Jeff Rubin Talks about Oil and the Economy
Posted by Gail the Actuary on May 28, 2009 - 3:35pm
Jeff Rubin talks about how skyrocketing oil prices will see a regression in global economies, and a return to local ones, as outlined in his new book, Why Your World Is About to Get a Whole Lot Smaller.
“What people need to hear loud and clear is that we're running out of energy in America.”
—George W. Bush, May 2001
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The cost of shipping stuff from china to the us (or europe) is only a few cents per kilo in bulk.
The rule of thumb I saw was that it took more oil/energy to move shipped goods 50miles from the port than it took to get it from China by ship. And that's with time=money; you can cut oil/energy usage by cutting ship speed.
We will still have global trade long after we have no personal car transport.
If I recall correctly, Rubin's point in an article earlier last year, was that oil increases since 2000 had effectively increased transport costs by a margin comparable to a 17% tariff on the goods. And it was the effect of this "tariff" over time that spelled gloom for China and prescribed new trading practices.
The cost in energy for the global economy is due to more than just shipping finished goods trans pacific.
1. Energy is used in shipping raw materials like copper from S. America to China, scrap steel from US to China, wood from Canada to China.
2. Energy is used in shipping within China raw materials and finished goods, often by truck as the railway network is still small compared to US.
3. More energy used in processing of raw materials in less than efficient plants/factories because the energy costs are subsidized and cheaper in China.
4. The energy for China's economy is increasing relying on coal for both electric power and transport (electric railways and soon electric cars), causing increased production of AGW gases.
US has the luxury of being more self sufficient in both raw materials and energy sources for its electricity (coal, ng, uranium) than China. In the US these things need go only maybe 1000 miles by rail instead of going 20,000 miles by sea to/from China and maybe 500 to 1000 miles by truck within China.
Not if you layer on enough carbon offset taxes and cap&trade fees. And how high do those taxes and fees need to be? Well, carbon cycle models show humans contribute 3% of all CO2 released into the biosphere annually. So if you wanted to make a significant dent in that 3%, say a 2/3 dent, how high would new taxes and fees need to be for you, for me and for all our neighbors to reduce our driving, home heating and the like by 2/3 (67%)? That's going to be a tremendous amount of government taxes and fees added to the current cost of transport. That would certainly motivate me to relocate manufacturing operations closer to my local markets. The result of such draconian measures would need to be coordinated world-wide in order to reduce CO2 emissions by net 2%. What do you think would be the impact on world economies? societies? living standards? What do think would be the net reduction in CO2 accumulation in the atmosphere over 5 years? 10 years? 30 years? 50 years? Here's the scale of the pay off:
http://www.forexyard.com/reuters/popup_reuters.php?action=2009-05-28T222...
Well first of all, the chances of carbon taxes that high are essentially zero. Its never going to happen. Rationing and laws on usage would come first.
Second, if you did have all those new carbon taxes the cost of goods would rocket and so would wage demands in your home market. Who's going to bring manufacturing 'home' to even higher wage demands?
Manufacturing, of new big LCD TVs say, is going to stay where wages are low and regulation lax. The cost of shipping is not significant enough to change that balance.
It would seem appropriate to put video links below the fold.
Just for the benefit of those of us on weird browsers and those still on dialup.
"Archie Bunker is about to get into bed with Al Gore."
What a great line. In CA they can't get married though.
Don't worry, it's extramarital, just a little fling due to a mid life crisis.
Rubin is way too optimistic about domestic production. Manufacturing of all kinds is going to be in increasing trouble as oil and energy depletes and continues depleting. Localization yes, but also a return to agriculture, permaculture type stuff, local and regional self-sufficiency. There will be a return of handicraft production. The millions of workers being ejected out of offices and factories are not going to get those jobs back, and they will be joined by millions more. There needs to be programs first explaining this and secondly helping people rebuild their lives in the above way.
That's what NEEDS to be done. And of course what IS being done is the direct opposite. All effort is directed at keeping global capitalism and the global market going as long as possible. Plus we are seeing the global T Rex's squaring off to see who'll be the last one standing. Once they're done, maybe we can (get: edit) down to work and focus on survival.
I don't quite understand Jeff's optomistic comments either.
I have not read the book but I have heard him speek a few times now and he never makes the link between our finite resources and our finacial systems. If our financial systems are based on compound growth and compound growth is based on compound consumption of resources (especially oil) then with Peak Oil we have negitive growth and the steal mills all around the world will be shut down. I thought as a finacial expert this basic fact would be obvious.
Am I missing somthing hear or is everybody affraid to pull the fire alarm.
Why especially oil? I keep seeing people write that money is a claim on oil. First, oil is only one form of energy. Second, money is a claim on labor and resources (among them energy, among that, oil). I see no reason why oil is better than electricity for most uses other than that our current infrastructure relies upon it. That can be changed, given strong enough market signals and economic pain.
And even if all of the oil disappeared tomorrow, as devestating as that would be, it would not mean no growth. There is still growth, from a lower point, and thus a reason to lend.
Your position is one akin to telling investors in 1930 that there is no reason to invest money anymore since they will not earn back their previous holdings until the 50s. Which was true. Yet we still had capitalism in the 40s, right?
