Logistics News: More Bad News on Fuel Prices, as Slow Down in Demand for Oil Seems to have Less Impact on Prices

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- January 16, 2008 -

Logistics News: More Bad News on Fuel Prices, as Slow Down in Demand for Oil Seems to have Less Impact on Prices

Slowing Economies in Developed Nations Usually Cause Prices to Fall, but not Any More; Geopolitics, Traders and China

SCDigest Editorial Staff

SCDigest Says:

Although the drop in demand was small (less than 1%), in the past this type of slowdown from the normal growth in demand would push prices downward. Instead during 2007 we saw an increase of 57% in the price of oil.

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With the price of a barrel of oil still hovering near the $100 mark, and the cost of diesel fuel and resulting fuel costs and surcharges right along with it, transportation and logistics professionals might look to relief in 2008 from slowing economies and consumption in the US and other large markets.

The bad news – it isn’t happening.

Throughout the last 30 years, rising oil prices have in time generated market forces that pushed the price back down. In some cases, such as in the 1970s, price spikes led governments, business and consumers to adopt strategies which ultimately reduced oil usage. The resulting drop in demand caused oil prices to fall and even plummet.

Similarly, periods of economic slow down – for which rising oil prices were sometimes a catalyst – also have had the effect of reducing global demand, again having a strong downward effect on prices until economic recovery.

A report issued today by the International Energy Agency saw oil demand in 30 developed countries actually drop in 2007, the result of slowing economies and some conservation measures. This follows another small decrease in 2006. Although the drop in demand was small (less than 1%), in the past this type of slowdown from the normal growth in demand would push prices downward. Instead, during 2007 we saw an increase of 57% in the price of oil.

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Geopolitics, Traders and China

So, what’s going on? Experts cite three important factors:

Geopolitical worries: With little buffer between supply and demand worldwide, actual or expected geopolitical hot spots act to resist fundamental supply and demand forces. On-going tensions in the Middle East, problems in Venezuela, and most recently unrest and fighting in Nigeria all work to offset a slow down in demand on prices.
Traders set the price: Over the past 20 years, the price per barrel of oil globally has been unhinged in large part from true supply and demand market mechanisms at a commodity level, and been set by futures traders betting on which way the price is going to go. If they are betting the price will go higher, the price goes higher.
China (and India): The rapidly growing economies and fuel consumption by developing countries, especially China, but also India and others, for the first time means reduction in demand from the US, Europe and Japan has much less effect on overall global demand. The IEA report says that developing countries will be responsible for 70% of the total growth in demand over the next 20 years.

So, the possible doubly whammy for the supply chains of US and other Western companies: economic slowdown that hits the top line, but this time without the usual reduction in oil prices that would have an offsetting effect on transportation budgets and some raw materials and manufacturing costs.

What do you expect to happen to oil and fuel costs in 2008? What if anything is your company doing to reduce transportation and fuel costs? Let us know your thoughts at the Feedback button below.