Singapore Peak Oil

With oil prices now accounting for almost half of total freight costs, it should come as no surprise that soaring oil prices have translated directly into soaring transport costs (Chart 1). Over the last three years, every one dollar rise in world oil prices has fed directly into a 1% rise in transport costs.

The last thirty years have seen an unprecedented growth in world trade—a phenomenon widely credited with providing the catalyst for the rapid industrialization of economies like China and India. In turn, the reduction in tariffs and non-tariff barriers over decades of multilateral trade negotiations was facilitated by the surge in global trade volumes. But in a world of triple-digit oil prices, soaring transport costs, not tariff barriers, pose the greatest challenge to trade.

Higher energy costs translate directly into higher shipping costs. At today’s oil prices, every 10% increase in trip distance translates into a 4.5% increase in transport costs. The duration of a typical sea voyage from China to North America is four weeks. Including inland costs, shipping a standard 40-foot container from Shanghai to the US eastern seaboard now costs $8,000. In 2000, when oil prices were $20 per barrel, it cost only $3,000 to ship the same container. But at $200 per barrel, it will soon cost $15,000 in transport costs to ship from China to the US eastern seaboard.

In a world of triple-digit oil prices, distance costs money. And while trade liberalization and technology may have flattened the world, rising transport prices will once again make it rounder.