You're falling into the trap of sunk costs. That's what you're missing.
EXACTLY!!!!!!!We have algae and methane hydrates....The substitutes for petroleum...Relax...We'll be fine.
NNooooooooo.
We have Thorium Reactors coming, that will substitute for everything energy related.
Now I'l relax. Cause it's already too late.
A man after my own twisted heart!!!
Is it ever too late if we are still alive?
But true, no matter what you do...you will die!!!
The pool of investors is dynamic. That is, there are always new people coming in the front door and always old people leaving through the back door.
The new crop is not tainted with sunk costs and are the agents of change. By the same logic the resistance to change slowly dwindles as the sunk cost crowd retires from the picture.
We did still have capitalism in the 40s despite the Great Depression . . . but . . . we also had lots of oil. So debt, and growth, made sense, at least in the short run.
I agree that in principle we could see growth again after the Coming Great Crash, just not on the basis of oil. Suddenly there could be a boom in wind turbines, thorium nuclear plants, or adobe dung housing, or the alternative energy and materials of your choice. You are right there. But then the further question would be, is this what we want? Wouldn't we then run into peak steel, peak dung, or peak something else? Wouldn't a "steady state economy" (with appropriate population control) be a better system? And if that's what we want, then we don't we need to revise the debt system, which essentially encourages growth? Just a thought.
Keith
I totally agree that some company in Flin Flon Manitoba (sorry Flin Flon, I just like the name) won't make a go of it, will then need to close its doors and stop making widgets. Yes sunk costs will be lost and some capitalist will start something else elswhere but with oil in everything from plastic to perfume how long will that maker of stuff survive. Our capitalist society is heavilly based on the consumption of non esential stuff.
We need to start focussing on the needs and not the wants. I don't know the percentages but in my community of Invermere, B.C. I would guess 80% to 90% of ten people make a living in non esential services, including me and no one with a voice that people listen to is telling people to start doing usefull things.
Locally we have built community greenhouses, re established farmers markets, supported local aggriculture, and are teaching people how to be more sustainable but even in a small community of 3000 we are only preaching to the converted and the rest are happilly driving toward the cliff in a fog.
I just don't here any of our leaders (buisiness, political, or otherwise) telling people what they need to do to be prepared for whats comming.
I only hope it is a slow enough decent so that the uninformed can adapt. I started preparing for this 6 years ago and I am still not prepared but I am starting to get a greenish thumb.
@2:20 "...because what put the world economy really in recession, is not Wall Street, but triple digit oil prices..."
A bold statement to say that triple digit oil prices is the "true cause" of the global recession. I think Jeff's ignoring a lot of underlying deviant behavior manifested from Wall Street over several years. But I'm not trying to sell any books here.
Yea, his predictions are an anti-capitalists wet dream. Surely 147 dollar hit the consumers pocket and wasn't a positive effect. However, $200 oil won't send the global economy crawling back into its caves, quite the contrary, I'm sure you will see some global industries booming under such circumstances. Chiefly agribusiness and oil. There is so much fat that can be trimmed.
You are wrong re: $200 oil not pulling the rug out from the economy. It will. Any meaningful economic recovery is likely to be tepid at best, at least for the first few years after a true bottom is reached. High priced oil will suck the air out of the real estate market in the far flung suburbs. $5-to-$7 a gal. gasoline will be the death knell for Detroit. Tourism, a major component of the economy, will shrivel up and die. The airline industry, already gasping for air, will go into a tailspin. The world of the shopping malls will shrink as driving declines. Big box stores will implode as the cost of shipping goods and produce from cheap labor markets goes through the ceiling. The article suggests that the U.S. will benefit as industry and jobs return to the U.S., but that may be overly optimistic. It will take years to rebuild the industrial base of the U.S. and to train those needed to do the work. Chances are we will all find ourselves able to afford less and less while our world shrinks about us.
You make the same mistake as many others on this list, thinking that because some can afford it that this means the economy will be just fine. Some people will be able to afford $5.00 gasoline, some will be able to drive 100 miles round trip to work every day even if gasoline prices reach that point. But it is the total affect on the economy that counts.
Four of the last five recessions were caused by high oil prices. And the higher the price of oil, the deeper the recession. The current recession has been the deepest since the Great Depression and it is only getting started. But then we have never seen $140 oil before. And oil hit $65 a barrel today, that is extremely high by historical standards.
Almost everyone has cut back because of higher energy prices. When oil prices hit new highs last year, natural gas and coal also increased dramatically in prices. Everyone's electricity bill went up along with their transportation cost. When they stopped buying a lot of stuff the people who made that stuff lost their jobs. They will not get their jobs back until people start buying all that stuff again. With high oil prices that is not likely to happen.
As you said some global industries as well as some people can withstand $200 oil but the economy as a whole simply cannot. If oil reaches $200 a barrel then the unemployment rate, I believe, will reach 25%. That will send the economy into another great depression.
Ron P.
Are you saying that no economy can prosper with oil at $200 a barrel? or just the US economy as it stands today? or only other economies can prosper with $8 gallon fuel prices?
