Peak oil and Asian production

[Eddie Dane]

Hi,

The depletion of fossil fuels will impact us in many different ways, as we use oil and gas for many different purposes.

Some say that rising fuel prices will bring back local production as transportation costs will rise. So it will make economic sense to produce electronics, clothing and such in Europe and the US again.

I am somewhat skeptical of this claim for the following reasons:
Labor is still really cheap in China, India, Vietnam etc.
Most goods are transported by container ship. Huge beasts that slowly chug along on cheap, thick diesel oil.

Is fuel really a big cost component of an imported item and could a -say- 100% rise in fuel costs kill the import business?

I talked to one of the buyers of a company I work with, he says that transportation cost of one fashion item is calculated at 7 Euro cents. I don't think that doubling those costs would make the import business go down in flames.

And, at what point could local production become viable again?

 

[Puppycow]

I've heard that the economies of scale can actually make it more energy efficient in some cases to buy from overseas than from locally.

For example, here's an excerpt from a skeptoid episode on local food:

Many years ago I did some consulting for a company that was then called Henry's Marketplace, a produce retailer built on the founding principles of locally grown food. Henry's had evolved from a single family fruit stand into a chain of stores throughout southern California and Arizona that sold produce from small, local farmers. Part of what I helped them with was the management of product at distribution centers. This sparked a question: I had assumed that their "locally grown produce" model meant that they used no distribution centers. What followed was a fascinating lesson where I learned part of the economics of locally grown produce.

In their early days, they did indeed follow a true farmers' market model. Farmers would either deliver their product directly to the store, or they would send a truck out to each farmer. As they added store locations, they continued practicing direct delivery between farmer and store. Adding a store in a new town meant finding a new local farmer for each type of produce in that town. Usually this was impossible: Customers don't live in farming areas. Farms are usually located between towns. So Henry's ended up sending a number of trucks from different stores to the same farm. Soon, Henry's found that the model of minimal driving distance between each farm and each store resulted in a rat's nest of redundant driving routes crisscrossing everywhere. What was intended to be efficient, local, and friendly, turned out to be not just inefficient, but grossly inefficient. Henry's was burning huge amounts of diesel that they didn't need to burn. So, they began combining routes. This meant fewer, larger trucks, and less diesel burned. They experimented with a distribution center to serve some of their closely clustered stores. The distribution center added a certain amount of time and labor to the process, but it still accomplished same-day morning delivery from farm to store, and cut down on mileage tremendously. Henry's added larger distribution centers, and realized even better efficiency. Today their model of distributing locally grown produce, on the same day it comes from the farm, is hardly distinguishable from the model of any large retailer.

Compare the traveling salesman's simplified tour to a tangle of crisscrossing bicycle spokes, and the inefficiency of direct delivery between farm and store becomes acutely clear. If we want to minimize the carbon footprint of the entire food cycle, eliminating direct delivery is the easiest place to make the biggest gains. So, right off the bat, the main reason most people prefer locally grown produce is shot down, and shot down in big flames.

 

[timhau]

Is fuel really a big cost component of an imported item and could a -say- 100% rise in fuel costs kill the import business?

I talked to one of the buyers of a company I work with, he says that transportation cost of one fashion item is calculated at 7 Euro cents. I don't think that doubling those costs would make the import business go down in flames.

No, and shipping has other costs apart from fuel, so doubling fuel costs doesn't double shipping costs.

 

[GreyICE]

At the moment, the cost of imports from China, when all is said and done, add 15% to the cost of the item.

This is more than the cost of the shipping. We have to do quality inspections on their facility (in China), we must have open a Chinese branch of our company to negotiate in China, we must write contracts that work in China and the US (the last isn't so hard).

Damn skippy the price of oil effects this.

 

[The True Scotsman]

As the supply of oil goes down, the price of oil will go up, which will make the demand for it go down. As the demand for oil goes down, while the demand for transportation stays relatively level, the demand for alternative fuel sources will go up, which will make investments in those fields more economical and cause an increase in the technology production and advancement of those field, which, in the end, will cause the price of alternative fuel sources to drop.

I don't believe local production will ever come back in a big way, except for some occasion like societal collapse. The major advantage of large scale production is division of labor, which, in a nut shell, works like a large scale assembly line, making it possible for workers to increase their output, which leads to cheaper and more easily accessible goods and a wealthier society.

