The global economy is undergoing a profound transformation as geopolitical risks and rising costs reshape trade routes and business strategies. For decades, companies have streamlined operations by reducing warehouses, spare capacity, and duplicate suppliers, making goods cheaper but also more vulnerable to disruptions. Now, war, sanctions, and broken trade routes are forcing businesses and governments to reintroduce redundancy, leading to higher costs in freight, inventories, insurance, and industrial investment.
This shift is evident in various sectors, from oil tankers navigating treacherous waters to manufacturers securing multiple suppliers. The question now is not just how much redundancy can be safely removed, but how much is worth paying for when the cost of being caught without it has risen.
The New Cost of Doing Business
A recent voyage of an oil tanker from Iraq to India highlights the new realities of global trade. The cost to charter a very large crude carrier (VLCC) surged to between $23 million and $25 million, a stark contrast to the $2 million it would have cost before the war. This dramatic increase is not due to changes in the oil’s production or the distance traveled, but rather the geopolitical risks associated with the journey through the Strait of Hormuz.
The Strait of Hormuz, a critical chokepoint for global oil trade, has become a hotspot for mines, missiles, drones, sanctions, and naval patrols. These factors have transformed what was once a routine commercial journey into an exercise in geopolitical risk management. A barrel of oil now carries a new cost before it even begins its voyage, reflecting the heightened risks and uncertainties in the global trading system.
The Return of Redundancy
Companies worldwide are rethinking their supply chain strategies in response to these new risks. Manufacturers are holding more inventory, cultivating secondary and tertiary suppliers, and governments are stockpiling critical minerals, medicines, and energy equipment. Oil producers are acquiring additional tankers and expanding pipelines to bypass vulnerable waterways. Countries that allowed strategically important industries to migrate abroad are now discovering the high cost of rebuilding them.
The organizing principle of the global economy is changing. While most goods still move and most factories still depend on international supply chains, the weight assigned to potential interruptions has increased significantly. For much of the past forty years, businesses focused on removing redundancy to enhance efficiency. Now, the question in boardrooms and ministries is how much redundancy is worth paying for when the cost of being caught without it has risen.
The Legacy of Just-in-Time Production
The revolution in global trade began with Toyota’s Just-in-Time production system, which challenged the notion that large inventories were unavoidable. By ensuring parts arrived precisely when needed, Toyota reduced waste and increased efficiency. Western manufacturers adopted this method widely, supported by advancements in containerization, computers, telecommunications, and trade liberalization. The savings were enormous, with the aggregate US inventory-to-sales ratio falling by roughly 35% between 1980 and 2018.
However, the focus on efficiency led to the removal of various forms of redundancy. Companies concentrated production in the most cost-effective factories, countries imported goods from the most efficient producers, and shipping companies built larger vessels for the busiest routes. Energy markets became dependent on pipelines and maritime chokepoints capable of moving immense quantities of oil and gas at low unit costs. The system worked well as long as these critical points remained available.
Now, the assumption of uninterrupted availability is being challenged. The factory in Guangdong, the container terminal, the canal, the pipeline, and the tanker must not only be efficient but also resilient in the face of geopolitical risks. The global economy is entering a new era where the cost of safety is becoming a central consideration in business and government strategies.
