free html hit counter Peak Oil Debunked: 330. THE END OF CHEAP OIL DOESN'T AFFECT GLOBALIZATION

Friday, January 25, 2008

330. THE END OF CHEAP OIL DOESN'T AFFECT GLOBALIZATION

A common view in the peak oil community is that high oil prices will dampen international trade, halt globalization, and cause production of goods to be done "closer to home".

Here's a classic statement of the position:
The case of transportation is straightforward. Increased transportation costs act very much like tariffs, reducing international trade by raising the delivered prices of imports. Thus increases in fuel costs will likely lead to a decline in the international movement of goods, particularly for those goods shipped by air or truck, where fuel costs are most significant, and for lower- value bulk goods where transportation is a more important element in final price. In North America, for instance, food items travel an average of 1,500 miles from the growing-processing region to store shelves.

To the extent that increased transport costs reduce the price advantage to outsourcing, not only will this reduce the trade in goods, but also American investment in countries such as China and even Mexico, which have been the major recipients of American outsourcing.Source
Sounds plausible enough, but a reality check against the actual stats tells a completely different story. The following is a chart I constructed using the FRED graphing tool at the St. Louis Fed website. The blue line shows the price of West Texas Intermediate, and the red line shows the dollar value of US imports from China (click to enlarge):


Isn't that amazing? Oil hit a low of about $10 in 1998, and rose by 900% over 10 years to $100. Meanwhile, US imports from China ballooned from about $5 billion/month to $32 billion/month.

Clearly, the peak oiler theory that "the end of cheap oil will be the end of globalization" has some serious problems.

*****

In the comments, Bertrand Russell points out the decline will apply "particularly for those goods shipped by air or truck, where fuel costs are most significant". So let's look at that side of it. Dialing up the stats for air freight from the DOT, we find the following annual figures for air freight (millions of tons) between the US and the world:

1999: 7.7
2000: 8.2 (6.5% increase)
2001: 7.8 (4.9% decrease)
2002: 8.26 (5.9% increase)
2003: 8.47 (2.5% increase)
2004: 9.48 (11.9% increase)
2005 9.75 (2.8% increase)
2006: 10.08 (3.4% increase)

As you can see, the peak oiler theory that "the end of cheap oil will be the end of globalization" blows another tire.

The same trend is also evident in the number of international flight passengers between the US and the world, which grew as follows:

1999: 133 million
2000: 142
2001: 131
2002: 125
2003: 126
2004: 141
2005: 150
2006: 154

The theory blows yet another tire. Wasn't air travel supposed to be the canary in the mine shaft of peak oil?

For all practical purposes, we are almost 3 years past peak oil. The allegedly toxic "gas" started leaking into the mine back in May 2005. And yet the canary is still singing strong.

*****

This phenomenon isn't limited to the U.S. Here's the worldwide passenger flight statistics from the Airports Council International (ACI):
ACI also reports that, worldwide, air cargo traffic in 2006 increased by 3.6% over 2005.

These trends continued into 2007. The 12 months ending in August 2007, showed an increase over the previous year of 7.5% in international passenger flight, and 4.4% in international air freight. Source

*****

To rub it in a little further, here are the stats for truck trade between the US and Mexico/Canada from the Federal Highway Administration (in billions of $):

1997: 323
1998: 350
1999: 385
2000: 429
2001: 395
2002: 398
2003: 404
2004: 453
2005: 491
2006: 534

by JD

19 Comments:

At Friday, January 25, 2008 at 11:20:00 PM PST, Anonymous Bertrand Russell said...

"particularly for those goods shipped by air or truck, where fuel costs are most significant"

Ships are very efficient ways to transport goods. And the price of actual fuel hasn't gone up 900%--more like 175% for gasoline. I don't know exactly how much bunker fuel has gone up. You can't argue with the fact that increased fuel costs tend to offset China's competitive advantage. That's an economic law. Fuel just hasn't gone up enough yet to offset China's advantage in labor and its undervalued currency.

