From the latest edition of the Transformance
Communiqué.
It’s time for an update on the first phase of
demand destruction for oil. What do we make of oil starting 2009 at about $45 a
barrel with supply exceeding demand?
How does this impact our discussions about
peak oil accelerating the desire of organizations to craft lean supply chains?
What about those studies that show how rising oil prices impact supply chain
dynamics that are best understood through total landed cost analysis and
network optimization studies?
Some studies suggest that oil at $150 a
barrel is the tipping point where transportation costs can overwhelm the low
labor costs in far away countries; the result is a total landed cost
calculation that favors production and distribution facilities close to the
customer.
The price of oil hit $147 a barrel last
summer with many organizations feeling enormous pressures on their cost
structures; some could have been at that tipping point where they have an
inherently uncompetitive supply chain.
Let’s repeat that – “they have an inherently
uncompetitive supply chain.”
And now, oil has become cheap at about $45 a
barrel.
Does this mean the storm has passed and an
extended supply chain leveraging low labor costs and lots of transportation is
the best approach? Are lean supply chains the wrong priority and is peak oil
nothing but a scary story to tell around a campfire?
My belief is that the drop in the price of
oil is exactly what has been predicted by proponents (including me) of peak
oil. Our predictions included how the price of oil would surge as supply and
demand become unbalanced. Then, given inadequate preparation, the
response to this price surge would be demand destruction.
The following chart shows the world wide
demand and supply for oil for 11 quarters through Q308, as reported by the US
Energy Information Administration. In this chart, we see the dramatic drop in
demand starting in Q108. This drop put demand less than supply and created
conditions for the plunge in the price of oil.
I believe the chart shows us the start of the
first phase of demand destruction. People are driving less and we are seeing a
decline in economic activity, with a US recession officially starting in
December of 2007. Unfortunately, demand destruction has only reduced demand to
a point where we now have adequate supply. When peak oil really kicks in, we
will see a relentless decline in supply. That implies we still need massive
investments in alternatives, or we will see additional phases of demand
destruction.
At
Transformance Advisors, we are serious about helping you take on the challenges
required to craft a lean supply chain.
I salute those of you that are preparing for the
future. This recession and the first phase of demand destruction will come to
an end. However, the end of demand destruction will bring an era of relentless
energy challenges that will reward those with lean supply chains.
What are your thoughts?
·
Has the storm passed and we can get
back to extended supply chains leveraging cheap labor and cheap transportation?
·
Will peak oil lead to another phase of
demand destruction and what will that look like?
·
Are you working to craft a lean supply
chain and what actions are you taking now?
Send me your thoughts and let me know how we
can help you and your organization prepare for the future.
Be sure to visit www.transformanceadvisors.com
and download the latest edition of the Transformance
Communiqué.
Mike Loughrin, CLM, CSCM, CSCP
Chief Executive
Officer
Transformance
Advisors Inc.