With oil nearing $100 per barrel, Chinese manufacturers are feeling the heat. As it becomes more cost-effective to make goods at home, China’s long time monopoly in the manufacturing sector might come to an end.
Cheap energy fed Chinese boom
During the 1990s, cheap energy made outsourcing manufacturing very profitable. When oil was just $15 a barrel, it was easily justified to send materials halfway around the world for construction, and then send the finished product back to consumers. As oil increases in price, it is hard to justify the transportation of goods to overseas producers.
The Chinese economy benefits from producing outsourced goods. Products and materials are moved to China to be put together where they are then shipped all around the world. Oil’s recent move to $100 per barrel makes outsourcing no longer as profitable or profitable at all.
Other commodities up as well
Higher energy prices also mean higher prices for materials, such as plastics and glass which requires large amounts of energy to produce. Prices for plastics are already up and will probably continue as oil prices rise through the summer.
History tells us that oil prices usually peak in June. Last June, prices were in the $50s and $60s, a far cry from the $100 that we are now seeing in the slow part of the year. If oil prices are up to $100 a barrel during the slowest driving season, what is in store for next summer when the driving season is in full effect?
History would suggest that 2008 will be a brutal year for the consumer if oil prices follow their historical pattern. The news of higher oil prices certainly will not sit well with China’s manufacturing industry, as most of Chinese production is for goods that will be sold on foreign soil.
Service industry benefits
Rising oil prices do come to some benefit for some Chinese industries, particularly the service industry. The service industry is unaffected by rising energy prices, and they may actually see increased business as corporations try to cut costs. Call centers and other IT related jobs are likely to prosper in China and developing Asian countries. Corporations now paying high energy prices will try to make up for energy prices by exporting other jobs.