 

[rjh01]

I cannot see much evidence that demand will go down much in the short term if the price goes up. If it goes up too much then it will cause a recession and that will cause demand to go down.

Oil is a necessity. You cannot easily decrease its use in the short term. Long term, yes, you can use alternative energy, but that will take 10 years or so.

 

[soylent]

Oil is a necessity. You cannot easily decrease its use in the short term. Long term, yes, you can use alternative energy, but that will take 10 years or so.

Sure you can; you just don't want to. Approximately half of fuel consumption is personal transportation and it's unpleasant but easy to take a big bite out of this.

You could go to 4x10 hour work weeks rather than 8x5. People could use an internet service to better identify car pool opportunities. People could move from a McHousing unit in a commuter town to an appartment in a proper suburb which has some industry, schools, stores and bus or rail lines within walking distance. You could trade your car in for a scooter or motorcycle that gets 50-100 mpg.

 

[Francesca R]

I tend to consider it as per the diagram below.

Oil supply is price-inelastic relative to "normal" goods. Oil price rises do not produce large supply increases (due to perverse non-capitalistic incentives permeating the oil exploration and supply "business"). Oil price falls do not produce large supply decreases (due to OPEC and non-OPEC not being organised well enough to exert any cartel power)

Oil demand is also price-inelastic relative to "normal "goods. Oil price rises and falls do not produce large changes in demand (oil-dependency of rich and emerging world economic activity, substitution effects highly politicised and also non-capitalistic)

Hence, small exogenous (not caused by the price) changes in demand or supply of oil produce large price volatility.

(It's a simplification of course)

 

[The True Scotsman]

Rjh01, I agree that there would be some growing pain throughout this process, but I'm not certain it would evolve into a recession. I believe that the rise in oil prices and the demand for alternative fuels will progress hand-in-hand.

Francesca R, I suppose it would depend on whether we were talking about the short-run or the long-run, as everything is elastic in the long-run. I don't see oil prices fluctuating at a price range of more than $1, give or take, within a given year. I believe the supply of oil will decrease and its price will rise at a somewhat steady rate, over the course of a number of years. (Of course this all depends upon no legal requirements coming about requiring regulations on oil consumption for the sake of carbon emissions and no derivation from the oil supply estimates, such as the discovery of new oil fields).

 

[rjh01]

The problem with alternative fuels is that it will take years for them to be a major source of energy. They are starting to build windmills, but when the wind does not blow then you need another source of energy. When the wind blows you have the electricity even if you do not need it. There is a similar issue with solar energy.

There is no new alternative fuel source they can tap on demand. The closest are
- geothermal. This is limited in most parts of the world. If you are on island with an active volcano you should be able to use this.
- Hydro electricity. But just about every one has been built. Not much room to expand.

 

[drkitten]

Sure you can; you just don't want to. Approximately half of fuel consumption is personal transportation and it's unpleasant but easy to take a big bite out of this.

No, it's not "easy."

Easy is buying rice instead of bread. It takes about five seconds to accomplish.

Nothing that you mention in the following paragraph is easy or short-term.

You could go to 4x10 hour work weeks rather than 8x5. People could use an internet service to better identify car pool opportunities. People could move from a McHousing unit in a commuter town to an appartment in a proper suburb which has some industry, schools, stores and bus or rail lines within walking distance. You could trade your car in for a scooter or motorcycle that gets 50-100 mpg.

You seriously suggest that selling your house and buying a new one is a short and easy solution to the problem of high gas prices?

 

[The True Scotsman]

Rjh01, I think the main question here is how long it will take for the oil supply to diminish in a significant way. I am under the impression that it will take many years and will occur at a steady rate. I suppose there will be some periods within this decline where fuel is much more scarce or expensive than in others, since technology advances more in bursts than at a steady rate. I suppose I can submit that it would be possible for this to cause a recession, but that would depend on the amount of time with which the fuel supply is in this state. If I were to guess, I'll say that bio-fuels or electric power will be used as the alternative fuel of choice for periods of oil shortage until such time as a better fuel source becomes available.

 

[rjh01]

The True Scotsman - How long before oil reaches a certain price is unknown. Supply might decrease (an oil well or two dries up) or demand pick up (due to the recovery). In either case price will go up by a large amount (as per Francesca R's post above) in a very short time frame.

Now that the world economy is recovering oil has gone up from $35 a year ago to a peak of $83 a couple of weeks ago and $74 now. Ref http://www.wtrg.com/daily/crudeoilprice.html.