 
At Saturday, January 26, 2008 at 3:23:00 AM PST, Blogger FR said...

This is a good point. However, I don't know why people think of relocalization as such a bad thing. It wouldn't kill the economy to have things produced closer to where they are consumed.

On a side note, you may want to edit something. Increasing from 10to 100 is not an increase of 900%, it's an increase of a 1000%.

 
At Saturday, January 26, 2008 at 12:39:00 PM PST, Blogger FR said...

Ok, that was my stupid moment. JD was right, increasing from $10 to $100 is a 900% increase. What I was thinking was that 100 is 1000% of 10. I had a "d'oh" moment at work today when I was thinking about what I wrote. I'm glad I'm just a faceless, anonymous person on the internet, or I'd be pretty embarrassed right now.

 
At Sunday, January 27, 2008 at 2:37:00 AM PST, Blogger bc said...

Shipping has always been the most efficient form of transport, it was long before there were FF, and it will be after FF.

And one thing that revolutionized shipping was the cargo container, nothing to do with oil.

It may be counterintuitive, but it is cheaper to ship stuff from China than it is to drive the last 200 miles over land. Relocalization theory is fundamentally flawed, Stuart Staniford did a comprehensive debunk on The Oil Drum - to howls of protest from the "reversalists".

 
At Sunday, January 27, 2008 at 2:37:00 AM PST, Blogger clif said...

A disjointed post if I ever read one.

It leaves out the fact more people are shopping at wal-mart because of the actual price inflation over the same time frame, (temporarily lowering their direct cost, by going to a low price outlet from higher price outlets) and wal-mart's business model of forcing quite a few companies, who supply to them, to manufacture in china to "keep prices low".

It uses also the price of OIL NOT the end price people actually PAY, which means it ignores whether manufacturing corps or oil corps are eating a little of the rise in price to the consumer. This will have a direct effect on your thesis you never address, means it confuses wholesale prices with retail prices.

BTW, since the cost of labor in China is much cheaper then the US importing goods from China, this will help alleviate the rise in the cost of Oil in both manufacturing costs, ie plastics, and other petro-chemicals they produce out of oil there.

This could defiantly be why even though the costs of shipping good in large ships from China to massive whole sale warehouses of wal-mart, a very efficient form of distribution, can for a while keep selling of cheaper goods up while transportation costs rise.

The post also totally ignores the FALL of the US auto industry in the United States, at the same time the US economy is slowing down, which in a few quarters could see a slow down of consumer spending, not to mention the rise in the cost of oil is having a direct effect you ignore here in the US.

One other caveat .... you totally ignore;

The sub-prime loan debacle, which fueled consumer spending, hence also alleviated the costs of the rise in oil. People were borrowing from their largest investment as it inflated because of very low costs of borrowing, and irrational refinancing which has been shown to be unsustainable.

This means what you claim could very well be produced by factors you ignore, and the thesis of this post is unsupported if you include relevant factors in both price structure in lowering manufacturing costs allied with an irrational economic model for consumer spending.

Your claim;

Clearly, the peak oiler theory that "the end of cheap oil will be the end of globalization" has some serious problems.

is FAR from proved, but stick to your beliefs if you want.

 
At Sunday, January 27, 2008 at 10:09:00 AM PST, Anonymous Benny "Peak Demand" Cole said...

The Peak? We are still increasing production of liquid fuels, to an all-time record in Dec 2007, according to Robert Rapier.
Meanwhile, demand for fossil oil is falling in 2008. The year 2007 was likely the year of Peak Demand.
There is a serious problem in that thug states control the world's oil. There is gobs of the stuff, the problem is that it lies in Venezuela, Mexico, Russia, KSA, Libya, Iran, Iraq, Nigeria et al. Backward thug states, run by corrupt elites.
This is bad news in many regards; political problems are harder to solve than geological problems.
The good news is that innovation is trumping politics. Demand is falling. The PHEV promises radical reductions in oil demand.
Indeed, if the oil thug states should ever modernize, and PHEVs are introduced, will will see the oil era extended another couple hundred years.
But, even if Oil Thuggia return to the stone age, the PHEV, juiced by solar and many other clean power sources, promises to usher in a cleaner and more prosperous world.
I like it.
The risk is that we see an oil glut sometime soon, cutting the knees out from conservation and alternative fuel efforts.

