The horizon is not so far as we can see, but as far as we can imagine

One way the price of oil hurts the economy

Promoted from comments:

I work for a small freight forwarder. How small? My boss, and myself – that’s it. Last year we shipped over 61,250 million tons of beef, pork, and chicken; mostly to Australia and Hong Kong, but several smaller markets too. You pick up the product, stuff the container, and off it goes. At each point in the transport, whether it’s rail from Chicago to Long Beach, or Long Beach to the actual port, or port to destination, fuel is used and it adds to the total price. Never mind the fuel used in the production of the meat.

In addition to the cost of the space on freight, there is something called FSC – fuel surcharge; on ocean freight it’s called Bunker, or BAF. It was about 18% 2009-2010. Then 21% last quarter of 2010. 23% in January 2011. 26% this month and expected to go up next month from there. So, if your freight rate is 3500 bucks Long Beach to Sydney, you add another 900 bucks for fuel; on every shipment. As the railcars come in to Long Beach, they need to be unloaded and the product transloaded into containers, then dreyed to the ship – that’s about 800 bucks/container – most of that is fuel. So when the P of oil goes from sub-$100 to over $115/bbl (and don’t forget that everyone along the chain is adding their margins), it adds a huge cost. At a certain point the cost of doing business becomes unprofitable to continue doing business – that point is not far off in the shipping world. Have you noticed that the price of a tasty Rib-eye has gone from about $5/lbs to over $10/lbs recently? Most of that is fuel.

In a nut-shell you have the price of product rapidly increasing, resulting in lower demand, resulting in lower quantities ordered/shipped, resulting in product scarcity, resulting in higher prices yet, resulting in lower demand…resulting in lower revenue and therefore workforce reductions…ad naseum… That’s how the price of oil plays out.

I would add, as an aside, that in the longer term this is why I think the big box stores may be a lot less big and you may see a return to more local production.  This is especially true the farther you get from the coast, navigable rivers and canals, as ground transport sucks a ton more energy than sea transport.




European leaders draft a “competitiveness” treaty meant to lower wages and cut pensions


  1. Reality: The real “invisible hand.”

  2. Phoenician in a time of Romans

    The assumption that it makes sense to raise cattle in the Us and eat their beef in Australia or Hong Kong is going to be seen as the historical anomoly, rahther than the “natural state of affairs”.

  3. B Schram

    While i may miss fresh strawberries and blueberries year round, I would gladly sacrifice that luxury for the death of big box stores.

  4. tBoy

    There will have to be decisions made soon – will subsidies for agriculture, grain production in particular, be raised?

    Because without subsidies CAFOs (Confined animal Feeding Operations) are not profitable. A single crop of corn with large areas of bare soil between the rows is not nearly as efficient as a field covered with grass, in some places year around. Grass – if managed correctly – has nearly zero inputs.

    My next door neighbor raises about 20 grass fed calves/year. This year is only the second time in seven years he has either broken even or made a small profit. He owns the land & has nearly zero inputs. His labor is all his own, almost none, and labor is not including that in his equations. The sale barn is less than 10 miles from his house. $1.00 to $1.10/lb on the hoof. Something is wrong.

    People need to smarten up & start buying non-CAFO meat directly from the farmer. A family of four can go in together and make a trip to the processor to pick up their quarter cut, wrapped, labeled & frozen if they so desire. But people better hurry because small processors that deal directly with the public are being relentlessly driven out of business.

    I grow strawberries as a hobby. I get the plants at the farmer price. I own the land and have nearly zero inputs because I use homemade compost, etc. If my labor was priced at $3.00/hr & I decided to sell locally I could not compete with strawberries shipped from California – 2,000 miles away. Our strawberry industry in Louisiana went from 3,000+ acres to about 400 acres in 30 years.

  5. Morocco Bama

    Manufacturers and Retailers will absorb as much of that margin as they are capable of absorbing in order to remain competitively priced for as long as possible, but eventually, in order to not dip below an acceptable level of margin, after looking for all manner of costs savings elsewhere in operations, they have to raise their prices. However, here’s the catch, and I know this because I’ve been there, once the price is raised, barring a miracle, it never comes back down, regardless of whether the fuel price has returned to a more acceptable level.

