The modern world is a deeply connected place, and many of the luxuries we enjoy rely upon the maintenance of that interconnectivity. While commodities are regularly associated with a single country of origin, the reality is that many disparate powers are involved in any reasonably complicated piece of technology. The past two years, in spite of what seemed like an unrelenting march towards total globalization, has forced (in certain regards) a break in the global interdependence that was taken for granted, and shown its real fragility. These events are, of course, the COVID-19 pandemic and the Ukraine-Russia conflict. The COVID-19 pandemic caused a break in the global supply chain for two reasons. The primary and prevailing effect of the pandemic is a diminution of the work force. If there is a COVID outbreak at a vital plant, whole supply chains can be thrown off. Most industries operate in terms of "just in time" logistics, and therefore rely on the accuracy of production projections. The second effect was a refocusing and repurposing of the workforce and factories in some industries. The production of masks, for instance, had to account for an extreme excess of demand. Masks being so desirable, some nations had to start manufacturing locally when they could not convince other nations to part with those which they had produced domestically.
The effects of the Ukraine-Russia conflict are significantly more complicated and will likely far exceed the pandemic in terms of global economic effect. Both the sanctions on Russia and the disruption or destruction of farms and factories in Ukraine have consequences that will be felt globally. While many in the West had not given much thought to Ukraine prior to the war – many underestimating its size and level of development – Ukraine is a top exporter in some agricultural sectors, and reduction in the availability of grain to those nations supplied by Ukraine may result. Meanwhile, Russian oil is the most well-known commodity that is being (slowly more) impacted by the NATO and EU allies' sanctions. In addition to oil, however – where consequences are being most immediately felt –niche components, important in several technologies, are no longer available outside of Russia. A good example of this would be the vacuum tubes used in the production of guitar amplifiers. Most boutique builders used vintage-spec tubes from Russia, and now they are no longer accessible! This has the possibility to necessitate a fundamental change in the priorities and possibilities of that market, especially if no one else can step up to make an analogous product.
Given our cultural tendencies as North Americans, the effect of these global supply chain issues is perhaps felt with the most ubiquity in the automotive industry. Cars, especially luxury cars, are becoming very scarce and precious, and across the board stock is low. The following sections will delve into the dramas plaguing the automotive industry, from gas prices to blue chips.
The Gas Problem
In Canada, gas prices are currently the highest they have ever been, and they will only be getting higher as we progress into the summer. Various outlets and specialists are suggesting that this is bound to be the new normal, and that we will have to learn to adapt – however that looks: be it accepting the costs, driving less, transitioning to public transit, or investing in an electric vehicle. How did we come to this point? The influencing factors are multiple, and some will emphasize certain causes more than others.
The above-mentioned events – the pandemic, and the Ukraine-Russia conflict – are certainly a causally important factors, thought their influence is somewhat indirect. The misinformed might be led to believe that the absence of Russian gas forces the price of gas up due to scarcity, but the reality is that Canada and the US are not dependent upon Russian gas, and the commodity is subject to speculation. Before there were ever sanctions levelled against Russia or an aversion to Russian oil – precisely in the first moments of the invasion – the price of gas had already shot up. This is because speculators and investors anticipated a justification for price gauging in the form of scarcity – however marginal the change in North American supply would be. This is significantly different from the European situation, where several countries are genuinely dependent.
Gas was also becoming more expensive before the invasion had taken place. This is a consequence of the pandemic. Most of this increase is due to a return to pre-pandemic prices as travel again becomes more common and gas consumption rates normalize. Part of the increase is not restorative, however, and reflects the same kind of supply chain interruption that is afflicting all industries. The production of gas has not returned to its pre-pandemic rate as workforces are still faltering under the weight of the virus. While this production slowdown is not sufficient to induce scarcity, it is taken as a marker justifying the increased cost of a barrel.
Excluding a market crash, some level of increased gasoline price is a practical certainty. Markets in capitalist economies work in such a fashion that ‘inflation' is the norm, and even if circumstances improve (this renewed rift between Russia and the West may last a long time, and it is uncertain how long COVID will linger), the slow acceptance of these new prices – and their continual increase into the summer, as consumption increases and production remains low – will be enough to sustain the pre-existing norm of ever growing costs.
If you're in the market for a new vehicle or follow automotive publications, you have likely heard about the ‘blue chip' shortage. This is an interesting issue as it is something which has been fomenting for much longer than the timescale of the pandemic, though the shortage is often framed in terms of it. ‘Blue chips' refer to semiconductor boards that are necessary for essentially all electronic devices. They are essentially the component which provides computational power to a device – the heart of the computer. While it might seem that vehicles are, at least at a basic level, ‘dumb' technology, there is in fact a lot of computation that goes on under the hood in any modern vehicle. All vehicles require multiple blue chips, and this requirement is exponentially greater in luxury vehicles and those with smart interfaces, electrical power, or self-driving capabilities. As semi-conductor reliant technology (an almost redundant term) proliferates, the need for blue chips grows exponentially. As such, this issue is something that isn't especially reliant upon the pandemic. Perhaps production would amp but more quickly, or present productive forces wouldn't have been slowed down – whatever the case, a crunch was inevitable.
So, the blue chip crisis is not merely an automotive one. It is the very same issue which has produced unparalleled scarcity in the GPU and console market. PS5s and Nvidia 30xx cards are still hard to come by, and spokespersons for these companies have said that the issue will persist until early 2023. Even here some caution is necessary – as problem uses like bit-mining have the potential to limitlessly consume stock, and thus always demand more than supply can offer. Fortunately, the US government and other bodies have committed to amping up blue chip production, opening new factories, and all that goes along with it. There is, then, a light at the end of the tunnel but it will take significant time to get there. Manufacturing such a small and microscopically precise device as a semiconductor takes a great deal to pull off, and so getting these new factories off the ground will take time. Until then, we are likely to find luxury vehicles with absurdly long queues, and find people selling semiconductor dependent goods well above MSRP – unscrupulously taking advantage of the moment.
The price of components, the growing scarcity of cars, all contribute to an increase in vehicle interest rates. Lenders are essentially capitalizing on the fact the vehicles are becoming too precious to afford, and gauging those who are now forced to depend on a loan – either to own or to term. But gauging isn't the sole reason here, as interest will necessarily go up with vehicle prices. Suppose a lender has a budget of a given size the cover the cost of vehicles the sell or lease. As vehicles grow more expensive, the number of vehicles that can be managed within that budget shrinks. In order to grow their budget and thus maintain the same number of cars and the same rate of income, some level of increased revenue is necessary, and additional interest is the most feasible way to make that money.
The automotive industry, and many others along with it, are presently suffering major setbacks. While some of the trends responsible for these struggles are dependent upon the pandemic and the Ukraine-Russia conflict, these two events are better described as aggravating factors rather than direct causes. All the problems presently experienced are due to constitutive vulnerabilities, or precipitous historical tendencies, and would have arisen otherwise. Having all these compounding factors at once make for a sizable and unpredictable problem. While plans are being set in motion to right present woes, these plans are not short term, and things will likely persist as they are (permanently, in the case of gas) well into 2023.