This is a guest blog post by Donald Stadler, an American living and working in London:
Washington Post economics columnist Robert Samuelson recently wrote a piece about the trade impact of the oil shock on the US, quoting economist Jeffrey Rubin of CIBC World Markets, who predicts that oil will go to $225 a barrel/$7 a gallon before this is finished.
Apart from the obvious impact on per-liter fuel prices in Europe (I have heard of diesel prices as high as £1.99 a litre in the UK), there are some interesting side effects on world trade.
The bottom line is that shipping cheap manufactures thousands of miles make much less sense than it has this past decade. Since 2000 the cost of shipping a 40 foot shipping container from East Asia to the US has gone from $3000 to $8000, and if oil prices go to $200 a barrel this will go to $15,000 per container.
Some production will be brought back to the US and Europe, and other production will go from Asia to nearby low-wage countries like Mexico (for the US) and Poland/Bulgaria/Romania, and perhaps Russia and Turkey (for the EU). This may be good news for factory workers in Italy and in depressed areas of Germany and the UK.
Inflationary pressures will be higher without cheap Asian manufactures to offset rising prices on fuel and food.
In Asia India should gain relative to China, because India exports more services and fewer goods than China does. Countries which export high-quality manufactures (Germany, Japan, France, the Netherlands, US) should benefit compared to China, because such manufactures tend to have higher value compared to the shipping costs. Low-bulk manufactures (think microchips) will see particularly little impact. Japan should also benefit compared to China because high-quality Japanese goods won't be as badly hurt by high shipping costs.
In the short term China seems to be the biggest loser, with other Asian exporters also seeing some impact. China may be obliged to develop domestic market and possibly other Asian markets for it's goods, or increase the quality and price of it's manufactured goods to offset increased shipping costs. China currently buys Brazilian iron ore and ships it home for smelting; it may have to look for Asian sources or do the smelting in Brazil because shipping now more than doubles the cost.
Biofuels made from 'waste products' have become commercially viable at this price point. The cost to make these may be as low as $1 a gallon. If that is true Samuelson advocates that western governments set a floor price of between $50 and $80 a barrel for oil by setting a tariff which only goes into effect if world oil prices fall below this level. This will assure domestic producers of alternate fuels that their investments will have a chance of being competitive - that OPEC cannot drive them out of business by dropping the price of oil as it did during the 80's.
In a more general sense this will shrink trade networks somewhat. It makes sense to look for local substitutes for goods which once came from Asia, or from the US to Europe or vice versa,