High oil prices will accelerate the move to electric vehicles, a massive boom in new car sales once vehicle manufactures are scaled up into high efficient ICE and EV production. With vehicles getting >100mpg, $10 gallon gasoline will feel like $2 gasoline today using 25mpg vehicles.Anyone who switched from a 15mpg vehicle to a 30mpg vehicle last year probably didn't notice rising fuel bills. Expect a big jump in wind and solar energy and employment in those industries. Also boom in local US tourism, but not much overseas or local air travel.
It will take time, but we have had 3 good warnings now, once in 1972, again 1980, and last year. No one should be surprised if SUV sales tank next price rise.
At $200/b oil would consume about 1/3 of the global GDP. At $588/b it would consume all the global GDP. At about $120/b, some people think we couldn't fully support the interest on the national debt. But also oil isn't only used by joyriding poor folk. I recall, (perhaps incorrectly but where is Pit the Elder when you need him?) that 2/3 of the oil we use is for growing and distributing food.
BaSE,
I recall, (perhaps incorrectly but where is Pit the Elder when you need him?) that 2/3 of the oil we use is for growing and distributing food.
You are very incorrect on this, look at Jason's post about a week ago, in US, 2% of energy is used to grow food, 1.3% to transport and another few % to process, cook. A farm uses a mix of electricity, oil and NG, so 2% 0f oil use is about the figure.
The big, big, use of oil is for driving low mpg SUV's and pick-up trucks, 2/3 of this could be saved by using existing vehicles that get >45mpg. Why assume $200 oil is going to be consumed at rate of $60 oil??
Well, you're in the ballpark, while I was way out. I looked around for info and the consensus was under 10% for food production and delivery to the supermarkets.
Still some of those SUV miles must have been for shopping for food. and there is the food storage and preparation. You might get a few more percent when the whole food cycle is considered.
Thanks for the correction. You're my new hero, since Pit didn't step up.
Let's not confuse cost and price.
Oil at $200 to the consumer does not necessary cost $200 to pump out of the ground. The rest is profit to the producer who has to recirculate the money back into the economy somehow. It redistributes wealth, and may destabilize individual countries and damage the financial system, but it does not by itself, kill the economy.
Oil that costs $200 to pump out of the ground (in , say, 2007 dollars) will kill the global economy, because it represents too low an EROEI to sustain our wasteful, high energy lifestyle. The economy will contract until we start using oil efficiently relative to other energy sources and key resources.
Oil does represent 35% ish of primary energy supply, and it too large and too high a quality to be replaced by other energy sources completely.
Some substitution will happen, some efficiencies , some demand destruction. But until supply and demand balance again, the economy can only contract.
At the atomic level, Dollars are made of time, ideas, earth and energy. When Oil reaches $200, it changes the molecular formula of money.
So, if we do head for de-globalization, anyone has tried to think what will happen to international relations? If global trade free-falls, without heading straight to oil wars, and nations needing each other less and less, don’t you see a very good scenario for a world breaking up into multiple power poles, and the rise of hostilities?, or do you envision a UN doing fine?
..what will happen to international relations?
One of the most challenging questions is what happens as oil depletes and the price of oil rises to say 200 a barrel? My assertion is you have to view it from a financial perspective. Right now the US is printing money and borrowing to keep the ship afloat. We owe 11.3+ trillion, which is over 37,000 for every single person in America (300 million). It seems likely that high oil prices will dampen any economic recovery, keeping the US economy in recession and demanding ever greater debt accumulation. At some point the US credit rating will drop and China will refuse to lend us anymore money. When that happens the rest of the world will stop lending us money and that will mark the first major step towards national economies away from globalization. It will also end the level of expenditures the govt. can afford, similar to what is now occurring to California.
As the financial situation disintegrates globally in a much worse way than it has recently, unemployment will balloon and countries we owe money to will demand payment. China is the wildcard as to what they may do when we cannot make the payment. Do they launch an attack or demand real estate, like Alaska or California or both? What is our answer? That may be the deciding factor in humankinds eventuality. Whether we take our lumps, there is a die off as Catton describes, societies like Kunstler envisages, or two giant rams, the US and China going at it head on militarily.
Time will tell...
Judging solely by content of the video, I would have to say that what Rubin is saying is a lot of tosh by someone trying to schlock his latest book.
European countries have been paying far more for gasoline at the pump than Americans have during the worst of the oil spike and their economies have been doing fairly well during all those years of high gasoline prices. Why didn't their economies tank as the result of the terrible stress of high gasoline prices?
As several posters above have previously commented, the cost of ocean shipping is not only a small part of the total product retail price but also a small part of the total transportation costs. So, if globalization does indeed die, I think it will more likely be due to geopolitical problems leading toward armed conflict rather than high oil prices.
Whether domestic production undergoes a renaissance will depend on many different things falling into place, high oil prices being only one of several important factors.
That old saw, "If you're a hammer, everything looks like a nail", is quite apropos in this case.
