Oil Prices & Structural Changes

With oil prices creeping higher, and assuming demand for energy continues rising while supply of easily accessible oil is reaching a bottleneck, there is growing impetus for structural changes in the global economy. P&G management in a recent FT interview (“Oil costs force P&G to rethink its supply network”, June 27) stated that their transportation cost now exceeds the operating costs of their factories due to energy prices. This causes P&G to contemplate relocating their factories to where the final consumption is, instead of where the labor costs are lowest. Since USA is still the largest consumer country in the world, this global phenomenon might very well lead to some degree of the unwinding of outsourcing in US. Outsourcing and globalization started with the plunge in transport costs and time over the last century fueled by the industrial revolution, enabling companies to locate different parts of their supply chain to wherever it was most cost-efficient. The rising energy prices will cause many countries to consider outsourcing in more dimensions.

Another more obvious structural change in the economy is the adoption of alternative energy sources such as solar and wind power. However, this is ironically harder to accomplish in developed nations such as USA than developing countries such as China. Where infrastructure is already built, a overhaul of the current system would be extremely costly. Also, traditional energy firms have more incentives to guard their dominance in the developed nations through lobbying. However, the adoption of alternative energy is inevitable unless more supplies of oil that are easily extractable are found. Solar power might also prove to be revolutionary for another reason: users are now able to buy access to power, instead of buying units of power.