More on De-Globalization: Oil, Transport Costs and Inflation

Following up on this post from October 2006, when oil was only $58.88 (WTI,daily average) a barrel, consider this excerpt from today’s Thomas Net:

The impact of rising transportation costs, driven significantly by high oil prices, is already being seen in capital-intensive manufacturing that carry a high ratio of freight costs to the final sale price. But a new report has determined that higher energy prices are affecting transport costs at such an unprecedented rate that “the cost of moving goods, not the cost of tariffs, is the largest barrier to global trade today.”

The CIBC report upon which this article is based focuses on ship transport. One interesting tidbit:

The cost of shipping a standard 40-foot
container from East Asia to the US eastern
seaboard has already tripled since 2000 and
will double again as oil prices head towards
$200 per barrel…

The note discusses how the decreasing in tradability of goods from China and other low wage countries will tend to release downward pressure on US wages and prices, making the Fed’s job of maintaining price stability more difficult. In the abstract, I’d agree with that point, to the extent greater insulation from foreign competitive pressures should give greater pricing power to domestic producers, in a monopolistically competitive setting (see a little math here).

However, as noted in this post, Chinese import prices have been rising, so it’s not clear how much downward pressure is being exerted by China now.

What is also of interest to me is the trend in air freight, which was critical to so much of the New Economy just-in-time innovations. In this regard, the trend in declining air freight costs has reversed course over the past few years. And the pace of increase has accelerated with the dollar decline and oil price increase.

Figure 1: Log real oil price (blue) and log real import air freight cost index (red) and export air freight cost index (green); series deflated using the CPI-U. NBER-defined recession dates shaded gray. Source: BLS via FREDII, BLS, Import/Export Prices, 13 May 2008 release, and NBER.

Air freight costs are rising for two reasons — higher oil prices as noted above, and also a weaker dollar (econometrically, it’s hard to disentangle the effects, given the short data span available).

If this reversal of air freight cost trends is mirrored by the cost of air freight relative to sea freight, then there are a number of other implications that arise in terms of the gains the US obtains from trade. And indeed it may be that countries close to the US might gain relative to producers far away from the US [1]; think China and Mexico.

Returning to the issue of inflation, to the extent that the euro area has experienced a smaller increase in oil prices in domestic-currency denominated terms, the euro area will will have also experienced a correspondingly smaller increase in transport costs, and hence a smaller increase the degree of insulation of the economy from foreign competition.

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17 thoughts on “More on De-Globalization: Oil, Transport Costs and Inflation

  1. odograph

    Will this produce a west coast advantage? (I keep seeing these east coast shipping prices, and from my perspective, say “who cares?”)
    … there is rail from here to the western half of the US.

  2. Buzzcut

    And yet the yen is back up to 107 to the dollar, and climbing.
    Dollar depreciation is played out. To the extent that commodity prices were tied to dollar declines, they’re played out too.

  3. MarkS

    I do not share your opinion that “Dollar depreciation is played out”.
    From my perspective, the major factors controlling Forex dollar exchange values are:

    • The US current account deficit at $739 Billion/year (as of quarter 4, 2007), is unsustainable. Imports have to decline massively and/or imports have to increase stratospherically.
    • The rate of US dollar denominated shadow money expansion via securitization and derivative vehicles has to decline. Unchecked and unregulated expansion of the (M3) money supply is a leading cause of dollar inflation.
    • Negative real yield on Treasury securities reduces demand for dollars in the financial markets, causing exchange rate decline.

    Happily, I see all of these factors beginning to change… The necessary corrections are so large, that I fear that at least 8 years will pass before the dollar’s slide is completed.

  4. GK

    I don’t see this is de-globalization. Rather, it accelerates technologies that scale to even faster globalization.
    1) Internet technologies and network speeds accelerate, enabling videoconferencing, Webex, Wikis, etc.
    2) Alternative energy technologies accelerate (like Solar).
    3) There will be a large push to make products lighter to reduce airshipping costs, thus causing innovation in new nanomaterials. Most car manufacturers are going to reduce car weights by 10-15% by 2012. Planes are getting ligher too – the Boeing 787 uses 20% less fuel, due to lighter materials being used in the body.
    Thus, all of these technologies cause adjustments that continue globalization despite high oil prices. It is silly to assume that technology is static, and that short term inelasticity in oil demand does not adapt in the longer term (3-5 years).

  5. GK

    The Western Hemisphere has just 14% of the world’s population, but 40% of the world’s nominal GDP.
    Therefore, Pacific shipping is decidedly one-way, and Atlantic shipping also is (to a lesser degree).