  6. Idiot

    This will only increase the competitive advantage of big box stores.

  7. Lex

    Actually, food systems like ours are not a historical anomaly at all. Our knowledge of Roman history is mostly centered on political struggles, but that’s not the whole of it. Rome was heavily dependent on a huge food empire, mostly importing grain from Egypt…which was analogous in terms of distance to meat from the US being shipped to Asia given transport technology.

    The failure of the Roman food empire was probably as responsible for Rome’s decline as the barbarians were. And then for a very long time the transport network of roads fell into disuse and Europe became a patchwork of localism.

    That didn’t change until monks figured out that hops preserves beer, and once again grain surpluses could be reliably stored and shipped throughout the year. And a new food empire arose.

    Which is not to say that what we’re doing today is sustainable. It’s not and it will fall. All we can do is prepare ourselves for that.

  8. cathyx

    Does the US produce more than it can consume? We ship beef overseas, but we import beef, lamb, even chicken from other countries. We can certainly raise what we need here, eliminating the extra cost of transport. What am I missing?

  9. zot23

    Even within the USA, this has been true for some time. We live in Colorado, there are quite a few beeves raised here for local consumption. The classic way this is done is to put down money on a certain amount of cow early in the season (1/4 cow, 1/2 cow, whole cow) from a local rancher and then in Fall you go to the local render plant to pick up your meat. It’s grass fed, free ranging beef with no antibiotics, steroids, or ??? (this was the reason to have such an arrangement usually.)

    Lately though, the price has also been getting flat out competitive with store bought beef due to the elevated fuel prices. We ordered a 1/4 last Fall (88 lbs meat) at $2.30 /lb. One stand up freezer in your basement and you’re set. This year, I’m sure the price will raise to be more competitive with the market (this is a business for ranchers after all), but the minimal supply chain does allow these farmers to cut their prices quite a bit. As oil gets more and more expensive, I can’t see how this setup doesn’t become more and more attractive to all consumers.

    Anyway, for what’s it’s worth…

  10. David Kowalski

    Historically, the bankers have played a role in pushing cash crops and increasing the role of foreign foodstuffs and other supplies. It was true of British bankers in the pre-Civil War south. Cotton, tobacco, and other cash crops could produce dependable payments to pay off the bankers. Food was imported either from the North, overseas, or a few areas not suitable to monocrop production: parts of North Carolina and Tennessee, the Shenandoah Valley. The British industrial revolution was fueled in part by leather belts that usually came from Argentina. The IMF is playing the same role today that the British bankers played circa 1850.

    The role of beer in medieval Europe was played by whiskey in the frontier areas of the early United States (see the Whiskey Rebellion). One of the “benefits” of the Civil War and other wars with mass consumption of food, uniforms and other supplies was the invention of new ways to store and prepare foods. It really was very iffy. Lee abandoned Richmond because his food supply was cut off. Sherman decided to limit his exposure to the supply chain by 1) using local blacks rather than cavalry to scout and provide a screen for his troops and 2) living off the land. He rewarded the blacks with 40 acres of land and a mule and did it against the orders of the Secretary of War.

    We have gone well beyond that. Today’s economies look similar in many cases to that of remote boom towns where miner’s basics and luxuries were provided from Chicago or San Francisco. This is inherently local and local to at least contract.

  11. Morocco Bama

    The fact of the matter is, there are now too many people on planet earth to allow for a “everyone gets a pony” global economy. Sure, you can go back to local food production, and it will go back to that, but the “everyone gets a pony” mentality will also have to change, meaning meat consumption will have to be dialed back, considerably. No more meat for dinner every night, or every meal. That will not be sustainably possible considering what we are about to face here in the overly consumptive West.

  12. anon2525

    In a nut-shell you have the price of product rapidly increasing, resulting in lower demand, resulting in lower quantities ordered/shipped, resulting in product scarcity, resulting in higher prices yet, resulting in lower demand…resulting in lower revenue and therefore workforce reductions…ad naseum… That’s how the price of oil plays out.

    This part is poor economic reasoning.

    When the price increases, there is lower demand and that does result in lower quantities ordered/shipped, but that does not result in additional product scarcity. It results in the amount being shipped that there is demand for at the current price. This is not a positive (i.e., increasing) feedback loop.