 
At Sunday, January 27, 2008 at 11:11:00 AM PST, Blogger clif said...

There is a serious problem in that thug states control the world's oil.

It's a damn shame God, the flying spaghetti monster, Allah or who ever put our oil under their land ain't it?

 
At Sunday, January 27, 2008 at 2:08:00 PM PST, Anonymous Soylent said...

fr: "This is a good point. However, I don't know why people think of relocalization as such a bad thing. It wouldn't kill the economy to have things produced closer to where they are consumed."

Large scale solutions tend to be more efficient from a perspective of labour, energy and pollution. Growing food crops under optimal conditions tends to favour remote places.

I suspect that the almost negligible amount of energy used in shipping freight by cargo container over water and rail will tend to further relocalize things further away, not closer to home.

 
At Sunday, January 27, 2008 at 2:26:00 PM PST, Blogger clif said...

Large scale solutions tend to be more efficient from a perspective of labour, energy and pollution.

Yep they certainly do;

Labor;

Force a significant majority of the populace to live at the wages of the lowest common wage, by outsourcing jobs away from the US, that has worked real well the last ten years destroying the middle class here. Smaller corporations couldn't hold enough power to destroy the good paying middle class jobs the last decade, it took mega corps with global reach to under cut the American middle class.

Energy;

Centralize so that power outages in Ohio shuts down a large portion of the north east, very efficient there also. Make sure that small localized sources are forced out because large corps can hike rates elsewhere to make up for low rates until local competition goes out of business.

Use the economies of scale to shut down the competitors until you can co-opt the technology to your benefit even if that means pursuing stupid ideas like corn ethanol for profit with government subsidies.

Let all regulations disappear until the entire country gets Enroned ....... then blame it on the consumers for not allowing less regulation or more pollution.

Pollution;

Yes the larger they are, the more efficiently they pollute on a very large scale, I totally agree.

It takes a DOW chemical to create a Bopal, or a Hooker Chemical to create a Love Canal, they needed to be large efficient polluters otherwise they couldn't have created such a large scale mess of things. Smaller companies just don't have enough pollution available to them to do it as efficiently as large corps do.

 
At Sunday, January 27, 2008 at 9:22:00 PM PST, Anonymous soylent said...

clif: [Off topic ranting about outsourcing]

Swing and a miss. I made no reference to what is desirable nor to outsourcing. I made an argument against the effectiveness of smaller operations dependent on oil in the face of scarcity.

Clif: [off topic ranting about energy production].

Do you or do you not generate more electricity out of a given quantity of coal, uranium, natural gas or sunshine using large, centralized generation with proven technology that exists today?

Clif: [Pollution].

And you believe the situation would be much improved if the task of producing these chemicals was distributed over thousands of private citizens with inadequate equipment, knowledge and resources?

 
At Monday, January 28, 2008 at 8:59:00 AM PST, Anonymous Benny "Peak Demand" Cole said...

Clif-
It is a shame, especially for people in Thrid World nations. The artificially high price of oil is a real burden on many.

 
At Monday, January 28, 2008 at 3:27:00 PM PST, Blogger clif said...

The artificially high price of oil

Not according to the EIA, IEA, who both agree that geological AND above ground conditions like a war in the middle east, belligerent stance of some against a major middle east producer, limits on production because of drilling rig availability and knowledgeable skilled workers, rise in price for resources needed to build new infrastructure, combined with lack of exploration and investment in the 1990's which stresses the demand by hundreds of millions of new consumers in China, Russia, India, Brazil, among others, all caused the rise in prices in the last 5 years.

You might be able to argue the top 10-15 dollars a barrel are speculators, but that is questionable given how much the worlds markets are being squeezed for liquidity to cover the sub-prime and credit losses.