When Europeans put high taxes on energy for consumer, it means that taxes are lower on other things, or that more things (like health care) get rolled into what the taxes pay. The total amount of funds that leave the country to pay for oil are a whole lot lower than in the US, because European countries use less oil per capita. It is expenditures that leave the country that are important in the final analysis. If the price of oil goes up by $50 per barrel, it is only the per capita consumption of this oil that has an impact on European spending. The taxes - no matter how strangely they are allocated - stay the same.
When oil prices increased, the impact was a lot less on European economies than on the US, because they use less oil per capita. That is why the economies didn't tank.
I disagree with part of your statement. The situation is more complicated. Billions of petrodollars returned to the U.S. through the purchase of CDOs and MBSs (not to mention T-Bills). This helped prop up the housing bubble and as housing values rose, U.S. consumers borrowed against these values. Mortgage equity withdrawals allowed the U.S. to dodge recession in 2006.
Here in the U.S. we may pay less for fuel, but we also have much lower average fuel economy. So some of that difference is mitigated. Additionally, the high prices forced Europeans to drive fewer 'disposable miles'. Low prices in the U.S. allowed for sub-optimal trips. As the price rose, people in the U.S. were able to adjust by driving fewer miles without having much impact on their well being. I suspect that this is not the case for European drivers. In other words, I think we have more control over per capita consumption.
"As the price rose, people in the U.S. were able to adjust by driving fewer miles without having much impact on their well being. I suspect that this is not the case for European drivers. In other words, I think we have more control over per capita consumption."
Yes we can cut out the trip to the mall, not take that vacation to the coast in the RV, not fly to Las Vegas for the weekend junket or business meeting, not buy that new house 40 miles from work. Eliminating these does not effect our personal well being by cutting out the driving "fat", but it certainly has a great effect on the economy.
I remember very well the recession of 1981-1983 and it was mostly due to high energy prices, just like the current situation.
Gail -
Well, I would have to agree with you that Europeans appear to get more bang for the buck on the high taxes they do pay. And a lower per capita consumption certainly does make a difference. So, I guess that the price at the pump doesn't tell the whole story.
What I would really like to see is a comparison between US and European per capita expenditures on fuel as a percentage of after-tax income. I think that would tell us a lot.
By the way, I am still not convinced that the current US recession was caused by high oil prices, though as a non-economist I do not have the knowledge or the credibility to make a persuasive argument to that effect. Sure, those high prices certainly were a drag, but I tend to think that the high oil prices did not last long enough to do the damage a lot of people are saying they did. Other factors, like the US debt bomb, are probably what pushed things over the edge.
Joule, I'm in your camp that the high oil prices did not cause the current recession. But they were the tipping point. A rapid slow down in growth, caused by a shocked populace bemoaning the rapid increase in fuel prices, allowed the same populace to see that the emperor had no clothes. When Nixon removed the gold standard, it allowed an expansion of the money supply, that allowed further growth. When that was not enough the wizards of wall street used the MBS's and the various Derivatives to expand it further. As Bartlett would say "exponentials are a bitch". We are where you can no longer hide the crap. Best estimate is $600 to $700 trillion in garbage securities worldwide. Match that to available oil supplies left ( $600- $700 per barrel) and it is easy to see why we are screwed. Where are those new trillion dollar Zimbabwe bills? We really need some inflation about now.
The definition of a recession is two consecutive quarters with negative growth in the GDP. That is a lack of growth. The GDP cannot grow, for very long anyway, without a growth in the energy supply. Our oil supply stopped growing in 2005. Coal and Natural Gas soon spiked in prices also. The energy supply stopped growing. It took two years for the combination of very high oil prices and no energy growth to send us into a deep recession.
So yes, the current recession was caused by very high oil prices combined with no growth in the energy supply. It has happened four times before. How many more times does the same thing have to happen before people stop denying the obvious cause.
Ron P.
My graph of VMT vs. gasoline supplied:
We all know that driving and GDP were well nigh joined at the hip for decades, disassociating somewhat beginning in the 90s, for what reason I'm still not sure - either online shopping or shadowstats. 6% of US sales in 2006 were online, and the number of people with computer access who've made first purchases has increased sharply in the last two years: Number of Internet shoppers up 40% in two years — Internet Retailing.
My theory is that the decrease in VMT was ameliorated somewhat by this increase; a correspondent demographic shift from rural to urban explains more of the situation; last year's price shock was too much for the system to handle though, along with all the knock-on effects of the recession making themselves manifest, and even urban areas are driving less, with attendant decrease in refinery output. Gasoline is a pretty inelastic benchmark, what else do you do with it beyond driving? Mowing lawns, stripping paint, getting a very bad high, adding to your doom stockpile...so this is something that bears more examination, IMO.
Interesting. I had a look at the Ayres-Warr paper that was discussed the other day... They manage to model (US) growth almost perfectly from 1900 to ca 1975, by relating it to "useful work". From 1975 on, the economy grows faster than their model implies; the conjecture that "a kind of phase-change or structural shift took place at that time,
triggered perhaps by the so-called energy crisis".
My knee-jerk reaction was: Something else of historical/economical importance happened around then: Nixon took the dollar off the gold standard in 1971! After that, a period of weakness for the dollar followed - before the world agreed there was no alternative, and it grew stronger than ever.
