclusions, but couldn´t explain them so well. We need much more open and clear minded like Jeff Rubin in the actual and destructive populism of the occidental countries. Carlos Tabares. Tenerife. Spain.

  • Charles

    Do you imagine 80% of the world energy got from coal? Don´t you believe in climate change? Are you serious? Regards.

  • Ctabares

    Mexico and Central America neither can´t compete with oriental philosophy of hard work (confucionism and taoism). We never realize it because in the occidental countries we have lost our internal/spiritual life and trascendental thoughs and values. It is another reason (often forgotten) for the Asian sucess in the actual global market (ok, helped by the cheap oil circunstance) and our inevitable decadence.

  • Mrs Robinson

    You make a really good observation and beat me to the punch. The disorganized, slack, laid-back culture of central and south America has relegated them to continual poverty and pestilence. With the exception of perhaps Chile there is no hope for this lot. Even Chile will never put a man on the moon. You can give them a leg up but they will ultimately drop the ball. Venezuala has the oil sand resource to raise the entire continents of north and south America into spectacular heights of prosperity and affluence. It will never happen to benefit our continents but surely will help the Chinese ultimately once they work themselves in (while the west worries about CO2 emissions).

    These countries, in addition, are too close to the influence of the likes of Greenpeace and WWF which surely guarantees perpetual poverty with their left wing alarmist messages.

    Believe me, China will rule and India won't be far behind with its favourable demographics.

  • Mrs Robinson

    Use oil for transportation. Rest from coal or ntural gas. Nuclear is the best eco-density wise and U is everywhere. Don't count on green support though.

    Climate change has been going on for a long time so I can believe it but man isn't causing it nor can he influence it. The issue is ridiculous like the hollow earth nonsense of the 20's. It has quite a following ,though, which is amusing to watch but a catastrophe to humankind at the same time.

  • Twg60

    In a recent CBC article, Sal Guatieri, senior economist with BMO Capital Markets says, “the bank is also cognizant of the risk to household finances (and the economy) of keeping rates too low for too long.”

    In our household – and we suspect in most Canadaian households – with mortgages, higher credit card balances and higher debt/househld (which this aricle claims is happening) lower interest rates should be a good thing.

    What am I missing?

    In the late 70,s early 80.s when the interst rates were 18% many families lost their homes or couldn't afford to buy homes, cars etc.

    Low interest rates are bad for households and the economy? Say what?

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