  6. DickF

    Menzie wrote:
    Air freight costs are rising for two reasons — higher oil prices as noted above, and also a weaker dollar (econometrically, it’s hard to disentangle the effects, given the short data span available).
    Menzie, you are spot on identifying these two reasons as why air freight costs are rising, but why in the world would you want to “disentangle” them? Higher oil prices are because of the weaker dollar. To disentangle, as you put it, is to disembowel, high oil prices and a weaker dollar are Siamese Twins.

  7. Anonymous

    Robert Mundell had some interesting comments about China in an interview released by Reuters June 3, 2008.
    VALENCIA, Spain A major dollar crisis could come within five years and China is discussing reforms to the global monetary system to protect its $1.6-trillion (U.S.) reserves pile, says Nobel Prize-winning economist Robert Mundell.
    Mr. Mundell, who has regular contacts with Beijing officials, said they are considering proposing ways to fix major currencies including the dollar and the euro, in a system similar to the one which operated under the Bretton Woods agreement from the end of World War Two until the 1970s.
    There’s no doubt about it that inside the Chinese government there’s a lot of discussion going on. I’m not sure how they’re doing it but I know they’re going to get an input from me, Mr. Mundell told Reuters in an interview.
    Without reform, the global monetary system is headed for a dollar crisis within years, Mr. Mundell believes.
    This is not a crank who is calling for reform.
    China is worried about its pile of about $1.6-trillion in foreign reserves, built up during years of U.S. trade deficits, which loses value as the greenback depreciates.
    What you need to have is an International Monetary Fund that’s going to take some of these excess dollars, put them into a substitution account inside the IMF or some other institution and then use that and create what is a new international currency, said Mr. Mundell.
    This kind of proposal would be very acceptable inside China. The Chinese are thinking in terms of this, he said.
    Would the value of this new currency be backed by a basket of currencies or would the currencies be used to buy something like gold for an even more solid backing?
    For years, China has come under pressure from U.S. and European authorities to allow its currency, the yuan, to appreciate, in order to make Western goods more competitive. But Beijing has resisted.
    They don’t have many pre-conceptions. They don’t have a belief obviously that floating is a good idea, whereas the European Central Bank and the Americans think that floating is the best of all possible worlds, Mr. Mundell said.
    Could this be a hint at why China is growing so fast?
    Fixing exchange rates would favour the euro zone, which is now battling with a euro at around record highs against the dollar, said Mr. Mundell, who has often been referred to as one of the intellectual fathers of the single European currency.
    I think the risk now is that the high euro is going to build in pressure which is going to involve deflationary pressure in the asset markets, housing and so on, and that’s going to cause a problem, a nagging problem, that’s going to go on for a long time as long as the euro is as high as this, he said.
    The swings in the dollar-euro exchange rate are big problems, and the problem is exacerbated by the fact that the Americans get the benefit of these swings and Europe gets the wrong end of the stick.
    Does this suggest an inflationary currency war with Europe while China continues to grow?
    Food for thought.

  8. Charles

    That’s very interesting, Anonymous. The question should be raised at Brad Setser’s blog as to the mechanics of taking Chinese dollars and placing them in an IMF account would play out. I don’t think I see it being large enough to deal with China’s problem or, if large enough, that it wouldn’t ultimately unravel. But then, that’s why it makes sense to ask an expert.
    Menzie, one point that could be relevant is that oil dependence within the category of domestic transportation costs varies by nation. The US has been very dependent on trucking and air freight, while trains are more common elsewhere.

  9. DickF

    You actually believe that Brad Setser is more of an expert than Nobel Laureate Mundell. Steser is good but I wouldn’t put him in the same class with Mundell.

  10. The Market Traders

    How Do Oil Prices Compare in Other Currencies?

    Menzie Chinn submits: Some of the explanations for the dollar jump rely upon the perceived weakness in the dollar’s value (and hence, by extension, Fed policy). Does this make sense? As I’ve remarked before [1], there is likely a two way causality betwe

  11. aditya

    I read a lot of blogs about how global oil prices would affect the auto sector. Surprisingly, the oil price hike has not had a major effect on automobile sales in India. Any explanations?

  12. JDH

    Aditya, sales of U.S.-manufactured vehicles are particularly hard hit since the larger cars have traditionally been their market niche.

  13. aditya

    Youre right. But the Indian car market is moving towards the mid segment range now due to reduction in car prices and an increase in per capita income(almost 14% a year).

  14. NJV

    Aditya – another key reason why Indian car sales have remained strong: Indian domestic energy prices are heavily subsidized by the government so rising global crude prices haven’t translated sharply rising domestic fuel prices (this should change soon as the subsidy is becoming unsustainable – driven by the sharp rise in crude prices recently and the fact that the rupee is no longer appreciating against the US$ and is rather depreciating)

  15. a

    high oil prices are affecting our transportation.The recent 140 percent rise in producer prices for intermediate diesel ans airline fules has affected the prices of passengers and freight transport.High prices have hit the travel and trucking industries particaular hard and have led to the closeure of some operations

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