    Only if the amount of oil being shipped worldwide continues to decline, or is manipulated by speculators, does the price of the product continue to rise. And if demand for the product collapses (i.e., no one will or can buy it at the cost of production and shipping), then the product is no longer made and shipped. And if the product is food, then riots and famine will result.

  13. Morocco Bama

    Also, it doesn’t necessarily result in a decrease in demand for a particular product, or product category. It depends on the price elasticity, among other things, of that particular product, or product group. Yes, overall demand for all things will decline considering a static or declining household budget, but it may mean other products/product groups will be sacrificed to enable a consistent purchase pattern on meat, for example. The price of meat has risen significantly over the decades, yet demand for meat has increased, meaning the price of meat is relatively inelastic. Of course, this is complicated by the fact that increased demand for a product/product group such as meat is further pushes the price up. What the range of the price inelasticity we will see, but I’m sure there is a point where responses to significant price changes trigger significant purchasing responses.

  14. bob mcmanus

    The fact of the matter is, there are now too many people on planet earth to allow for a “everyone gets a pony” global economy.

    That everyone can’t benefit equally definitely does not imply that everyone will suffer equally when or if the global economy starts ratcheting down. I find amazing the people who say “Americans will have to give up beef” Maybe so. but I can imagine other scenarios, like crashing and starving the BRICs until the US has treadmill energy.

  15. skuppers

    Two things: a correction and a response. Don’t know what happened to my calculation (I blame it on the booze) but when I saw the number of product shipped my eyes popped out of my head and I thought “did we really ship THAT much meat? Nope we didn’t. Here’s the real number: We shipped just over 2500 containers last year. That’s 54000 lbs net/container, or 24.5 MT/container. That is 61250 MT. Big difference, but the rest of the figures hold true. Like I said, we are small. Apologies.

    *When the price increases, there is lower demand and that does result in lower quantities ordered/shipped, but that does not result in additional product scarcity.*

    It results in short term scarcity as demand remains fairly constant in the short term, but supply has decreased. The price increases. Consumer will switch to different product or go without over the longer term. Demand will decrease; especially as the new equilibrium price is higher. Producers then cut production and you have long term scarcity. As one of my customers said to me the other day when we had to cancel a few orders because the producer couldn’t fill them “does the man even own one fucking pig?” Keep in my these were future contracts. Over the longer term, with less business being done, smaller concerns lay off workers or go out of business. That will keep demand depressed – less people able to buy, less demand. 2007 was a banner year in my industry. We were doing over 500 containers/month. Then the economy crashes, mass layoffs etc. We are now averaging just over 200/month. Things have stabilized a bit now, but throw in a new shock, like a dramatic rise in the price of oil, and I think we’ll see a repeat. Is that a positive feedback loop? meh. It is the way things are working out; we’re 40% of where we were 3 years ago. Will it reach equilibrium? At some point in the long run, but then again, in the long run we’re all dead aren’t we?

  16. beowulf

    “This is especially true the farther you get from the coast, navigable rivers and canals, as ground transport sucks a ton more energy than sea transport.”

    Right, the most expensive part of shipping is getting cargo to the port. East Coast and Gulf ports are expanding capacity because once the Panama Canal expansion is finished (2014), much of the Pacific port traffic will shift over because its cheaper to ship goods that can reach the sea by internal waterway than those that come in by truck or rail.

  17. Ian Welsh

    Thanks Skuppers, correct in the post.

    I have gone on a bit more about this and some digressions in a longer post:

  18. skuppers

    *The price of meat has risen significantly over the decades, yet demand for meat has increased, meaning the price of meat is relatively inelastic.*

    I see your point and think it’s basically true, but people have alternatives to meat – they can go veg; getting their protein from a variety of other sources. Not from a save-the-cows mentality, but because they can’t frickin’ afford it. I think there is a great amount of elasticity in the demand for meat. As for oil? There ain’t no substitute. At least no viable one presently. In 2009 the demand dropped and so did the price, but then again so did the demand for labor (read layoffs/unemployment); folks not going to work so less demand for oil. I agree that static household income, or no income reduces demand, but it’s really a result of a growing population clashing with a necessary but declining availability of a crucial resource, isn’t it?