(Previous to, and in, 1975, the Ayres-Warr model predicted stronger than observed growth, ref figures 8 & 9 in their paper)
Could the additional unexplained growth be a monetary artefact - the US milking its currency hegemony?
Has anyone "done an Ayres-Warr" on Europe, or on the OECD as a whole? Anybody know?
First, let me say that The Big Lebowski is one of my all-time favorite films... makes me smile just to see that 'The Dude' made a comment.
That said, VMT doesn't paint the full picture. In addition to VMT falling, a lot of trips were swapped from the family SUV to the family Corolla... or in an increasing number of cases the family Prius.
Thanks, man. I like your style. Here's one courtesy of the Big Lebowski Haikutomatic:
In-and-Out Burger
I’m performing, give me notes
Zesty enterprise
True enough about, what would you call it, MPG switching? We will have more data after the census is completed; in the meantime VMT's effective as a gross measure.
Joule,
You may not be able to make a persuasive argument that high oil prices did not cause the recession, but why so much faith in economists?
Did the Oil Price Boom of 2008 Cause Crisis?
Good afternoon Gail et al:
One point I would like to make. It is 3000+ miles from sea to shining sea here in the US. It is only 1552 miles from London to Moscow or 1484 from London to Athens. Movement of people and goods in Europe uses much less energy. A Chinese item from SF to NYC has a very long rail or truck trip or sail to NYC.
A woodworking student of mine (Ken) is an analysist to determine optimum location of warehousing. His company owns warehouses throughout the US and can determine with great accuracy where to move (and how) and store to move to market your individual widgets. Size, weight, value etc. He definitely understands the cost of fuel and its impact on prices. He understands peak oil and other market considerations.
I received Rubin's book today so after I read it this week end, I will pass it on to Ken for his reaction.
I also received Sharon's "A Nation of Farmers" today.
Cheers
Lyn
One point I would like to make. It is 3000+ miles from sea to shining sea here in the US. It is only 1552 miles from London to Moscow or 1484 from London to Athens. Movement of people and goods in Europe uses much less energy. A Chinese item from SF to NYC has a very long rail or truck trip or sail to NYC.
I'm not sure of that wrt goods. Yes, Europe has very nice passenger rail, but cargo is a different matter. Compared to the US, we have lots of long distance trucking here, practically all cross-border traffic. Rail is a lot more energy efficient, but cross-border rail cargo is quite low volume; the rail networks are very much centered on the nation states and owned/run by the governments, different standards etc., and cross-border traffic is so bureaucratic that most shippers just give up and use trucking instead.
OTOH, there is quite a lot of coastal and river shipping.
Hi Gail,
The nice thing about bicycling in a foreign land is that people seem eager to speak with you - even if you can barely manage the language. I've biked a fair amount in Ireland and France. When you talk with common folks, at least in my experience, you don't hear a lot of discusion about the price of fuel for cars. We have to rent a car once in a while and the cost of gas has been around $6 to $8 a gallon (trying to figure conversions the best we can) for some time. People generally drive much smaller cars and don't seem to feel particularly abused by this practice.
What is really important is the fact that their kids can get a college education without the huge debt our kids incur. And, health care is generally not the crazy quilt we have. The higher tax on fuel funds a lot of education and health expenses. The proportion of tax to base fuel cost is such that a buck rise in the base cost is a lot less noticeable.
I was in a GM car dealership today looking at the cheapest high mpg cars they offer - it was amazing to notice the folks wheeling and dealing on $40K plus, monster, macho, vehicles! We are a strange bunch of folks here in the good old USA.
European countries have been paying far more for gasoline at the pump than Americans have during the worst of the oil spike and their economies have been doing fairly well during all those years of high gasoline prices. Why didn't their economies tank as the result of the terrible stress of high gasoline prices?
That has little to do with the price of shipping things up or down the Rhine & Danube.
Here's an excellent piece from an exPat Yank on Going Dutch, the ups and downs of high taxation, different takes on quality of life issues, etc.
Oil today rose to $65 which means it has more than doubled in less than 5 months again, however you need to balance that against the falling US dollar. It feels like 2007 all over again. I think Rubin is actually describing a transition to permanently higher base prices for oil. Of course there will be losers from this but there are also opportunites for the previously disenfranchised masses who may be able to again compete by being small scale local against monolithic corporations that are built to exist on cheap oil. As Rubin says, the economy as it stands today does not function at $100 oil. Somethings got to break and we know that the BAU economy is not as resilient as most people assume. There will be a new economy emerge but the only successful businesses will be those that have oil dependence as a very small part of their cost structure. These will likely be entire new businesses that may be what we could call micro business but we'll all be doing it.
