Tuesday, April 19, 2011

At What Oil Price Does it Pay to Ship Agricultural Products?

Will Martin, who writes the blog "Peak Oil Proof Your Portfolio," has an amazing new post up speculating on how Australia will fare in future, in light of peak oil and climate change. Because he has a background in oil rig sales, he knows of what he speaks when he discusses vulnerabilities in shipping at higher and more volatile oil prices, so I chose a small portion of his section, "Sea Transportation" to excerpt. This subject is of utmost importance when trying to imagine how our future Ag trade might become impaired due to decreasing oil supplies. The writing also has a section on agriculture, which you might want to check out.

With oil at $100 per barrel, the cost for a Norwegian company to ship a 40-foot shipping container of lingonberry jam from Norway to the UK would be about $350. The cost for an Austrailian company to ship a 40-foot shipping container of vegemite from Austrailia to China would be about $6,600. With oil at $200 per barrel, shipping the lingonberry jam would only cost $650 while shipping the vegemite would cost $12,200. The average shipping container holds about $300,000 worth of goods (with a $100,000 standard deviation). With profit margins of less than 2% in the food industry, the $6,000 profit for the Australian company shipping vegemite to China quickly disappears as oil prices rise, while the Norwegian company will continue shipping lingonberry jam to the UK at a profit.

International shipping freight prices have fallen, of late, due to an excess of supply having been built out. Read here: Cheap freight, behind unusual crop deals, to stay. Costs of shipping corn from the US Gulf to the German port of Hamburg, for instance, have tumbled by 24% to $28 a tonne over the past year, and to China by some 21% to $58 a tonne, increasing the feasibility of transporting grain over greater-than-usual distances to importers. Today's lower rates are an aid to all food importing nations, helping to offset the higher fuel prices.

Currently, ten percent of world oil production is used for ocean transport. When you consider that modern grain production is closely tied to fossil fuel costs and when sea transport costs are added, rising fuel prices have sobering thoughts and implications.
K. McDonald

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