The Rising Cost of Oil & the End of Cheap goods

So the thought occured to me on Sunday that the North American economy is incredibly dependant on easy access to cheap oil. Ok. That thought had occurred to me sometime ago. What actually occurred to me is that with oil prices rising so dramatically, we may well reach a breaking point soon. Consider

North America’s economy relies on goods being made incredibly cheaply at vast distances from their intended point of sale. This means that huge amounts of oil are used up simply sending goods to their point of sale. The plastic toy truck you’ve just bought at Walmart is quite likely to have travelled thousands, probably tens of thousands of kilometres to reach you.

At what point, I wonder, does the price of oil outstrip the savings of having that toy truck produced in China? Worse yet, think about what happens as we reach that point. Walmart, Dell, all the large retail outfits are always squeezing their suppliers to lower costs. There are enough suppliers that there is probably for a fair number who are willing to make a deal at a break-even, or even loss price point to get a foot in the door, but that can only go on so long. What happens when that toy truck that has been $1.89 for the last ten years (or getting gradually cheaper, as Walmart loves to advertise), suddenly starts going up in price?

Most big-bix stores are in suburban/exurban strips because land is cheaper. They are destination locations that their customers are willing to drive a fair distance to in order to find a more convenient and cheaper shopping experience. But what happens when the cost of gas to get to and from that store outweighs the savings on the goods bought? We can’t discount the convenience factor. Corner stores (or, convenience stores) have long proven that we’re willing to pay more for convenience (ie – a 2-minute walk to the corner store rather than a 10-minute drive to the supermarket to buy milk & bread), but at some point, I imagine, the cost must outweigh the convenience. This is likely to be different for different people, but some sort of median (or is it average I mean here? I always get them confused) could possibly be established, and quite likely, has been by Big-box-employee economists.

Now, I’m imagining the worst case scenarios, but what happens when these cornerstones of the American economy start to close because no one can afford to shop there anymore? What happens when goods start to disapear off shelves because no one is willing to pay the newly increased costs for them? What happens when the seemingly once-inevitable globalization based on cheap oil simply vanishes back into regionalism, purely because it costs to much to travel between regions?

It’s probably worth remembering that there was another era of heady globalism – the belle époque of the late 19th Century, fuelled by cheap energy (coal, at that point). I’m sure companies thought that would never end too, but it collapsed with World War I, and really, didn’t reappear until the 1960’s or 1970’s.

Are their papers/studies that have been published about this sort of scenario? Does anyone have any thoughts on what might happen when/if this occurrs?

4 Replies to “The Rising Cost of Oil & the End of Cheap goods”

  1. When peak oil hits us, it’ll be a dramatic shift in the way we live life. The exact timing it will arrive, however, is something that’s exceedingly difficult to determine, due to the secretiveness of both oil companies like Shell and ExxonMobil and oil states like Saudi Arabia.

    (As a sidenote, it’s interesting to note that as of late, big oil companies have been putting ads in major magazines like The Economist asking for ideas on and/or promoting their up-start “alternative fuels” business. If oil was so cheap and plentiful, why bother dithering in solar and wind? It’s also been speculated that the rash of oil-company mergers in the last 5-10 years is a cheap way of adding more petroleum reserves to the books instead of doing the increasingly expensive drilling and extraction of hard-to-reach and not-very-plentiful-anyways oil reserves that haven’t yet been tapped.)

    As you’ve pointed out above, the whole western economy relies on cheap goods, often manufactured from cheap petro-chemical-based plastics, and shipped over long distances in vehicles driven by cheap petro-based fuels. As oil becomes either scarcer or harder to reach for a variety of reasons (geographical, political or economical) the costs of these products will inevitably rise. As an example of how it’s already affecting commerce in the western world Wal-Mart recently speculated that high gasoline prices affected consumer spending at their stores.

    Other areas that will also feel the impact of expensive or dwindling supplies of oil include agriculture, whose dependence on petroleum for fertlizers, pesticides and fuel for farm machinery has dramatically increased the efficency and output of the industry over the last 50 years. Many pharmaceutical makers also rely on petro-chemical based precurors to produce the medications we all take for granted. Take cheap oil away from both of these industries and you end up with shortages of cheap and plentiful food and drugs.

    As the worlds #1 oil consumer, it’s almost a given that the US will be increasing their military presence in oil-rich countries to ensure their economy keeps humming along. Iraq is the latest example and Iran may or may not be the next in line, but West Africa has also been getting a lot of military attention lately.

    There’s been a dramatic recent increase in the press that peak oil has been given over the past couple years and numerous books and documentaries are starting to come out that speculate on the situation. The site Brishen posted above is an excellent source, as is typing “peak oil” into Google news.

  2. When peak oil hits us, it’ll be a dramatic shift in the way we live life. The exact timing it will arrive, however, is something that’s exceedingly difficult to determine, due to the secretiveness of both oil companies like Shell and ExxonMobil and oil states like Saudi Arabia.

    (As a sidenote, it’s interesting to note that as of late, big oil companies have been putting ads in major magazines like The Economist asking for ideas on and/or promoting their up-start “alternative fuels” business. If oil was so cheap and plentiful, why bother dithering in solar and wind? It’s also been speculated that the rash of oil-company mergers in the last 5-10 years is a cheap way of adding more petroleum reserves to the books instead of doing the increasingly expensive drilling and extraction of hard-to-reach and not-very-plentiful-anyways oil reserves that haven’t yet been tapped.)

    As you’ve pointed out above, the whole western economy relies on cheap goods, often manufactured from cheap petro-chemical-based plastics, and shipped over long distances in vehicles driven by cheap petro-based fuels. As oil becomes either scarcer or harder to reach for a variety of reasons (geographical, political or economical) the costs of these products will inevitably rise. As an example of how it’s already affecting commerce in the western world Wal-Mart recently speculated that high gasoline prices affected consumer spending at their stores.

    Other areas that will also feel the impact of expensive or dwindling supplies of oil include agriculture, whose dependence on petroleum for fertlizers, pesticides and fuel for farm machinery has dramatically increased the efficency and output of the industry over the last 50 years. Many pharmaceutical makers also rely on petro-chemical based precurors to produce the medications we all take for granted. Take cheap oil away from both of these industries and you end up with shortages of cheap and plentiful food and drugs.

    As the worlds #1 oil consumer, it’s almost a given that the US will be increasing their military presence in oil-rich countries to ensure their economy keeps humming along. Iraq is the latest example and Iran may or may not be the next in line, but West Africa has also been getting a lot of military attention lately.

    There’s been a dramatic recent increase in the press that peak oil has been given over the past couple years and numerous books and documentaries are starting to come out that speculate on the situation. The site Brishen posted above is an excellent source, as is typing “peak oil” into Google news.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.