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What Will Happen to the Supply Chain When 'Cheap' Oil Ends?

A conversation with Chuck Taylor, founder and principal of Awake! Consulting.

Many supply chains were built when oil cost under $20 a barrel, says Taylor, but with the cost of oil at five times that now, supply chain managers who think they can continue doing business as usual are simply out of touch with reality.

Taylor has been in supply chain for more than 40 years, having held positions with such companies as American National Can, Burlington Northern/Santa Fe Railroad, Mercer Management Consultants, Nabisco Brands and Ryder System Inc.

Since 2005, when he founded Awake! Consulting, Taylor has warned about the end of "cheap" oil, changes in consumption that will inevitably follow, and the need for shippers to become more involved with political leaders on the issue of a national energy policy.

Q: You say you "semi-retired" in 2005. Why didn't you just retire altogether?

A: Taylor: I started seeing what was going on in the oil world, and having witnessed the '73 Arab oil embargo and what that did, I knew what expensive oil could do to our country and to companies.

Then, after going to supply chain events, I knew from hundreds of breakout sessions that none of them talked about energy. So, I concluded our supply chain people and management had lost touch with what runs all this - which is cheap energy and cheap oil.

All these supply chains we have now are built on cheap energy, and I realized that those days were coming to an end.

Q: In fact, you've been talking about the end of cheap energy for years now. So where do you see us today? How are we doing?

A: Taylor: Well, if you go back to 2005, everything that I've said has basically come true. It's mathematical, there's nothing magic about it or about my prognostications.

When I started this business, oil prices were $55 a barrel, in 2005. Last year they averaged $111 a barrel. So that's up100 percent in seven years. Global production of oil, on the other hand, has been stuck at around 74 million barrels a year. The demand has increased during the same period from 83 million barrels a day to about 89 million a day. What's making up the gap are these unconventional types of oil - things like deep-water drilling, Canadian oil sands, ethanol. That's not conventional oil. It's not the stuff that you drill a pipe in the ground in South Texas or in Saudi Arabia and it just flows out. All of that kind of oil we're filling the gap with is much more expensive.

So as conventional oil runs out or as it decreases and depletes, it has to be replaced with something, and that something is much more expensive, much harder to find, much harder to make flow. So that's where we are.

Q: And how do you see that affecting our supply chains?

A: Taylor: When you boil it all down, what we do with the supply chain is we move stuff around with oil. Ninety-five percent of the world's transportation is petroleum-based. In the next 10 to 20 years, there will be no substitute for that. Supply chains were all built, most of them, in days when oil was $10 to $20 dollars a barrel - now it's $100. It calls into question - is your supply chain obsolete?

When you look at a lot of the locations people are in, the 12,000-mile supply chains they have set up, they're not going to survive as oil prices continue to increase, and we're already seeing that.

I said five years ago we would see industry move back to this country or Mexico, and now we see insourcing back here. I'm not bragging about my prognostication powers, but if you looked at the mathematics of it, you knew eventually that oil prices would go up, stay up and not come back down, and that has a dramatic impact on us.

Q: How much impact do you see in the future then? Where is all this going?

A: Taylor: I've predicted that diesel will average $4.65 this year, that it will start picking up toward the middle of the summer and stay high.

Q: And geopolitics - how will that exacerbate things?

A: Taylor: I don't even factor that into it. That's a whole different aspect, and you can't know its impact. But something could happen at the Strait of Hormuz or in Venezuela, where 8 percent of our oil comes from. So, $4.65 for diesel. The only thing that could change that in the lower direction is if we had an economic depression, which I don't see. I think the economy will grow faster than what most pundits are saying.

Q: OK, as difficult as it is to predict this sort of thing, what are your long-range views?

A: Taylor:  There's only one way up for oil prices - and that's much higher. For 2015, my prediction is we will get close to $6 a gallon for diesel, and at that point I think that's when people will really start waking up. By people, I mean our political leadership. They will have to face reality.

We're going to have to transition to other sources of power, have to change our lifestyles, and demand is not going to stop. Demand for oil is another part of this equation because China and India are coming on.

Here's a statistic: in the U.S., we use 20 barrels  of oil per capita each year. In China they use two per capita. In China, they want a lifestyle like we have. India does, too. Africa is growing at 7 percent a year. They all are convinced they want to live like we do. So demand won't slow down, and then there's the geopolitics. So nothing in this is trending the right way in terms of ever seeing any kind of cheap oil again.

Q: Surely there are some mitigation strategies.

A: Taylor: Well, the first thing we have to do as a country is become more efficient. I always tell audiences that the government will have to get involved. In 1973, what was the first thing to happen? They dropped the speed limit to 55. That definitely helps. So government will get involved. It could be everything from rationing to having different hours of operations. For instance, trucks could only operate at night to avoid congestion. There are a lot of things we can do as a country, but they are going to require some change.

Q: Some would say you're a pessimist.

A: Taylor: I try not to be a pessimist because there are things that can be done, but I also try to be realist. None of this is going to be easy. It's going to be relatively long, a 20- to 30-year transition.

Q: What does a supply chain manager need to focus on ?

A: Taylor: Our distribution centers may be in the wrong places, for instance. We built one in the middle of nowhere because we got a tax break. Well, tax breaks go away but transportation's forever. We have to look at every piece of the supply chain to see if we're potentially wasting energy. Do you have to reduce complexity? Where may you source better - closer and cheaper in terms of distribution and transportation costs?

And they should get involved more in public policy. Since everything is regulated, you have to get involved in government. There needs to be a higher level of trying to influence public policy from the shipper's standpoint.

To view the video interview in its entirety, click here

Resource Link:
Awake! Consulting

Keywords: Chemicals & Energy, Business Strategy Alignment, Supply Chain Security & Risk Mgmt, Environmental, Supply Chain Analysis & Consulting, Global Supply Chain Management, cost of transportation fuel, fueling the supply chain, containing logistics fuel costs

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