Unfair fuel and the future
02 June 2008
This is a first – everyone is in the same boat and we all have the same thing to complain about. The price of oil. In every other economic crisis in the past there has been winners and losers, but today – all around the globe – there seems to be mainly losers. Is this the end of ‘cheap fuel’ or just a cyclical blip, and what could be the long-term effect on our industry?
This is not a new theme with me – the artificial manipulation of markets – but for once the headlines from the financial sector are having direct consequences for all of us. Not just as engineers working in a manufacturing industry either. I mean every one of us as consumers, workers, members of society – it is hitting home. The costs of food, heating, getting to work is an issue across the globe. While demonstrations in Western Europe have started in the fishing, haulage and farming industries, every business is affected. In Western Europe we have traditionally paid a huge amount of tax on our fuel and so the virtual doubling of the cost of a barrel of oil to over $130 in just two years is having a real effect on not just transport, but the entire retail sector. The fact that fuel in North America is half the price of that in Europe is of little consolation to Americans – if you are used to paying a price and it doubles then it hurts!
But why has this cost spiralled so high? In theory, the simple balance between supply and demand should logically determine a cost of a barrel of oil. As with any commodity, this is not the whole picture. The price is determined by how much a trader believes that it is worth. The trader, being neither supplier nor user, has no sense of real value in terms of supply or demand. The trader is there to trade, and the trade is there to make a profit. It is obvious that the higher the value of the commodity you trade in the higher the profits to be made. If the cost of a barrel of oil increases from $10 to $100 in ten years, then the money that can be expected to be made will also increase by an order of magnitude, so it should be no surprise then that the prices seem to go up more than they go down.
Regular readers of this column may have earmarked me as something of a cynic. But surely I am not the only one who has noticed that everything recently seems to result in an increase in the price of oil. A huge new resource seems to make the price go up as it will need huge resources to develop it. A failed exploration makes the price go up because of shortage of reserves. Political instability, particularly in the Middle East, is a firm favourite for a price increase. Forecast increase in future demand from developing countries, particularly China and India, increases price and so on. If you were as cynical as me (and I will try and convert each and every one of you), you could argue that the whole commodity market has gone off the rails. Some people are making huge profits while the rest of us - nearly all of us on this occasion – are suffering.
THE FUTURE
But let us assume that the oil industry is not managed by a self-interested cartel and ripped off by market traders, and that oil reserves are diminishing to such an extent that current costs are both realistic and indicative of what lies ahead. In short – let us assume that the age of cheap energy is over. What then for the electronics manufacturing industry?
The obvious change will be that the cost of manufacturing will increase. While we don’t have the huge energy costs of, for example, the steel industry, every machine needs power and that is therefore going to become an increasingly large proportion of the final cost of a product.
Directly following on from this is the energy efficiency of the equipment we use and the processes involved. For example, as only a few components are through-hole these days, does it make sense to keep a wave soldering machine in constant operation when a selective soldering machine could be employed to take care of the occasional connector or capacitor? Equally the increased soldering temperatures of lead-free are already contributing to higher energy bills – lower temperature alloys could be developed and employed to reduce this.
What about factory location? To take Europe as an example, a site in Northern Finland (and there is one within a snowballs throw of the Arctic Circle) would, you would hope, require a lot of heating to make it workable. Conversely, a balmy spot in Southern Italy might be far more to most of our tastes, but without air-conditioning in summer would be bordering on the inhuman, irrespective of the technical consequences for solder paste and the manufacturing process. While those more temperate countries across central Europe might not be to everyone’s liking, the more consistent ambient temperatures would result in a significantly lowered energy consumption (we will see if the halls of SMT Nuremberg this week are being filled with hot air!)
But by far the biggest contributory factor will not be the manufacturer’s location in terms of latitude, it will be in distance from market. The transport costs have the potential to significantly impact on a product’s retail cost - the bigger a product is, the more impact it will have. Possibly the migration of manufacturing to low-cost geographies will therefore not only cease, but reverse.
And finally, my prediction for the biggest winner will be the company or companies that develop an efficient solar cell that can be manufactured cost effectively. At least then the factory in Southern Italy can have all the air-conditioning it wants, but I’m not sure where that leaves the manufacturer in Northern Finland!
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