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What does sustained high energy prices mean for the world?

Oil hits a record US$112 a barrel today or thereabouts. It’s now at its inflation adjusted high. And Goldman thinks its on track to hit U$200 barrel within two years.

What does this really mean for the world. Sure more expensive gasoline, higher air ticket prices, but how is the face of the world going to change?

The ten biggest changes are probably going to be:

1. The death of suburbia: The high cost of fuel is going to force consumers to relook allocations of monthly budgets. As the fuel bill becomes larger, long run consumer choices are going to be skewed towards shorter daily commutes, living nearer the office. Bigger cities will expand dramatically. This should be the death knell of small town middle america as high transportation costs reduce the viability of communities.

2.  The resurgence of local manufacturing for some goods. The cost of trade overall is going to increase, and fewer low value goods are going to be exported over time. Value density of exported goods will increase. Some manufacturers of low value goods are going to site them closer to their consumers.

3. A drastic increase in fuel efficiency of vehicles. Within 5 years, what the US Senate has been unable to legislate for the last 20 will occur. Consumers will naturally prefer high fuel efficiency cars. This should be the last stand of the SUV.

4. An increase in the power of oil producers: No brainer. But this is also going to lead to a world which needs to be much more sensitive to the needs of Muslim communities over all.

5. Big infrastructure projects that reduce travel time and cost which depends on oil. The Kra Canal, the Silk Road rail project, perhaps even an Artic Route from Russia to the US. Spending US$100 billion on the Kra would not seem that much if were compared to the 7-14 days saved by every ship through the Straits of Malacca for the next 100 years.

6. Increases in food prices to levels never before seen. There is going to be a tight coupling of the world’s food, energy and arable land markets. Tough choices are going to have to be made by governments and consumers on what kind of crops and for what purpose is to be planted. Food is going to take up a much larger chunk of income.

7. Decrease in disposable income, and increase in poverty. Or at least a moderation of the current trends if not a reversal. If poverty be defined as lacking access to basic necessities of food, shelter and water, then high oil prices are going to push people into poverty as the basic necessities are going to cost more.

8. Resource arbitrage. Should you use a barrel of oil of energy to produce 100 gallons of drinking water from the sea? Or to produce fertilizer. Skewed incentives on the part of governments may make one activity more profitable than the other.

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April 10, 2008 - Posted by | Uncategorized | ,

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