All Things Considered: Distance Costs Money

In case you haven’t noticed, fuel
costs hit record highs this year. And those who analyze oil supplies
say this isn’t a short-term event.

In case you haven’t noticed, fuel costs hit record highs this year. And those who analyze oil supplies say this isn’t a short-term event.

They admit there will be some zigging and zagging of prices but the trend to lower supplies and higher prices is unstoppable.

The immediate effects are obvious – people complaining at the gas pumps. But it goes way beyond that. Behaviour is starting to change with people switching to more fuel-efficient vehicles. Carpooling is becoming more widespread, companies are starting to subsidize employees’ cost of getting to work and there are many, many more people working from home.

At an individual level these things are important. But they are small in the grand scheme of things.

More interesting are the evolving effects on commerce.

One of the great, underreported stories this year is asphalt. It is one of the lowliest uses of oil, but it is also one of the most significant. This year asphalt prices have surged.

The result is that municipalities and provincial governments are paying more to repair and rebuild fewer and fewer kilometres of road.

An example of this is the municipality next door to mine.

I cover that municipality’s council meetings for a local paper and got an up close look at what is happening there.

During its budget deliberations earlier this year the council decided to continue with its long-standing paving program. The cost was estimated and this year’s portion of a 15-year plan approved.

A couple of months later the tenders for the work returned to council and the costs were one third higher than estimated all because of the higher price of asphalt. With the tax rate already set and no money available from any other source, one third of the work targeted for this year was set aside.

I have been told the same thing is happening nationwide.

Given that the infrastructure deficit in this country is estimated in the tens of billions and municipal councillors are routinely elected on promises to keep taxes down it looks like the roads are going to get very bad indeed.

While provinces have more resources to play with than municipalities they too are being squeezed and that will take a toll on highways.  Since it costs more, in both fuel and repairs, to drive on bad roads than good ones that too will drive up transportation costs.

Bottom line, local and regional transportation costs are going up.

But those increases are miniscule compared with the increases in the cost of shipping across oceans and continents. Ocean freight rates have almost tripled since 2000. It now costs more than $8,000 to ship a container from China to New Jersey.

In a recent report by CIBC World Markets Jeffrey Rubin and Benjamin Tal write: “In a world of triple-digit oil prices, distance costs money.”

All of this makes a real mess of the just-in-time manufacturing strategies established in recent decades. Cheap oil underpinned the scattered factories and fleets of trucks required to make this work. With oil no longer cheap companies are rethinking their manufacturing models with an eye to squeezing out transportation costs.

Already we’re seeing a shift to rail for the long distance shipping of containers. Some companies are even looking at reinventing the warehouse and putting them at railheads.

Now that really would be a blast from a past when every community of any size had a warehouse district.

But this goes way beyond even those things. With distance equalling money, local products have an advantage. This is especially true for agricultural products, which can be expensive to move.

While the 100-mile diet and other initiatives have been generating headlines as environmental movements, it looks as if they will soon become more than trendsetting ideas. The reason will be cost. If transportation starts to account for 10, or 15 or 20 per cent of a product’s price, then it leaves a lot of room for local producers to grab the local market.

This advantage will grow even further as the world moves to methods of charging for CO2 emissions. It’s already happening in Europe and many parts of the U.S. and, while it will no doubt be a divisive political debate in Canada, it will happen. It’s just a question of how and when.

Charging for CO2  will further increase the cost of transportation and further enhance the local advantage.

Thirty-five years ago, when rural schools all across Ontario were being consolidated, a professor of mine called school buses the “yellow plague.” He said hauling students all over the countryside was expensive, inefficient, socially disruptive and resulted in no academic benefit.

The bottom line in all this is that soon everyone will be thinking and acting local, in more ways than we can imagine, because it will be the only thing that makes economic sense.