  19. grs

    Have you noticed that the price of a tasty Rib-eye has gone from about $5/lbs to over $10/lbs recently?

    The problem is that it doesn’t if the beef in my grocery store comes from Texas or from Illinois. The store sells “beef”. I don’t get to decide where it comes from. Yes, I can search out local sources, but if you go to chain store, that is not a possibility.

    I keep an eye on the Blatic Dry Index and it seems producers are just sitting on their goods, waiting for prices to go up for them to ship. Contract prices seem pretty low right now for the people looking to ship. As if shippers are desperate just to keep their ships moving. As skuppers noted, people still want 2007 prices, when that isn’t going to happen for a while. It find it similar to the financial world not giving out loans and holding onto their cash.

    And that’s my understanding of the oil industry too. Most producers are sitting on stockpiles of oil, just waiting to ship. Short term thinking – Prices at the pump are increasing due to social unrest in the Middle East, but not to the big oil producing countries (yet?). So I’m a little befuddled by the rise in BBL cost. I think it’s pure speculation at this point, again. Long term, I think Ian and skuppers are right on.

  20. Ian Welsh

    Don’t expect these things to always work in smooth curves like the textbooks. People want meat, but when the demand collapses it will really collapse. Also, I suspect, though I can’t say for sure, that a lot of demand for meat has shifted down the curve: McDonalds style crap rather than rib-eyes. Unhealthy meat rather than organic.

    What seems to happen is that they make the regular product shit, and then charge more for what used to be the standard product. When I was a kid, I could get a good hamburger for nothing at a mum and pop fast food joint, now there are “gourmet” burger places that promise you that the cow you’re eating hasn’t been fed other cows and so on, that properly age the meat, and so on.

    Much like airlines. I remember flying coach in the 70s. Nowadays the same product is called business class (or whatever.)

  21. grs

    Damn, I got back from grocery shopping and I buy bison burger every once in a while. Used to be around $5-$6 a pound. It’s going for $10 now! Wow. I knew cattle prices were rocking, didn’t know bison was taking off even more.

    Yeah, food is something that I have a hard time compromising on. Especially for my kids. I would rather have good, quality food than whatever the new iphone/Mac product gadget is. But I disagree a bit on the regular = crap product line. People historically used to spend a significantly larger portion of their income on food than they do now. Food quality has become less of a priority. If by regular you mean the most consumed, then yeah, I’ll go with that. Buying a half side a beef has always been a pretty good value until recent trends. The convenience of going to the grocery store and having the middle men between you, the rancher, and the butcher is what’s lead to a general decline in quality. Profit margins.

    But it hasn’t been a change overnight. I think people have gotten used to settling. It’s hard finding a good butcher, a good bakery, etc. Mega farms, consumer spending trends, etc. – it all has been based on the relative low prices of fossil fuels. Which is the main point of this thread. In theory, people should be able to get better quality, fresher, and quite possibly cheaper food if it doesn’t have to be shipped half way around the globe. But if industry figured out a way to do that, I am extremely doubtful that industry would pass those savings to the consumer. There would be no incentive to cut current prices since people are already willing to pay them.

  22. Lex

    While i live in a place that sees incredibly high food prices because we’re so far off the main transport corridors, i don’t have much knowledge of food prices at the grocery store.

    This household is off the industrial meat grid and partially off the industrial food grid. (We could be off it entirely but for staples like sugar and flour, and i’m expanding my own production every year.) Good, local food tends to be more expensive to purchase. That sucks but it’s god damned hard to be a small farmer…most have the pleasure of full-time farming and a full-time, off-farm job too.

    Industry isn’t going to find a way because it has no interest in doing so. We’ll have to cultivate parallel institutions and cut industry out. That means higher prices (probably) for We the Consumer, but it also means that all the money from your pocket goes directly into a neighbor’s pocket. I’d rather have the money recycling around my community than save a bit and have the money go half way across the country (or the world).

    In short, nobody’s going to fix this for us simply. It’s up to us. I think that’s the big change coming to the American consciousness: it’s up to us. We’re not ready but perhaps WI is showing that there are inklings, beginnings of that afoot. At least i hope that’s the case.

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