 
At Monday, January 28, 2008 at 8:49:00 PM PST, Blogger clif said...

Your very generalized post;

Large scale solutions tend to be more efficient from a perspective of labour, energy and pollution. Growing food crops under optimal conditions tends to favour remote places.

My response;


clif: Labor;

Force a significant majority of the populace to live at the wages of the lowest common wage, by outsourcing jobs away from the US, that has worked real well the last ten years destroying the middle class here. Smaller corporations couldn't hold enough power to destroy the good paying middle class jobs the last decade, it took mega corps with global reach to under cut the American middle class.

Your derogatory meaningless remark;


[Off topic ranting about outsourcing]

My response;


Well that is the greatest force here in the United states which is affecting labor. I don't see where that is off topic since if the labor which is the vast majority of the consumers which underlie the economy in todays modern world, are being squeezed out of the income which they use to live on, and enlarge the economic pie, well then I don't see what you're arguing in your ONE word statement Labor.

Your false claim:

Swing and a miss. I made no reference to what is desirable nor to outsourcing. I made an argument against the effectiveness of smaller operations dependent on oil in the face of scarcity.

No you didn't you said LABOR and left it at that.

Any generalization of an argument is both partial truth and partial falsehood, because so much gets left out. Efficiency measured in dollars which end up in some bank account might be ONE way of measuring efficiency, but since we are considering the total societal effects, then that efficiency just might not be the best measurement we need, BUT the real efficiency might be the one which continues the GROWTH of all aspect of a society, NOT just the highest income brackets.

In that case the efficiency gained by outsourcing the very jobs that underlie the structure of our economy are NOT efficient in any manner but to the bank accounts of those who profit.


My second statement about energy;

Clif: energy

Centralize so that power outages in Ohio shuts down a large portion of the north east, very efficient there also. Make sure that small localized sources are forced out because large corps can hike rates elsewhere to make up for low rates until local competition goes out of business.

Use the economies of scale to shut down the competitors until you can co-opt the technology to your benefit even if that means pursuing stupid ideas like corn ethanol for profit with government subsidies.

Let all regulations disappear until the entire country gets Enroned ....... then blame it on the consumers for not allowing less regulation or more pollution.


Your second derogatory meaningless remark;

[off topic ranting about energy production].

Not off topic, because my comment shows the down side of centralization.

Your question;

Do you or do you not generate more electricity out of a given quantity of coal, uranium, natural gas or sunshine using large, centralized generation with proved technology that exists today?

Yes you "produce more electricity, however NOT necessarily more efficient in that. In todays world we must maintain a very large unwealdy infrastructure which to create that electricity and get it to where we use it. Things like co-generation have until now been RULED out by the powers that be to protect their "state sponsored monopolies" to guarantee they and they alone are the only option on the block. things like conservation and smaller generation plants have been under funded and even ignored so the large supposed efficient plants can make enough money to pay for themselves. That is NOT necessarily the MOST efficient way to produce electricity. Smaller local production does not rely on large infrastructure, which has been shown to collapse.

Local production in many cases is MORE effecient from production and distribution means, but with the ability to use the economies of scale financed out of existence by large corps who undercharge until the local source is gone. Enron style manipulation of markets for both control and profits is not a new thing, but deregulation has allowed it to be ramped up to national scales.

Here as elsewhere in this discussion efficiency that is good for society is not necessarily the same as efficiency that is good for certain large bank accounts.


My third statement about pollution;

Clif: [Pollution].

Yes the larger they are, the more efficiently they pollute on a very large scale, I totally agree.

It takes a DOW chemical to create a Bopal, or a Hooker Chemical to create a Love Canal, they needed to be large efficient polluters otherwise they couldn't have created such a large scale mess of things. Smaller companies just don't have enough pollution available to them to do it as efficiently as large corps do.

your question, (No snark this time at least);



And you believe the situation would be much improved if the task of producing these chemicals was distributed over thousands of private citizens with inadequate equipment, knowledge and resources?

