There was an article in the USA Today on Aug 22nd that really struck a cord with me – “Transportation Costs Could Alter World Trade.” The article continued the theme of articles that ran in the Money Section for most of the summer about the rapid rise in energy cost that is affecting the world.
Instead of focusing on automobiles in this country, this article is focusing on a section of the transportation grid that has been largely overlooked -shipping by sea. For the last 20 years, businesses have been moving their manufacturing base to various parts of the world to take advantage of cheap labor, lower environmental laws, lower taxes, etc. The one key area that has allowed this globalization of the manufacturing base is the availability of cheap oil. It has been far cheaper to manufacture various goods overseas and ship them back to the USA by containers on ships.
However, since oil has been running above $120 a barrel for most of the year, corporations are rethinking portions of this supply chain. Here is a great example of the increase of shipping costs companies are experience base from the article – “Shipping a standard 40-foot container from Shanghai to the U.S. East Cost in May cost about $8000 vs. $3000 eight years ago when oil was round $20 a barrel.” That is a 266% increase in costs! How can any company sustain those costs over a long period of time? They can’t, so something has to give.
One of two things must happen here. First companies could raise prices, in turn increasing inflation. Not the best option as we all know. The second option is to reverse the trend of the last 20 years and reinvest in this country with new a manufacture base. In doing so, this will cut their transportation cost by 200% since the markets are lot closer to distribution points.
In my home state of Virginia we are already seeing that trend with the announcement of Ikea manufacturing plant in Danville along with the opening of Rolls Royce aircraft engines plant in Price George. Both of these companies see the advantage of being closer to their prime markets and taking advantage of lower transportation costs. steel, furniture, apparel and other consumer goods are also starting to see this trend is occur.
So what is the net gain here besides lowering the cost of these corporations? Good question. For the U.S. the advantages are huge. We could very well start to reverse the decline in our manufacturing base, increase jobs, increase tax revenue (local, state, federal levels), and lower the National trade deficit. Before we all get giddy about this prospect, we as nation will need to realize this trend will not happen overnight nor will it occur on a massive scale.
Not all companies are going this route instead they are looking at other options that will help offset fuel cost. One option being implemented is slowing the container ships down as they cross the ocean. Instead of cruising from Asia at 30+ knots, ships will be setting new cruising speed at 20 knots. The draw back here is that your transit time increases which could potentially cause an increase in shortages at the retail level.
Another way to possible supplement this slowdown is by adding more ships to these lanes. However you would need to bring ships from retirement and retro fit them to take advantage of fuel efficient technology (like there is any for ships). This plan would take time and money which could be easily passed onto the consumer who could very well stop buying the products if they get too expensive.
Each company will have to determine what option best fits its balance sheet; either to invest in new manufacturing plants, distribution centers, labor, etc in the U.S. for the long haul or continue to ship goods from Asia with higher cost and longer transit times. If companies do go with reinvesting in America then these high oil prices might be a blessing in disguise after all. Time will only tell.