Oil - Blood Of The Earth - Part Four - The Effect Of High Oil Prices On Business

by Darren

Consumers suffer from high transportation fuel costs, as do businesses. In fact, the high cost of transportation fuel cannot be ignored as a primary underlying cause of inflation, which means higher prices on everything for business and consumers. In the last ten years, much of the global economy has come to depend on the concept of cheap shipping of products. As transportation costs increase, the most obvious victim is inexpensive shipping. Since so many of the world’s products travel long distances to arrive at their final destination, skyrocketing gas prices mean an across the board increase in what people pay for products.

Some argue that the effects of high transportation costs will actually reverse globalization.

Globalization is reversible. Higher energy prices are impacting transport costs at an unprecedented rate. So much so, that the cost of moving goods, not the cost of tariffs, is the largest barrier to global trade today. In fact, in tariff-equivalent terms, the explosion in global transport costs has effectively offset all the trade liberalization efforts of the last three decades. Not only
does this suggest a major slowdown in the growth of world trade, but also a fundamental realignment in trade patterns.

In fact, if globalization can be reversed, the entire philosophy of business towards making it cheaper could also reverse. Consumers have become reliant on purchasing prices for the cheapest amount of money possible and business have become accustomed to providing this type of exemplary product at a low cost to them. High transportation costs threaten the very paradigm that modern business has built itself on for the last two decades.

In deed, many indications are in place that show business is adjusting to higher transportation costs by passing the price increase a long to consumers and by laying off employees. Slowed production equals higher employment, which puts a further downward pressure on consumer demand. It’s a vicious cycle.

Inflation is already high in India, in large part due to increased transportation costs as well as a price spike in many commodities.

India’s inflation accelerated more than estimated to the fastest pace in 13 years, suggesting the central bank may add to this month’s two interest rate increases.

Wholesale prices rose 11.42 percent in the week to June 14, after gaining 11.05 percent in the previous week, the government said in a statement in New Delhi today. Economists surveyed by Bloomberg News predicted an 11.22 percent increase.

Central banks worldwide are considering freezing or raising interest rates in an attempt to slow inflation. But if much of the inflation is coming from increased transportation costs, it’s unlikely measures concerning interest rates will have much of an affect.

Right now, a reverse in globalization efforts, a constriction in revenues, and more expensive raw materials costs all bode poorly for business at large.

Continued from Oil - The Blood of the Earth - Historical Causes of the Oil Crisis.