Some comments:
1) A group of logistics researchers lead by David Simchi-Levi (Chief Science Officer at ILOG and Professor of Engineering Systems at MIT) show that U.S. logistics costs comprise more than 10% of total U.S. GDP, and that this percentage has risen from roughly 8.5% in 2003. Transportation is directly responsible for about 2/3 of the total logistics costs. Additionally, however, they show that increasing transportation costs indirectly drive up inventory costs. This occurs because as transportation costs increase, the benefits of JIT fall out of favor to larger less-frequent shipments. Inventory costs comprise almost the entire balance of logistics costs (with administrative costs being the third category). What we see is that the rise in transportation costs (which was driven by higher fuel prices) had already begun to impact supply chain strategies. In their research, they build a model that takes two main factors into account: labor costs and transportation costs. Depending on the good, there is a wide range of ratios of labor savings to increased shipping costs. And Rubin was right about steel. I know that here in the Puget Sound, steel production picked up as prices hit about $80/bbl. Steel is not that labor intensive, but it is heavy and bulky - and therefore costly to ship. The model of Simchi-Levi (et.al.) predicts that at $125/bbl significant amounts of production destined for the U.S. market will shift from China to Mexico... and some current production in Mexico will shift to the U.S. And again, I can't remember the source or the details, but there is at least one company that has moved production from Mexico to the U.S. specifically to save on shipping costs. (If I have time, I'll try to look it up later as it is a good case study).
2) In my own research, I have studied the structural and geographic shifts in the U.S. warehousing and distribution center industry. Location decisions made under the assumption of $30/bbl oil are turning out to be sub-optimal at $100 because the last leg of the supply chain must go by truck - and the move to centrally located mega DCs has lengthened this distance significantly.
3) to talk about prices and give a single figure only gives half the story. An even bigger threat is price volatility. Volatility introduces risk to the location models. Watch what happens when prices spike next time... Even though the next spike will be followed by recession, falling demand, and falling oil prices, the twice burned but still alive are not likely to take that chance again.
4) I am not particularly optimistic that we can ever return to a business as 'usual' economy. But, there is a huge amount of fat that can be trimmed from our energy economy simply through spatial reorganization... but this requires thoughtful and knowledgable insight into the global oil situation. The world is becoming ever more interested and ever more educated on this topic. So, maybe... just maybe... there is room for medium-term optimism.
Thank you for this. Please do post any case studies you have.
Relatively cheap water transport won’t matter much as long as food and energy consume most of our income. There will be little money for non-essential purchases of imported goods. Even if there is, unless you live next to a port, the overland transportation costs will increase the price beyond what most will be able to pay.
If Kunstler is right, large urban populations will disperse, reducing the size of mass markets. This widely dispersed population will make it very costly to transport goods to consumers. This will not be your Grandfather’s Globalization. There will be international trade, but not the volume we have now, not even close.
Eventually the trade situation comes into play but by that point the whole landscape will be so different we won't even notice. At $147 oil, when airlines were going under and the exurbs were squealing, they were shipping pickles from India to Toronto and selling them for $3.00 a jar, so it appears that the likely order is something like:
1.Airlines
2.Trucking
3.Exurbs, outer suburbs
4.North American economy in general
5.Then MAYBE long distance trade/globalization-at this point China will be by far the largest market in the world so it might not be that relevant for our current suppliers of consumer goods.
Hi Greg C,
It would seem that this is a very important point to analyze. Perhaps a very sophistocated model would help. It is also my understanding that these huge transport ships add very little to the cost of an individual item. So, forgetting toys and gadgets, how does this work for things like essential items that are produced in a favorable season or near abundant natural resources and shipped to another part of the globe durning and unfavorable season or where those resources are scarce? For example, tomatoes are very cheap here in the US in August. In February, they can be grown in a hothouse in the US, or a field in South America. Or, beautiful marble that is in a shallow open mine. How does shipping, even air cargo, play out in this scenario? Local hothouse vs a distant field + shipping. I guess you could run this exercise on many types of goods and various levels of fuel costs (oil or alternatives).
We often hear how rising fuel costs will end global shipping - it would be nice to see a really quantifiable model of how this all works with different classes of goods.
In the May issue of National Geographic, there was a short article about the carbon-footprint of wine being shipped from Chile, Australia, Bordeaux, and Napa to cities in the United States--LA, Chicago, New York. To summarize the article, the carbon footprint (which can also be read as energy content) was primarily determined by truck transportation. For example, wine from Australia shipped to LA has the same CO2 footprint as wine trucked from Napa Valley (0.6 lbs CO2).
http://www.drvino.com/2009/04/14/the-carbon-footprint-of-wine-in-nationa...
The smallest footprint was for wine shipped from Bordeaux to New York at 0.3 lbs; the largest was trucking from Napa to New York at 4.4 lbs.
This chart means that transport by ship will still be an option after the peak especially for high value items--wine, olive oil, lamb from New Zealand, grains, etc. It also means that as costs rise, alternative domestic shipping methods--intermodal, piggybacking--will displace long-haul trucking. So costs might not rise much initially for those who live in urban areas that are on rail lines.
In the end though, we'll all see a decrease in the variety of goods available since those will the lowest energy invested will have a significant competitive advantage. (If you want to sample beers from around the world, you probably should do it now.) And certainly, those in the ex-urbs and rural locations who are at the tail of the supply chain will be hit the hardest.
It would also appear that the fifty-three (53%) of US population that lives on the coasts will have a better time of it than the remainder of the population that lives inland.
I really worry about this, living in Minneapolis. Do we still have a future as a Midwestern manufacturing center? Or will this city shrink back to it agricultural processing roots as high transport and heating costs drive all other industries to the coasts? Do deep inland cities have a future?
