Curious Capitalist

How Higher Fuel Prices Could Help American Manufacturing

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Ariana Lindquist / Bloomberg via Getty Images

A worker inspects the body of a vehicle on the production line at the Bayerische Motoren Werke AG (BMW) manufacturing plant in Spartanburg, South Carolina, U.S., on Wednesday, Jan. 11, 2012. Bayerische Motoren Werke AG (BMW), the world's largest maker of luxury autos, will invest about $900 million in its South Carolina factory to expand capacity and prepare the facility to produce a new sport-utility vehicle.

The revival of Detroit has been a big story over the past couple of weeks. All three major automakers have posted their best profits in years, and GM posted its highest ever-annual profits earlier this month. It’s a boon for the Obama administration and proponents of the bailouts, and many would like to think it heralds the beginning of a major manufacturing renaissance in this country.

The truth is that in the short to mid term, at least, the growth of manufacturing jobs in American may have less to do with cars than it does with fuel. Gas prices are climbing, up 13.3% in 2012 and edging close to $4 a barrel. That, along with a weak dollar and rising wages in China “is driving up shipping costs for companies” notes Mitch Free, the CEO of, a kind of eBay for the manufacturing industry.

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Indeed, for a long time, low energy costs have meant that American business focused mainly on the cost of labor when making outsourcing decisions, and that was almost always likely to be cheaper in the developing world. Now, higher energy prices are changing that equation, as is the notion of just-in-time production. As Free points out, “When you order from a factory on the other side of the world, it typically needs to be a big order, say 1 million widgets. There are big risks involved when placing such large orders – consumer demand may fade, a competing product may arrive on the scene, etc. Some companies prefer to have their products produced in smaller lot sizes to mitigate the risk of being stuck with inventory they can’t sell.”

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That’s especially true in a still fragile recovery, where consumer willingness to spend can change on a dime, and in a market where the life span of a product is getting shorter and shorter, and where fickle (and still penny pinched) consumers demand more from companies. “It takes too long and is too costly to spool up a factory on the other side of the world for a product that will have a short life,” notes Free. “Production needs to be done close to home to have the speed and agility required.”

That was certainly a factor in the success of Mavi, a Turkish blue jean company I wrote about recently. If $120 barrel oil and quickly changing consumer tastes continue to collide, it may help more jobs back to the U.S., too.

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