The world is already getting a little smaller

The debate over rising energy prices has lately focused on how an early rise in commodities prices might stall an economic recovery. But two well-publicised books this year have focused on the effect of permanently higher energy prices on the shape of the world economy, rather than just its growth rate.

One is Jeff Rubin, whose ‘Why your world is about to get a whole lot smaller‘ says higher oil prices will make the importation of previously cheap manufactured goods unaffordable, prompting a return to localised economies. Christopher Steiner’s ‘$20 a gallon‘ makes a similar point.

Several interviews by the FT’s Richard Milne suggest this shift might already be taking place: some large manufacturing companies are already localising their production, partly because of higher energy prices:

“A future where energy is more expensive and less plentifully available will lead to more regional supply chains,” Gerard Kleisterlee, chief executive of Philips, one of Europe’s biggest companies, told the Financial Times.

Ernst & Young concurred, with the firm’s head of supply chains Dan O’Regan saying we will see “smaller, more regional supply chains” – although he puts the emphasis equally on the cost of carbon, which is increasingly being taken into account by global companies as the US moves towards introducing a cap-and-trade scheme.

What’s interesting – and supportive of Rubin’s and Steiner’s arguments – is that these moves are purely based on cost. But it’s also worth noting that all three are talking about ‘regional’ rather than local moves – Philips’ Kleisterlee and David Bartlett, an economic adviser to accounting group RSM International, both gave examples of US companies using Mexican rather than Asian suppliers. Western European companies, in turn, might use Eastern European suppliers rather than China.

It could be the first signs of a radical change in the global economy – but it might also show that international trade will adapt to higher energy prices so gradually that we’ll barely notice.

Related links:

Crisis and climate force supply chain shift (FT, 09/08/09)
Jeff Rubin interview: ‘When you spend more on fuel than food, an economic contraction will follow’
(FT Energy Source, 03/06/09)

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