Earlier this year, a report from industry analysts at Goldman Sachs predicted we would be looking at oil prices of $100 a barrel. While a few took the prediction seriously, many characterized it as mostly a publicity stunt.

Now, with oil futures shooting over $70 per barrel, and Katrina and refining problems sending prices at the pump to over $3.00 per gallon, the prediction doesn’t look so whacky any more.

Obviously this impacts our personal wallets, the economy, Wall Street, etc. But if oil goes to $100 per barrel, and gas and diesel prices shoot towards $4.00, what are the likely impacts on supply chain strategy and operations?

Here are some thoughts:

Obviously, transportation and logistics costs are going up. At $2.00 plus per gallon, we saw fuel surcharges by carriers of 10-20%. In a Business Week article last April, plumbing fixture maker Kohler reported it was paying $1 million per month in fuel charges. At this writing, gas is up about 25% since then. ABF Freight’s published fuel surcharge at the beginning of 2005 was 10.4% for LTL freight, and 20.8% for truckload. The numbers for Aug. 31 were 16.8% and 33.6%.

At these levels, especially if the costs cannot be passed on to customers, rising transportation costs can have a real impact on company profitability. At $100 oil, the impact could be substantial. Are you budgeting and preparing management for this continued and/or potential spike in transport costs? Are they being reflected in delivered price quotes being given to customers? Are you putting in place contracts that for delivered pricing that include adding your own fuel surcharge in the event of a continued spike in oil prices?

Raw materials and related supply costs could increase dramatically, not just due to increased inbound freight costs, but the cost of energy used in manufacturing and oil-based products, such as plastics. Already, for example, we’ve seen huge pressure on many suppliers to the auto industry locked into fixed price contracts with their customers.

The higher gas prices go, the greater the imperative to unbundle product and freight costs, and to look for opportunities to consolidate and save on inbound shipments. Long a goal of many transportation groups, perhaps the current and continued spike in fuel prices can be the catalyst to achieve unbundling in the procurement process. Companies should also be looking right now at the degree of energy sensitivity in procured products, and strategizing on alternatives and impact from $100 oil for these commodities and parts (e.g., at some point does steel replace plastic?).

The big question I have is how a spike to $100 oil might impact sourcing, offshoring, and network strategy decisions. At the heart of network strategy is the balancing of trade-offs across inventory, transportation and operating costs while meeting customer service. Almost be definition, the result of that calculation should be different at $100 oil than it would be at $30. Would $100 oil, for example, pull back a decision to offshore certain products when the added cost of transportation is considered? Would the general (but certainly not universal) trend towards smaller, more frequent shipments begin to reverse itself somewhere on the way to $100 oil? At what point am I better off keeping spare parts inventory in the field versus express shipping from a master DC?

I recently had a conversation with Wayne Gibson, former VP of Logistics for Home Depot, and he noted that risk factors are rarely considered adequately in the sourcing and network design strategies of most companies. So, for example, few companies put in a factor that adjusts for the risk of $100 oil (or strikes at the port) when analyzing the alternatives.

What the current environment and potential $100 oil tells me most of all is that we need to use more dynamic analyses of these decisions, use more complex scenario alternatives, and move from using network design tools from a once every few years basis to having them baked into a consistent process of designing and running our supply chains.

I’ve only scratched the surface here.

Let us know your thoughts.