SCDigest: Is it Deja Vu for Oil All Over Again?
Through a special arrangement, presented here for discussion
is a summary of a current article from Supply Chain Digest.
Oil prices
started to become a concern in 2005 and 2006 when they rose from roughly the
$40-50 per barrel range into the $70s. This caused much angst, accelerated
the nearly decade long rise in U.S. logistics costs as a percent of GDP, and
had many companies here and around the world complaining about the growing
costs of transportation and input costs.
Then, in 2007, Goldman Sachs analysts
said we were heading for $100 per barrel oil. At the time, it seemed as if
the sky was falling. Many thought the global economy would come to crashing
halt, there would be blood on the streets, etc.
We got close to $100 for several
months at the end 2007, finally moving above $100 early in 2008, after which
the price kept rising to the July peak. There were new predictions for $200
per barrel oil. During those times, anything — some pipeline had to be shut
off in Nigeria for a few days — seemed to send prices strongly upward. Many
were blaming “speculators” bidding on
oil futures from the pits at the mercantile exchanges for the price surge.
But
starting in August, we saw oil prices rapidly falling under its own weight
and the recession that was already in full swing (even if we didn’t know it),
then collapsing with the financial crisis to under $40 per barrel in March
of 2009.
So here were are in 2011, and we are back to $100. It’s news, but not
the same level of news as it was just a few years ago. Why is that? Is it because
we have been there and found it really wasn’t quite as big a disaster as we
thought it would be? Or that $100 just seems not all that high when we know
we can get to $147?
So, my quick summary: I think we are going higher and could
easily see $120 oil before long. Logistics managers really need to be looking
at their budgets and discussing the potential scenarios with executives. Relook
at strategies and policies on fuel surcharges. I am not an expert on hedging,
and it could be dangerous at these levels if prices drop back down, but I would
at least consider the cost/benefits.
We will hear more and more companies in
2011 citing rising oil prices as pressuring profits, as Nike recently has.
Logistics costs and pressures once again move to center stage — both good
and bad for those of us in the business. “Green
supply chain strategies” get re-invigorated not for green reasons but
due to these cost pressure.
And maybe rising prices push us to trucks and then
cars that are powered by natural gas — abundant in the U.S., clean, and cheap
— to largely get us out of this mess.
Discussion Questions
Discussion Questions: Why do we seem to have less concern now over $100 oil than we did a few years ago? What lessons did the oil spikes of 2008 provide?
I think “human nature” has a lot to do with it. We generally worry about the unknown but eventually adapt and get used to just about anything, not just as individuals but also on a macro-economic scale. $100 oil is the new reality, in fact it can only go up from there.
But it’s not all bad. $100 oil stimulates R&D and the quest for alternatives. This quest is not only good environmentally, it is good economically as a “green” economy could be a huge catalyst for economic growth in the coming decades. In the meantime, increases in oil prices can largely be offset by more efficient production and delivery methods which will positively affect productivity.
Doing more with less is the new competitive advantage, are North American manufacturers, distributors and retailers ready?
To some extent it is like any metric, once it’s reached the first time the second time is less of a big deal. The classic example is the four minute mile. Once that barrier had been broken in 1954, then many runners did it and it’s now the standard for middle distance runners.
Another factor is that when oil first crossed that barrier many companies were unprepared for the impact it would have on their business. Having seen oil fluctuate as it has over the past few years businesses are better prepared to handle the variation. Transportation companies have built in schedules that allow their delivery charges to move with oil prices, companies have developed and implemented hedging strategies, etc.
I’m not sure there is less concern now about the price of gasoline. The fact that oil exceeded $100 per barrel before, takes some of the shock factor out of the public discourse. But make no mistake about it, consumers are taking a hit at the pumps and higher oil prices will hurt consumer spending and therefore economic growth.
With all the bad news over the last few years, Americans have become inured (numb?) to impending doom scenarios on the melodrama that passes for news these days. Their primary thermometer is the price at the pump. They’ve gotten used to a trading range of $2.50-$3.75 and their world hasn’t stopped. If that price goes were to go above $4, it will get a lot noisier.
