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  Newsletter Archives                  Can't View In E-mail? February 3, 2011 - Supply Chain Newsletter

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The Ying and Yang of $100 Oil

Is it Deja Vu all over again?

They said a huge percentage of people always remembered where they were when they heard that president John F. Kennedy had been shot. It may be a poor comparison, but from my conversations, I think a lot of people have some moment associated with the dramatic rise in oil and gas prices in the summer of 2008 that also sticks with them.

We happened to take an easy coast family vacation at the end of July that year that came exactly at the peak of prices, which of course saw oil reach almost $150.00 per barrel, and gas and diesel prices soar well over $4.00 per gallon. We had a three-hour in a rented minivan from the airport to where we headed, and found the gas prices in the east were 10-15 cents more than we were than they outrageous levels we were paying in Ohio. That first fill-up of the large minivan tank, knowing how much more money in total was going to be spent that week, was painful.


" We are back to $100. It's news, but not the same level of news at is was just a few years ago?"


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We have friends with Suburbans and Tahoes who said at the time they were only filling those 25-gallon tanks halfway either because of the credit card limits at the pump or because they just couldn't bear to see the huge number from a complete fill up.

Today, oil is at something like $103 per barrel. Industry sources are saying that the retail prices of gas and diesel for whatever reason haven't really caught up yet with that rise, and we can expect big prices moves soon.

A little history is in order. It is hard to believe now, but 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 US 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 oil "speculators" bidding on oil futures from the pits at the mercantile exchanges for the price surge. To this day, despite much reading, I still can't figure out if the speculators really play a bad role is this or not.

But starting in August, we then 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. Of course, diesel prices moved in almost lock step, and it is quite interesting to see those patterns, which we have handily made our Supply Chain Graphic of the Week: A Short History of Diesel Prices.

Oil prices swung5% or more in either direction an amazing 38 days in 2008.

So here were are in 2011, and we are back to $100. It's news, but not the same level of news at is 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?

The equally important question is where do we go from here. A government official yesterday predicted we will drop back a bit for the rest of the year, then march to $100 or so again sometime in 2012.

But of course this is at best a guess. The recent rise is in large measure due to developments in the Middle East. Does anyone have a good crystal ball as to how things are going to play out there over the next year or two? It is a vast unknown, but as expert oil industry analyst Steven Schork told me last year, "We know we can get to at least $147 per barrel, since we been there before."

There are other wild cards. Since still today oil is sold globally in US dollars, its price is highly correlated to the value of the US dollar. When the dollar falls versus other major currencies, oil prices go up. With the US budget deficit and "quantitative easing," many believe the dollar will continue to lose value (though potentially in a race with the Euro to the bottom). If that happens, oil will rise further, and concerns about this is in large part why China and Russia are pushing to end the dollar as the currency standard for oil transaction.

We seem to have a real economic recovery happening, if still modest, in much of the developed world, and the developing economies have already roared back. Demand is going up.

One of the most fascinating things I have read in the past year is the just released BP Global Energy Outlook 2030, which we recently reviewed on our web site. It is a highly researched and analytic view of where energy markets and consumption are headed. It predicts total growth in consumption in oil from about 85 million barrels per day currently to about 102mbd by 2030. That includes about a 3 million barrel decline in demand from developed economies, but strong growth from China, India and elsewhere.

As shown in the chart below, BP believes world supply will be able to keep up, with biofuels and tar sands oil playing an increasingly important role. The report doesn't really address the "peak oil" theory, but I will just quickly say that if it is at all accurate, that could mean much higher prices even if there is supply to meet demand, because getting each barrel becomes relatively more costly


View Full Size Image


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 your 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 US, clean, and cheap, to largely get us out of this mess.

Why do you think we seem to have less concern now over $100 oil than we did a few years ago? Which way do you think we they will head from here? Could natural gas vehicles solve much of the problem? Let us know your thoughts at the Feedback button below.


Dan Gilmore


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Going back a bit, we received a number of letters on out First Thoughts piece on "US Logistics Infrastructure - Critical Issue or Not?" last year that we are just getting to now.

We print several of those below, offering a divergent set of views on the topic.

That includes our Feedback of the Week from Frad Schafer of Ingersoll Rand, who says the issue is less how much is spent but better deciding where it should be spent.

You'll see is letter and a number of others below.

Feedback of the Week - on US Logistics Infrastructure:

Although interesting for discussion, the real strategic issue for US manufacturing competiveness is not the age or condition of our US-based physical logistics infrastructure…it is how we elect to prioritize and fund renovation and repair of these assets holistically with other governmental spending….much the same way our businesses must prioritize and fund renovation and repairs of our physical assets WITHIN the financial capabilities of our businesses.

Unfortunately (and at the detriment of US competiveness), our government has not demonstrated either the ability to prioritize or the ability to grasp the fundamental notion of debt and financial constraints in terms of spending as our businesses and we as individuals must do.

I would certainly not see our logistics infrastructure as an immediate crisis warranting an additive governmental spending initiative funded, if at all, by added taxes.

Fred Schafer
VP Logistics & Distribution

Ingersoll Rand

More on on US Logistics Infrastructure:


Infrastructure means different things to different people, so to be more definitive in the definition of infrastructure will help keep congressional mischief at bay. I do think that there should a combined transport infrastructure capital expenditure pool – I would not call it a bank or fund since both of those words carry a connotation that there are investments with returns coming directly to those who have invested.