(And on a tangential note: Will climate change lower the Mississippi water levels and total goods/year transfer?)
This bit is interesting
Apparently Rubin took a calculated risk with his book.
I just finished the book and looked at the video as well.
Aimed at those who think Rubin is too optimistic:If you read the book,carefully,you will find that his style of communication is understated,sort of like that of a ship captain who might say "we're in for a bit of a blow" when announcing the expected arrival of a hurricane to his crew.The more perceptive of his crew members who know the man will get it,and the new ones will learn,if they are capable of it.
You can't expect him to come out foaming at the mouth and screaming at the top of his lungs.That- could considering who he is-could push things to a new level of fear,possibly result in a another round of very bad news,and give his naysayers a chance to blame things on him that he has no control over,except shooting his mouth off.
He might even find himself in court or accused of using his position to manipulate the market,depending upon the investments he and his friends have made.Others before him have been accused of giving advice they must have known was bad,given thier other actions outside thier advisory role to the sore investors.
If you read the book you will see that he is predicting another down cycle as bad or worse than this one,a new peak/crash in oil prices,with the new low higher than the old low,and the new high higher than the old high-followed by a second and maybe a third cycle,ditto.Yes he says that the steel industry will come back home,but you will notice that he also said that Detroit is basically done for,maybe half thier former sales right?You are expected to KNOW that the steel industry is dependent upon the auto industry,and figure out what this means for the steel industry,without having it spelled out as if you were a toddler.IT IS SPELLED OUT,as bright as the sun at noon,
if you are used to operating in the atmosphere of economists talking to business managers.You will notice that he did not say that steel production in the aggregate would grow, or even recover to the levels of a few years ago.
This man is predicting some seriously hard times,including the possibility of a runaway inflation.
The tone is soft and civilized,like that of a mafia lawyer,but the message is the sawed off shotgun peeking out of his body gaurds top coat.
I don't pretend to know what his plans or goals are,but I expect that if he wants to he can get into our congress easy as 123 next election ,or maybe even the senate,if he wants to,and moves quick enough.Maybe not,maybe he will go into Canadian politics,or maybe head up a new venture capital fund.He may be getting started on building a base of popular support,that would be consistent with the book.
If so his message has, as Kissinger put it, the (added)advantage of being true.
A considerable part of the book is devoted to the geopolitics of carbon taxes in thier various forms,and he paints a pretty bright picture of this working out very much in our favor here in the US and Canada.I reserve my opinion on this,it looks good on paper,but I don't know about in practice,the rest of the world may not play.This part of the book is over my head.
He says that we are toast unless we figure out a way to get by with a LOT less energy year after year,and still keep the economy growing.He's not pianting himself into any corners by predicting specifically how this is going to be accomplished.I did not come away with the impression that he is very confident that it will be accomplished,but he probably does believe that it CAN be.
If some of this post seems inconsistent with another I put up earlier today,chalk it up to a case of indigestion,I ate too fast w/o chewing and wrote before it had time to settle in my tummy.This book covers a lot of ground,and I've only had it a day.
Now we have a champion who gets it (and) who has defected from the highest ranks of the enemy,if you see big biz/big banking as the enemy. I think we have turned a corner.Maybe we are now at the point that the English were when Churchill spoke of "the end of the beginning" during WWII in terms of the public becoming aware of peak oil.
In the US, cars are 100% recycled so do not contribute to net new steel, appliances 90% recycled, cans 65%, overall 78% of all steel is recycled.
A construction boom is going to do the most for steel production as only 37% is recycled.
Steel and most(?) metals can be recycled many times without loosing any of their properties. Therefore IMHO it is wrong to exclude steel for cars simply because it is recycled. If there is a drop in demand of say 50% of "car steel" then this will be felt in the entire steel market.
You are correct that "it will be felt in the entire steel market".
You got it,at least as far as that,but others aren't yet thinking about the ripple effects.In autos alone,we will have a glut of servive buildings,retail gasoline outlets,tire manufacturing capacity,paving contractors as the need for new roads declines with decling miles driven,etc.
With miles driven down,convenience stores /fast foods will decline.Potato chip sales and paper /plastic food containers sales declines follow. Generalize.BIG RIPPLES still to come WILL swamp many a boat thought safe as of now.
And it is not all auto driven.As prices of energy rise,so do lawn care products from mowers to fertilizer.If peoples disposable incomes are down,and energy and all energy coupled prices are rising,less and less discretionary income is left for vacation travel or any other nonessential,and businesses will be switching to conference calls etc when possible.Bartenders,housekeepers bellboys waiters cooks-lots of them headed for the street.glut of vacant houses and stores equals carpenters and electricians out of work.ditto hardware manselling to new construction market.you gotta think it thru,EXPAND yer head,everybody.sorry about the typing,not up to it with one finger tonite.I'm headed to bed very long day.
on e more thought:
The mortgage bankers association via wire service said yesterday that fore closures of "prime " loans now outnumber those of subprime,and that the PEAK of this wave of foreclosures is not expected until the end of next year, meaning as I read it 18 or 19 months.
