The world rethinks globalization as the pandemic, war, sanctions, and punitive tariffs have disrupted supply chains and ended what were once smooth relationships between companies and their suppliers and customers.
SHUTTING OFF RUSSIAN GAS WILL BRING PAIN TO EUROPE AND THE REST OF THE WORLD
Europe has learned that turning away from reliable base load generating plants powered by coal and nuclear power created a too-heavy dependency on Russia for natural gas for heating, industrial processes, and for power generating stations to supply base load power to supplement their wind turbines, solar farms, and other renewable electricity sources.
The recent power shortages in Europe connected with sanctions on Russia drove home this lesson when a shift in the weather stopped wind turbines from turning and supplied less sunlight to solar farms. Europe is negotiating with the UAE to supply more natural gas, but there is a limited number of liquified natural gas (LNG) ships and terminal capacity to load LNG to those ships.
Existing pipelines in most areas already run at full capacity during winter months, and new ones take years to plan and build.
In the meantime, dealing with the phase-out of Russian gas will take a combination of factors, including reactivating coal and nuclear power plants, importing additional oil and gas from whatever alternative sources they can find, and implementing additional conservation measures that will be reinforced by higher prices and government-sponsored programs.
Replacing the millions of barrels of oil supplied by Russia will be just as difficult. The world cannot switch 20% of its vehicles from gasoline and diesel to electricity overnight, and even if it did, electric power has to come from somewhere, and a shift that large needs a major investment in the electrical transmission infrastructure to carry that extra load. In short, there is going to be a disruptive period of pain and adjustment and increased costs.
SUPPLY CHAINS AND TRADING RELATIONSHIPS ARE MORE FRAGILE AND STRAINED
A recent surge in Covid-19 cases in China shut down major manufacturing and shipping centers, further demonstrating the fragility of Chinese supply chains and motivating those who depend on Chinese suppliers to find alternative suppliers domestically and from other countries. Moreover, a history of tit-for-tat tariffs and political tension between USA and China has made trade links between American and Chinese companies less certain. The US government’s sanctions and threatened sanctions against China have played a major part in this uncertainty.
Even when companies have confidence in their trading partners, a surge in ocean freight charges, difficulty in booking passage on ships for freight, congestion at seaports, and difficulty in booking trucks to pick up freight when the ship finally arrives have made importing goods more difficult and less profitable that it was just 2 years ago.
Finally, Russia’s war on Ukraine and the associated sanctions and other disruptions have made Russia an unattractive trading partner and an unattractive place to do business or to invest. Hundreds of multinational companies have closed down stores and offices, stopped manufacturing and distribution operations, and stopped exporting to or importing from Russia.
While this world boycott of Russia is an obvious example of a country that went from a growing center of trade and business to one that became an outlaw and thrown into the same category as North Korea, but other countries could also shift from lands of opportunity to risky trading and investment, either due to war, government actions, or other surprises.
In a world where globalization of supply chains and trading relationships have become more fragile, there will be a shift toward more domestic sourcing of raw materials, manufacturing, and development of domestic markets as the costs and risks of international trade increase. Where there is risk, there is opportunity for those who are bold, and therefore there will not be a shutdown of world trade, but as world rethinks globalization there will certainly be more diversification of supply and markets by companies that realize that excessive reliance on long international supply chains is no longer a prudent risk.
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