I think that your point of increased diesel taxes is on the mark. The population of truck drivers, or trucking company owners of investors is much smaller than the general population of “sheeple” who pay gas taxes, and no Politian will want to talk about raising taxes on the main users of the roads. Far better to tax the trucks, who pass the coat along to the people in higher costs.

There is a logic of keeping some of the pools of money divided. Every time you get on an airplane there is a ticket charge for use of the ATC and the airport. The revenue generated from this source is so microscopic compared to the debt that local, state and federal governments carry for the construction of and improvements to the physical plant of terminals and runways. The true culprit to our air congestion is the Air Traffic Control systems and the limitations to operating in low visibility conditions. A modern 737, 747, 757, 767, or 777 can land without pilot control in 300 foot visibility IF the runway is equipped with the right ground based equipment. Some airports have all of the runways set up, other only one, and some none.

Part of the reason that when summer thunderstorms hit that the air traffic system hits is safety of the ground personnel who work on the ramp to load, unload and service the aircraft. When there is lighting in the air the crews are commanded to take cover. Planes land and take off but there is no ramp activity. If that ramp inaction is too long – well, there is a delay. I have sat several times on the plane – waiting for pushback – doors shut – lighting off in the distance and not a drop at the airport.


David K. Schneider

David K Schneider & Company, LLC

What a great, even-handed, and carefully reasoned discussion of an enduring issue!

I am just back from a terrific week on the Maine coast, and that has given me one complex question to add.

How do you balance infrastructure spending between congested, busy places like the MD-DC-VA metro areas and quieter places like Maine?

On one hand, I saw many truck-trailers and trucks pulling containers on I-95 in Maine. I’m sure that Maine, a relatively poor state, relies on the manufacturing that produces what those trucks carry, and wants more of it. They truly need good infrastructure in the business sense that you described.

On the other hand, the entire East Coast chokes on I-95 around here – commuters and truckers. The inland rail terminals that Norfolk Southern and other Class I’s are building to pull loads from the ports will help some. As business re-builds after the recession, though, I expect congestion to worsen.

And another issue: I was one of those who rejected a western I-95 by-pass a few years ago because it would destroy so much open space in our region. The only compromise I can see is more and better rail service for passengers, but I don’t expect it anytime soon.

Thanks for providing such thoughtful discourse.

Karen Owsowitz
Sr. Research Analyst, GlobalTrak
System Planning Corporation

Your “U.S. Logistical Infrastructure – Critical Issue or Not?” article proposes a critical topic worthy of further discussion. Your article talks of “improvements,” however, that is a very broad concept. I spent 28 years in a federal civil engineering/infrastructure organization, and “improving the infrastructure” encompassed our whole mission. It would be helpful if you further divided that concept into more manageable categories to better frame the discussion. Maintaining serviceability of existing assets and increasing assets/capacity are really two separate issues.

The St Paul bridge failure highlights a serviceability issue and the need to insure a funding stream for adequate maintenance and repair of existing infrastructure. I believe the ASCE report card is focused mainly on serviceability and maintenance/repair of assets such as the St Paul bridge. Traffic congestion, especially in our metropolitan areas, is a capacity issue and these construction efforts require a different thought/prioritization process than the maintenance/repair projects. I believe the World Bank ranking is focused on system efficiency which is more a capacity issue. Also, often neglected is the future maintenance/repair funding stream required to support new asset added to the inventory.

The initial problem is deciding how to divide available resources between maintenance/repair and construction. I like Malcolm Berkley’s idea of a single integrated approach to our logistics infrastructure. That organization would then have to decide how to further divide available resources between road, rail and air systems to “improve” the total logistics infrastructure. It would also better address intermodal issues than the “silo-approach” now used by congress.

Therefore, I believe your “improve” discussion would benefit by being broken down into three separate topics: prioritization & funding of existing infrastructure; prioritization/funding of additional assets/capacity; and thirdly addressing all aspects of road, rail and air systems in an integrated logistics infrastructure approach.

John Shogren

Cardinal IG


I think that the biggest infrastructure drag on passenger air is the government's inability to modernize air traffic control.  The history of this effort is a painful example of our government's inability to execute modern, safe, cost effective processes in under a decade.



George Murphy, CPIM



The infrastructure problem is real, and NOW, I live in the northeast about 35 miles from NYC. The roads are beginning to deteriorate and bridges are a real issue. The move by congress to raise truck weights by about 25% will exacerbate the situation.

I agree that I’d rather see US made goods transported than those from the Pacific Rim, but it’s all commerce, all good for the overall economy. If the products aren’t there and people don’t spend, we have a problem. The transportation trust funds are bust and unless we get a realistic level of taxation on gasoline to fund the trust funds, our deterioration will continue (and gas guzzlers will dominate). I think there may even be an argument for per mile “user fees”. Electric or hybrid vehicles will escape the gas tax and not pay a fair share.

A lot of this is above my pay grade, but I think we must get the transportation system back on track.

Thanks for your thoughts.

Geoff Sisko
Senior Consultant
Jack Kuchta LLC


Q: Over the last 20 years, how many winners of CSCMP's Distinguished Service Award were primarily practitioners in "regular companies", as opposed to academics, consultants, 3PLs, etc.? Who were they?
A: 4 - Lee Scott, WalMart (2003), Ralph Drayer, Procter & Gamble (2001), Joseph Andraski, Nabisco (1995), and Howard Gochberg, Land O'Lakes (1992)
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