Yes in many ways, because then the corporations which are doing it wouldn't have the deep pockets to fight for years against government regulators and private citizens who suffer from that pollution all the while they continue to pollute the earth.

HOW do you know they lack the adequate, equipment, knowledge and resources? Because those corporations which ARE polluting say nobody but they do? Because their overpaid corporate lawyers can stall dodge block any attempt to make those corporations to fulfill those very requirements? Because they have enough money to pay lobbyists to donate campaign money to politicos who are willing to either gut the very regulations that protect this planet from that pollution, or even worse ignore the very regulations they get appointed to honor, like the Bush administration has done since 2001.

Size does NOT equate efficiency especially when that size is used in such a way to dominate markets for profit OVER everything else. Because profit is NOT the only way to measure efficiency, but the way economists do. In many cases economic questions are at best secondary if important at all. In other cases no economic efficiencies are possible because the laws of science dictate and no economic argument can ever over come those laws of physics, chemistry, biology or geology.

Efficiency is just not the final arbitrator, as we all will find out in the years ahead.

 
At Tuesday, January 29, 2008 at 2:19:00 AM PST, Anonymous Anonymous said...

Clif,
You make a good point about JD's argument. IMO there is the risk that his argument is non-sequitur without some other data (perhaps costs of shipping globally, not just US/China?*).
Having said that, the efficiency of large machinery does increase with size. I remember from a power subject at tech, the lecturer was describing a hydro-alternator that dissipated 1MW in it's main bearing. It seems like a lot, but it was a +100MW unit. Most geared mechanisms don't get near as low as 1% friction loss.

*JD, yes, I did see that link to air freight.

Uncle Yarra.

(I'm too lazy to start an account tonight...)

 
At Tuesday, January 29, 2008 at 2:46:00 AM PST, Anonymous Anonymous said...

JD -

Nice.

Just wanted to give to a 15th comment. Keep up the good work as they say in the peak oil community. I've been reading you for years and You Da Man.

-Johnny Rico

P.S. More savage attacks on Matt Savinar. Please!

 
At Saturday, February 2, 2008 at 5:59:00 PM PST, Anonymous fugeguy said...

cor·nu·co·pi·a (kôrn-kp-, -ny-)
n.
1. A goat's horn overflowing with fruit, flowers, and grain, signifying prosperity. Also called horn of plenty.
2. Greek Mythology The horn of the goat that suckled Zeus, which broke off and became filled with fruit. In folklore, it became full of whatever its owner desired.
3. A cone-shaped ornament or receptacle.
4. An overflowing store; an abundance: a cornucopia of employment opportunities.

So you believe that in 2025 the world will have 11-12 billion people and we will be pumping 115 mbp?

Nice blog.

 
At Monday, February 4, 2008 at 2:06:00 AM PST, Blogger JD said...

So you believe that in 2025 the world will have 11-12 billion people and we will be pumping 115 mbp?

No, I haven't ever made those claims, but if you want to fantasize that I believe that, by all means, enjoy yourself.

 
At Monday, February 4, 2008 at 7:21:00 PM PST, Anonymous fugeguy said...

People tend to lump peak oil followers into one group.

One of the things that bothers me is that peak is not the only concern. If the supply of oil (read liquid energy) cannot grow fast enough to support our current "growth" economy that is based on endless debt rollovers then peak might not matter.

I apologize if my definition bothered you but this blog is without question a monument to the cornucopian position. This is not an insult just an observation.

Like I said nice blog with a lot of useful, albeit one sided information.

 
At Monday, May 12, 2008 at 8:35:00 AM PDT, Blogger Alexandre Costa said...

All things equal... things are often more complicated than most people realize. High oil prices will, sooner or later, put an halt to globalization, in my opinion, if they continue to rise, or even stay this high long enough (120US$).
I work at a cork factory and we ship goods by truck from Portugal to Spain or France and at our last meeting one of our worries was that the cost of transportation practicaly increases every month! Being now 1/4 of total production costs. Thus we'll have to increase prices sooner or later...

 

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