The real issue is how the cost of oil is measured – in US dollars. There’s a simple law of economics that says that if you continue to create dollars out of thin air and pump them into the economy, you get this thing called inflation. The more you pump, the more inflation you get. The government is now putting $trillions more into the economy than it takes in. While oil is a critical component, it isn’t the only one to be affected.
The price of oil is being dictated by commodities traders, and this has to stop. We currently have the largest reserves of oil in years, yet we are facing prices at the pump in excess of $3. These two metrics do not make sense and sooner or later something has to give. Unlike 2007, we are already in a recession, so demand will not be driving the price higher, only the commodities traders…this will eventually require government to step in and stop this foolishness. Oil, at a national level, will become more like electricity and gas, which are stabilized by the government. The first step is with government, and recognizing the true source of this problem (it is not supply and demand based).
The price of oil is being dictated by commodities traders, and this has to stop. Kai Clarke (See published comment.)
Sorry Kai, but I have to respectfully disagree. Oil was not a publicly traded commodity until Ron Reagan allowed the practice in the 1980s. Until then, the pricing was historically controlled by the oil companies and then the OPEC cartel.
Supply and demand, fright and turmoil, whatever terms you wish to use, it is still better than having a group of dictators deciding on the actual price. We are a free market economy, let the market decide but a strong dollar makes for cheaper goods.
It will ultimately depend on the economy and where the dollar trades. If our economy tanks and the value of the dollar goes much lower, look for higher oil prices no matter what happens in Egypt. We obtain almost all of our oil from Canada, Mexico and Venezuela (the last two are REAL bastions of political security). Check the stats on oil imports from the Energy Information Agency published by our government to double check if in doubt.
The charts matching the movement of the dollar to the price of oil are pretty convincing. Unless we can prop up our currency, we will be seeing high energy, commodity, and other prices.
I don’t know how you cannot be concerned. Increases in oil and gas prices are a serious headwind on a still shaky economy. It’s like a tax increase, at a time when everyone understands that a tax increase would be the worst thing you could do to the economy.
But oil prices represent our vulnerability to the global economy. We are vulnerable because we do not currently have an economy capable of absorbing the impact of increasing global raw material demand and prices.
Individual consumers may voice disapproval with higher gas/oil prices, however they rarely, if ever reduce their consumption long term. Time heals those wounds. Businesses, however need to optimize their supply networks to maintain margins. Depending upon the industry, fuel costs can be substantial.
The issue continues to be the world’s addiction to oil, period. Alternative energy sources are gaining, however, not fast enough.
My vote? HYDROGEN. It’s limitless, the technology is there today on the streets of the US, Norway and other countries and we can use dual fuel gas/hydrogen until the refueling infrastructure exists. BTW, it would ONLY cost $25B in the US. Can you imagine eliminating our foreign oil addiction for that small amount (compared to what we continually cough up for military expenses)?
High oil prices are surely a concern. Maybe the only difference is that we are awash in cheap money printed hand over fist by a very determined Federal Reserve. There have been those that have said that because of this, many companies are absorbing some, if not all, of this in their margins rather than passing it on to the consumer. I don’t generally believe in this. However, if you look at what is happening to commodities prices in general (they are going up quickly) and we don’t see an significant price inflation at this point, it definitely doesn’t make pure academic sense. I suppose you could say that when the cheap money does dry up we could see a whiplash effect with sudden and dramatic price inflation–only time will tell.
Yes, the value of the dollar has an impact, but oil is the one commodity that has the strongest link to speculators driving the price. Most of the oil sold is not based on spot prices, but the futures/forward contracts. Given the volume of speculators in the market, it’s logical that they have more of an influence over those future prices, than the producers and users of oil. When prices rise, producers sell as much as they can, but because demand drops, they must reduce their production to sustain the level of pricing. When spot prices are low, producers hoard supplies offshore reducing supply, to drive prices up…spot price = futures price. But this only happens in the short-term.
Ultimately, the fundamentals prevail (as we saw prices drop back in the previous few years.) Nevertheless, we have our s-t bubble markets, with speculators driving the price up and down, making $ on both long and short positions. Fundamentally, the long-term trend is higher because of the obvious supply/demand issues and lack of alternatives.