Is low-cost country sourcing set to become a victim of the rising costs of oil?

A new article from Purchasing.com reports on an Economics and Strategy Report from CIBC World Markets in Toronto, whose chief economist believes that the rapidly rising costs of transportation may be reversing globalization as businesses are forced to look closer to home for suppliers. Claiming that rising costs will once again make the world rounder, the article notes that the combination of global raw material costs and high energy costs in China have led to receding Chinese exports of such products as steel, furniture, footwear, metal goods and industrial materials. Interpreting the CIBC World Markets Report as a sign that transport costs are erasing China's labour savings edge, the Montreal Gazette cites from the report that it currently costs $8,000 to ship a standard 40-foot container from Shanghai to the North American east coast, up from just $3,000 in 2000, and at $200 per barrel of oil, the cost to ship the same container is likely to reach $15,000, making the cost of moving goods the largest barrier to global trade today.

While the greatest impact of rising oil prices is on poor, oil importing countries, record prices even have energy producers concerned. During talks between energy producers and consumers held in Rome in late April, OPEC oil ministers insisted the problem has nothing to do with short-term supply but is rather the result of a weak U.S. dollar. Yet in October last year China Dialogue analyzed the findings of a German energy study produced by the Energy Watch Group (EWG) which found that petroleum output peaked in 2006 and henceforth would drop annually. Expecting world oil production to fall by as much as half by 2030, the study envisioned apocalyptic consequences when extreme shortages of fossil fuels and rising demand lead to economic restructuring and social breakdown. In China, the rising price of oil is particularly daunting, as Donald Straszheim comments at Forbes.com, because while its strong economy has been a key driver inflating prices, China has a burgeoning appetite for oil with demand growing 65% faster than the U.S. and four times faster than India, complicated by China having to import over half of its oil while controlling retail prices with inflation in excess of 8%. 

Cargonews reported this week that, in response to the dizzying rise of bunker fuel prices, shipping lines have shredded almost all of last year's customer contracts, in contrast to previous years when contracts were usually extended for another year. As fuel prices are making it hard for lines to make a profit, oil price shock has replaced the traditional arm wrestling at the negotiating table over the rates for the peak season from July through October. Hence more emphasis is being placed on volume discounts, guaranteed sailing dates and shipments, and long-term pledges by shippers.

Dan Gilmore at Supply Chain Digest recently analyzed the cost impacts of rising oil prices on supply chain network design. Incorporating the analysis of MIT professor and supply chain thought leader Dr. David Simchi-Levi, who used data from a real consumer goods company, it was found that every $10 per barrel price increase of crude oil amounts to a 4-cent per mile increase in transportation costs in the U.S., yet when the price of crude oil surpasses $150, things really start to change:

At that point, rising transportation costs start to significantly impact both where products are made and what the distribution network looks like...Rising oil prices would have the effect of changing the way we think about outsourcing and offshoring, after 10 years of a mad rush to China and other Asian locations.

Yet if $150 is an ominous benchmark, Gilmore expects that we will blow past $200 in a heartbeat, so with some fitting hyperbole of the doom that awaits us, Gilmore likens the impact of rising fuel costs to an unwitting frog in a pot of water being slowly heated:

We're being boiled alive, but may not realize it until its too late. The US economy and our supply chains can be very resilient, but at some point in both, something has to give.