I like Jeff but he keeps hammering away at the "Cleveland" strawman, when it doesn't really work and frankly there's no need to write that side of the crisis' balance sheet so small. Jeff should just say 'yeah, there was this huge quarter century debt bubble that was mainly centered in the US, and was enabled by the US Dollar regime.' Then he can move on to say that Oil popped it (or helped it pop.) I just disagree with Jeff that he needs to keep writing the debt bubble story as small. It was huge and it remains huge. It's even possible that the debt bubble popped of its own accord. That too was inevitable.
I think Jeff is shoehorning what are otherwise excellent and expansive ideas, into this narrow fit where he wants oil to be the primary cause of the crisis. It's an overfocus on causality. He should just say a number of forces came together at roughly the same time.
G
In light of the current turmoil in UK politics - what/where is the OilDrum's response ?
"In light of the current turmoil in UK politics " do you mean the expenses scandal? If so then it is not especially relevant to TOD, IMHO the problem is that there has been lax or no control over the expenses and so a culture of large claims has grown with some of the MPs being unable to see that what they have done is unacceptable. Maybe something akin to experiments where people are asked to torture others? Until recently the expenses were secret and the Speaker went to great lengths to keep them secret but fortunately he was defeated. The proposal from Cameron (leader of the opposition)to have expenses immediately published on the Internet will fix the problem since the MPs will not want to have to explain any excesses to their local voteriat.
The same problems exist in many other organisations where those in power are not clearly held acountable or proof of expenses is not required australian MPs, MEPs. People going from government into the military/industrial/banking complex..... if they have helped their friends. I expect that the media will have seen the interest this has created and be looking at this type of thing in many other countries.
"It is difficult to get a man to understand something when his salary depends on his not understanding it." Upton Sinclair
"Never appeal to a man's "better nature." He may not have one. Invoking his self-interest gives you more leverage." Robert Heinlein
I prepare prudently, you stock up, he/she hoards criminally.
Something more relevant to TOD is the ongoing tussle betwen Russia and Ukraine over Ukraine's inablility to pay for gas. I think I posted here a few months ago that the signed agreement was only a holding measure.
Concerning UK politics and "his not understanding it", here's an interesting piece from the May 29 ODAC Newsletter I find particularly astounding and revealing:
Arguing climate over PO or vice-versa is the ultimate in self-defeating behavior. While the worst effects of PO will come sooner, the causes of of the worst effects of climate change are now.
Dancer/dance.
Silly to attempt any discussion of one without the other, and worse still to address only one over the other in terms of actions taken.
Cheers
just noting on jeffs speech. the last i heard was that cargo ships run on low grade oil. this isnt the light sweet that hit $147 last year. low grades didnt move that much while light sweet crude was going mad if i recall.
so, $200 oil, doesnt increase filling costs for cargo ships because light sweet isnt the oil they use .. ??
aside to this, i agree with comments above that when it spikes, we are stuffed. i just dont agree about the cost of shipping over the ocean being directly effected in the sense he lead me assume in the talk. indirectly it definately will.
Nonsense! Bunker fuel rose right along with all other forms of petroleum. Cargo ships, along with many boilers that produce electricity in many smaller countries, run on bunker oil, primarily #6 bunker fuel. Bunker Oil Price History
Of course bunker fuel sells at a lower price than crude. #6 bunker fuel is basically what is left after the gasoline, diesel and other transportation fuels have been removed. Just as gasoline can be made from either light sweet crude of heavy sour, so can bunker fuel. Though heavier oil sold at a slight discount from light sweet, their prices rose and fell in unison.
Bunker fuel reached an average of about $93 a barrel in the third quarter of 2008 and then crashed right along with crude oil. But the point is, bunker fuel is pegged to the price of crude just like every other petroleum product. Why should it be otherwise? Bunker Fuel Price Chart
Ron P.
I don't think many people realize how cheap shipping by sea is compared with any other form of shipping. Until the industrial revolution introduced rail transport, the seas were the world's highways. Britain became a world power on global sea trade before oil production was significant.
Today's cargo ships use much more fuel than necessary, because time is money. Slowing down only a little greatly reduces fuel usage, and ultimately shipping can return to sail and still be used for global trade. A hundred years ago wheat was transported profitably from South Australia to England (about as far as you can carry cargo on earth) in sailing ships with a cargo capacity of several thousand tons.
My one personal experience (35 years ago) with the fuel consumption of a ship was crossing the Atlantic with a small ship chartered for geophysical operations. The ship's captain liked travelling at 10.5 knots, his vessel's top speed. As the charterer's representative, I did not appreciate the extra fuel this used: that ship used 50% less fuel at 9.5 knots. The fuel consumption (diesel, not bunker oil) was measured in tonnes per day, so the cost was significant, even in those days of cheap oil.
Lawrence D Hills in his pamphlet "Save your Own Seed" 1975 makes an interesting asside while talking about seed potatoes: "Most Canary Island and Spanish new potatoes are grown from scots seed and it is probable cheaper to send a hundred tons to Las Palmas or Tenerife by Tramp Steamer than it is to get it down to London by British Rail".