The Price of Oil and the Dangerous Supply Chain Dance

Today oil prices continued their downward trajectory hitting a three-month low after weekly data showed a record buildup in U.S. crude inventories. Brent crude, the global oil benchmark, fell 1.6% to $52.25 a barrel on London’s ICE Futures exchange. On the New York Mercantile Exchange, West Texas Intermediate futures were trading down 1.9% at $49.34 a barrel. Official data on Wednesday showed crude-oil stockpiles rose by 8.2 million barrels in the week ended March 3. This dwarfs the increase of 1.7 million barrels the market was expecting.

The rising stocks cast doubt over whether six months of cuts by the Organization of the Petroleum Exporting Countries, along with other major producers including Russia, would achieve the goal of reducing global inventories unless the supply cuts are extended.

Why should you care? Cheap oil defined traditional supply chain practices. For the last three decades, with low oil prices, companies chased lower costs of labor. This included reducing operational costs through manufacturing outsourcing, offshoring, plant rationalization, and facility consolidation. Low oil prices drove these trends. There is always a balance between labor and transportation costs. The price of oil shifts this balance. Volatility during the period of 2008-2014 fundamentally changed supply chain practices.

Supply chain baby boomers know the impact of volatile oil prices well. From 1999 until mid 2008 the price of oil rose significantly. The rise of globalization, with demand from China and India, fueled demand. In the middle of the financial crisis of 2007–2008, the price of oil underwent a significant decrease after the record peak of US$147.27 on July 11, 2008. In February 2009 the price of oil sank beneath $40 a barrel. On 31 January 2011 the Brent price hit $100 a barrel for the first time since October 2008 on concerns about the political unrest in Egypt. For about three and half years the price largely remained in the $90–$120 range. In the middle of 2014 the price started declining due to a significant increase in oil production in USA, and declining demand in the emerging countries. The recent oil glut—caused by multiple factors—spurred a sharp downward spiral in the price of oil that continues. By February 3, 2016 oil was below $30 a drop of 75 percent since mid-2014. Some analysts speculate that it may continue to drop further, perhaps as low as $18/barrel. 

In 2009-2014 we saw the shift of supply chain design to embrace high oil prices. This included regional distribution centers and in-country manufacturing. The higher the price of a barrel of oil, the more important it is to invest in a flexible supply chain strategy to reduce transportation costs. The challenge for supply chain professionals as the price of oil falls is to not get lulled to sleep. If oil prices stay low, and there is less volatility in the price of crude, there will be a temptation to back off of network design efforts and reduce the focus on building agile value networks. Let's hope the lessons from the gray-haired supply chain leaders who lived through the escalting cost issues from high oil prices do not fall on deaf ears.

Source: Wall Street Journal March 9, 2017 and Wikipedia (https://en.wikipedia.org/wiki/Price_of_oil on 3/9/2017)

Image sourced from Shutterstock.

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