Musing about the Future, Part II

Rising fuel prices are bringing some reversals to globalization trends, and bringing some traditional forms of manufacturing back to the United States.

I would like to say "I told you so," but apparently I didn't. After careful perusal of my archives it appears that many of the thoughts I've had about the future of energy and global markets never made it to the electronic page. So far, only my husband, and my colleagues on the Technology Committee have had to listen to those ideas, which were prompted last summer by reading Thomas Friedman's The World is Flat

Today, the New York Times has a piece "Shipping Costs Start to Crimp Globalization" which documents that changes I was predicting for the future have already begun. Globalization, the dispersion of economic activities across the world is driven by the search for cheaper and cheaper labor, and considerations of monetary exchange rates, tax policies, and environmental restrictions. Globalization has been made possible by cheap transportation and the global spread of instantaneous digital communications. Friedman and others have viewed the globalization process as moving in one direction only, to greater and greater integration of all localities into one world-wide economic web.

Thomas Friedman's description of what happened to the world up through 2006 is excellent. However, as I read The World is Flat last summer, it occurred to me that Friedman's predictions for the future did not take into consideration what would happen when the cost of fuel made transportation a more important cost than labor. That was in July 2007, when the cost of oil was approximately $70 a barrel. The cost of oil yesterday, August 1, 2008, was $125 a barrel an increase of seventy-nine percent - and this is nearly $10 less than the all time weekly high of $134 a barrel last month (July 2008).

Since cutting costs is the driving force behind globalization, it seemed to me logical and reasonable, that as the cost of moving goods across oceans become more expensive this would offset other costs (such as labor, taxes, and environmental controls) and make production of goods closer to end consumers more appealing. Moreover, a rise in transportation costs seems inevitable given the finite nature of the primary transportation fuel - petroleum.

As much as oil prices have risen (and with expanding economies in Asia to blunt any declines in consumption from the U.S. and other advanced industrialized countries) traditional economic theory would predict rises in world oil production. Albeit that many oil producing nations (especially within OPEC) are not market economies, even state owned industries are not completely immune to the pull higher prices can have on production levels. However, the Energy Information Agency of the U.S. Department of Energy gives oil production figures that show only small increases in world production in recent years, and even small declines in early 2008.


Oil production from Saudi Arabia where oil is state owned rose from August 2007 to January 2008, and then declined slightly in the first quarter of 2008. In Russia, where major efforts have been made to privatize and modernize oil production, saw small but steady production declines from August 2007 through April 2008. The overall pattern of world oil production in this time of rising prices suggests that oil is becoming more difficult and more expensive to find and produce. The easing of oil prices (and the price of gasoline at the pump) in the last three weeks, does not signal a long term return to cheap fuel, but a short term adjustment to the downturn in demand in the U.S. The long term outlook is for fuel prices to continue to rise.

The NYTimes article provides some specific examples of industries that have already bucked to the globalization trend due to increased costs. One of particular interest to people in central Appalachia were I'm located is a return of furniture manufacturing to the region.

Until recently, standard practice in the furniture industry was to ship American timber from ports like Norfolk, Baltimore and Charleston to China, where oak and cherry would be milled into sofas, beds, tables, cabinets and chairs, which were then shipped back to the United States.
But with transport costs rising, more wood is now going to traditional domestic furniture-making centers in North Carolina and Virginia, where the industry had all but been wiped out. While the opening of the American Ikea plant, in Danville, Va., a traditional furniture-producing center hit hard by the outsourcing of production to Asia, is perhaps most emblematic of such changes, other manufacturers are also shifting some production back to the United States.
Among them is Craftmaster Furniture, a company founded in North Carolina but now Chinese-owned. And at an industry fair in April, La-Z-Boy announced a new line that will begin production in North Carolina this month.

The U.S. steel industry is another that has seen resurgence due to rising transportation costs, while steel imports from China have been steadily declining in recent years.

The assumption by Friedman (and others) that all industries would eventually move into "just-in --time" supply lines that span the globe, is likely to run afoul of rising transportation costs and greater uncertainty of fuel supplies. The NYTimes article gives a few specific examples of industries opting for local suppliers for components in their products, which hints at a future in which more localized neighborhood based integration of groups of producers and suppliers may reappear in the American landscape.

This does not mean that there will ever be a complete retreat from global trade. As Brian Fagan discusses in The Great Warming even during the unpredictable precipitation in the Sahara Desert during the "medieval warm period" camel caravans carrying a variety of goods continued to be regular feature of northern Africa's economy. However, it does mean that the future global economic landscape may not be as "flat" as it is today.