High Oil Prices, Reversing Globalization?
High Oil Prices, Reversing Globalization?

Recently, John Stewart and John Hodgman of Comedy Central’s “The Daily Show” joked and lamented about “stay-cations,” a new term coined by the media to describe the phenomenon of vacationing in one’s own neighborhood. As gas prices hit record highs, the first instinct for many American families is to cut back on non-essential spending, including vacations abroad. Stories of hardship and struggling due to high energy prices flood newspapers, radio stations, and news broadcasts.

High oil prices can be found around the world. As of May 30th 2007, the price in U.S. dollars for a gallon of gas was $11.49 in Germany, $9.66 in France, $8.31 in Britain, $5.77 in Japan, and $5.67 in Brazil.1

The wide-range of gas prices is partially due to the fact that most of the above countries have gas taxes, unlike the U.S. Most of the above countries also have a more extensive system of public transportation and have invested in alternative fuels to wean themselves off of oil. Japan has been far ahead of the curve in the development of fuel efficient cars and electronics.

Nonetheless, protests are erupting around the world. For example, Spanish truck drivers and fishermen are striking; Indians and Nepalese are protesting; South Korean truckers are getting ready to strike; bus and truck drivers in Hong Kong are protesting as well. Demonstrators in Spain and Portugal have already gotten killed protesting the price of oil.2

High oil prices translate into increased prices on anything that has to be transported, from raw products and commodities to finished goods. Multinational corporations use The Theory of Comparative Advantage to develop supply chains that have taken into account supplies of raw materials, the price of labor, and of course transportation costs. When fuel prices were relatively low, it was profitable to have extensive international supply chains, but this may change.

Localization

Environmentalists have often emphasized the importance of buying local food, flowers, cotton, and locally-grown products as a way to reduce carbon footprints, as well as to support the local businessmen. The trend to “localize” though may soon go further than just buying locally grown products.

An article in The Times (a British newspaper) notes, “Oil price crisis threatens to reverse globalisation,”3 Carl Mortished outlines this trend and its consequences. He notes the revival of the U.S. steel industry and the Australian iron ore industry (because of its proximity to China).  He believes that companies with a domestic supply chain will have an advantage over those companies with an extensive, international supply chain. Mortished notes that a likely outcome will include more regionalization as well. For example, countries will look to neighboring markets to provide goods and commodities, such as China’s likely move to buy more Australian iron (rather than iron from Latin America or Africa).

Localization or regionalization will provide growth opportunities for neighbors of large consumer markets (i.e. U.S. or China), but there will be losers as well. Small developing countries in Africa and Asia may lose their competitive advantage as purveyors of cheap natural resources. Industries in these regions may suffer from lack of foreign investment and existing plants and industries may close. These countries could also suffer financially because of their lack of rich, industrialized neighboring countries. Consumers in rich countries may also suffer as well, as there will be less competition and therefore less incentive to offer low prices to the customers.

The picture is not so bleak though, countries with a robust service industry will still thrive in the global economy. Countries, such as India, Ireland, and Israel, with high-tech jobs and other service jobs, are poised to continue their growth, despite the potential downturn in the global economy. Although India has recently decreased its fuel subsidies and, in the short-term, will be facing protests and economic losses, as the population will need to spend more money for fuel. In the long term though, countries with a strong service sector, rather than a manufacturing-based economy, are in a better position.

Moving Forward

The days of cheap oil are gone. There are a multiple of factors that have converged to bring high oil prices. Many around the world blame the huge increase in speculation in the commodity exchanges, which were brought upon by the subprime mortgage crisis and the desire for high returns on investment that has recently characterized commodity markets. Others in the U.S. blame the weak dollar and the decreased purchasing power associated with it. The growth of Indian and Chinese economies and the subsequent demand for fuel is another factor as well. In addition, fossil fuels are a finite resource and many believe that peak oil as already been reached.

After past oil crises, such as those that occurred after the oil embargo in the 1970’s and Gulf War in 1990, countries around the world pushed for better fuel efficiency standards, research into alternative fuels, and investments into public transportation. Some countries, such as Brazil and Japan, continued on that path and strove for more self-sufficiency in their fuel policies and have succeeded. Much of Western Europe decided to tax fuel and to keep the prices high to curb demand. The U.S. though did not keep up the pressure and Americans today consume more oil and fossil fuels than anyone else per capita.

Will high gas prices reverse globalization? Only time will tell. There’s a good chance that there will be increased localization and regionalization, which will certainly produce new winners and losers. Today’s youth may face lower standard of livings, with less opportunities available to them due to increased prices for everything, from food to travel to manufactured goods. But perhaps, with the right amount of money and resources dedicated to research and development, new technologies will be developed to harness renewable energy sources. The race is on.


1 Sullivan, Kevin. “Fuel Protests Erupt in Asia As Oil Hits $139 a Barrel.” Washington Post. June 11, 2008. http://www.washingtonpost.com/wp-dyn/content/article/2008/06/10/AR2008061002877.html?hpid=sec-world
2 Ibid.
3 Mortished, Carl. “Oil price crisis threatens to reverse globalisation.” The Times. June 11, 2008.
http://business.timesonline.co.uk/tol/business/columnists/article4107268.ece

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