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Gas pains equal gains, for some

Imagine a world in which crude oil prices continue to move upward and any company associated with transportation - from airlines to car manufacturers to trucking companies - finds it harder and harder to make a buck.

There's no need for a vivid imagination here because that world is already upon us. Oil prices have remained above $120 (U.S.) a barrel for a month, and judging from the surge on Thursday and yesterday, prices are showing few signs backing off any time soon. Oil hit a record high of $139.12 (U.S.) yesterday before settling at $138.54.

Besides the obvious investment theme here (buy energy stocks), there is another idea. If energy prices undermine companies' ability to ship goods around the world due to exorbitant transportation costs, countries with a close proximity to their export markets will have a big advantage.

In other words, high energy is bad for China but potentially good for a place like Mexico (despite General Motors Corp.'s decision this week to close a plant there), which is sitting at America's back door.

According to Jeff Rubin, chief economist and strategist at CIBC World Markets, the cost of shipping a standard 40-foot container - ubiquitous on trains and ships around the world - from East Asia to the United States has tripled since 2000 and will double again if oil rises to $200 a barrel.

That means the cost of goods shipped from Asia is also on the rise, and that rise will be passed on to consumers, making the goods less competitive.

"Distance costs money," Mr. Rubin said in a recent note. "As oil prices keep rising, pretty soon those transport costs start cancelling out the East Asian wage advantage."

Following the 1973 oil crisis, when the price of oil blasted off and transport costs similarly soared, U.S. imports from Asia and Europe plunged and imports from the Caribbean and Latin America surged.

This time, China's once-feared steel exports are already being rendered uncompetitive in overseas markets because of the prohibitive shipping costs. This has given new life to the U.S. steel industry: The S&P 500 steel index has risen 28.5 per cent his year alone and recently hit a record high.

"Instead of finding cheap labour halfway around the world, the key will be to find the cheapest labour force within reasonable shipping distance to your market," Mr. Rubin said.

Mexico fits the bill. Labour there is cheap, it shares a border with the U.S. and it already exports a whole whack of products, including cars. It is also a country that is easy to invest in, with the iShares MSCI Mexico fund, an exchange-traded fund that tracks a basket of Mexican stocks.

It's up 9 per cent this year, but is down 2 per cent over the past 12 months - meaning that there is plenty of upside left if oil bubbles higher.

See David Berman's Market Blog at ReportonBusiness.com

© 2007 The Globe and Mail. All rights reserved.

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