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Editor’s Note: We appreciate that you clicked through to read this update on oil and fuel. Before getting started, we’d like to give you a “heads up.” One reader who reviewed a draft version of this document told us: “This is alarming!” Transportation and logistics professionals have two options. The first option is to get informed, get involved, and get active in pursuing strategies to manage, or reduce costs, even with increasing fuel costs. Reading this document is a good first step in pursuing this option. The second option is to do nothing, or to react as the rising fuel costs impact your business… As you read this document, you may want to consider whether the “do nothing/react” option is in your company’s best interest. Regardless of the option you choose, I’d encourage you to review some of the suggestions included on pages 2 and 3. We welcome your feedback after you have read this document.
If the current fuel surcharges don’t grab your attention, then perhaps a look at what could happen with oil prices will bring you back to reality. The price of oil has traded at records highs – and it shows no signs of abating in the near future. Translated: Today, depending on where you live, you are paying about 80 to 90 cents more for a gallon of gas than you were one year ago! A couple of years ago, I came across an article that painted a rather stark picture about the world supply of oil. Subsequent to reading that article, I embarked on a journey that included devouring several books that discussed the (then) impending crisis, and talked to some of the experts to determine whether these books were accurate. What I learned was shocking, hence the Executive Briefing we sent in 2006 noting that one major financial firm was predicting oil at $100 per barrel within the next two years. We also hosted a conference call with some of these experts. When oil was trading in the fifties at the beginning of 2007, a friend and loyal Executive Briefing reader told me to retire the Crystal Ball. I told him to be patient. Today, he is not sending me any more notes. With rising oil prices, comes rising fuel surcharges. On the truckload side, it is not uncommon to see fuel surcharges ranging anywhere from high 30 cents to mid 40 cents per mile – and higher on the West Coast. On the LTL front, surcharges are ranging anywhere from the high teens to mid 20% of the freight charges. So it’s not surprising that the two most common questions we’re hearing these days are: “How much higher can the price of oil and fuel go?” and “What can my company do to manage the impact of rising fuel costs?” If we had the answer to the first question, we’d be commodity traders. What we do know is that there is a wealth of data to suggest that oil and fuel costs may be going higher – much higher – in the next twelve months. And that is before considering the recommendations of the National Surface Transportation Policy and Revenue Study Commission which called for a 40 cent increase in gas taxes over the next 5 years. Regarding the second question, “What can my company do to manage the impact of rising fuel costs?” we can offer you some alternative suggestions:
If you are interested in some of these strategies, it is useful to understand why the prices are high, and may be going higher. It takes some time and effort, but it will provide some context in answering the question: “How much will we be paying for gas over the next twelve months?” Fortunately, one of the newsletters I receive addresses this issue in a straight forward and direct manner. So instead of Mike Regan trying to answer that “how much” question, I’d like to share some excerpts from two editions of the Weiss Money and Markets financial newsletters. Candidly, this publication does a much better job than I could ever do of explaining the variables affecting the world oil markets. The following information will provide a basic understanding of what we are up against, and some scenarios under which the price of oil could increase to $150 to $200 per barrel. I’ve divided this into two sections entitled “This is Bad” and “This is Worse.” Section 1: This is Bad Oil demand is hot and getting hotter. According to the International Energy Agency (IEA) it's averaging 85.9 million barrels per day (bpd) this year…will rise to 87.6 million bpd in the fourth quarter…and up to 88 million bpd in 2008. Production is sliding. The IEA says the world pumped 86.13 million bpd in July 2006. Less than one year later, in June 2007, production of total liquids fell to 84.50 million bpd.
Now to make matters even more interesting, you have the problem with the US Dollar. Here is what Weiss had to say about that: OPEC Is Considering Dumping the Dollar for a Basket of Currencies Every oil transaction around the world, save for a piddly few done by Iran, is currently paid for in greenbacks. However, that could soon change. The weakening dollar that serves as a benchmark currency is creating distortions in oil markets.
You really can't blame the oil sheiks. With the U.S. dollar stumbling lower, they are getting less and less real return for every barrel of oil they sell. And the lower the dollar goes, the more expensive oil gets here in the U.S.! Consider this: While U.S. oil prices have surged 50% since the start of the year, the price rise in Euros was 38%! If OPEC does change to pricing oil in a basket of currencies, that would kneecap an already stumbling U.S. dollar and make imported oil even more expensive for U.S. citizens! Meanwhile, America Doesn't Even Have a Comprehensive Energy Policy! No country on Earth is more vulnerable to higher oil prices than the U.S. We use 25 barrels per person, and of those 25 barrels, about nine are produced domestically while 16 are imported! Section 2 – This is Worse! Could we see oil prices spike to $150 per barrel in 2008? If anything, that target might be too low! In fact, the head of the International Energy Agency just said that demand growth just from China and India alone could cause prices to rise to $150 per barrel. So imagine what other factors such as geopolitical disruptions would do to prices! Indeed, the fastest-growing bet in the oil market these days is that the price of crude will double to $200 a barrel by the end of this year. Why We Are Careening Toward The Next Major Energy Crisis? America is the world's largest consumer of oil, guzzling more than 7.5 billion barrels per year. We import more than half the oil we use, and that amount is rising, which is why America is described as being "addicted to oil." But that's not all...
Just to keep prices stable, in the next decade, we're going to have to find a couple more fields the size of Ghawar — the biggest oil field in Saudi Arabia ...and the world. The U.S. is running scared!
Low crude oil supplies have already driven gas prices past $3 per gallon, but unfortunately, it can get worse. U.S. consumers are now spending 3.5% of their household budgets on gasoline and fuel costs. But during the Oil Crisis of 1981, that number was more like 3.8%. In other words, once inflation is factored into the equation, oil prices would have to rise to $140 per barrel to reach the equivalent levels of 1981! If you believe there is pain at the pump now, how do you think $5 or $6 per gallon gas will go over with the American public? Of course, the oil crisis isn't just a U.S. issue... Plenty of Fast-Growing Countries Are Lining Up for More and More Oil According to the World Bank, 104 countries expanded by more than 5% in 2006 and most of them kept up that pace in 2007. Businesses and consumers in Asia, South America and Africa are buying more and more cars — 14,000 a day in China alone. OPEC reports that in 2007, world demand for crude oil rose by 1.2 million barrels per day. They project that in 2008, world oil demand for crude will rise by 1.3 million barrels per day. And by 2030, this thirst is expected to increase about 35%. Of the world's growing oil consumers, China deserves mention all on its own. China's demand for oil rose from 5.6 million barrels per day in 2003 to 7.6 million in 2007, and will increase another 5.7% this year, the IEA said. Meanwhile, half of the world's oil production comes from less than 120 giant fields, each producing more than 100,000 barrels per day. The majority of the largest producers are over 50 years old ... the average size of new discoveries is declining ... and we're getting less production out of existing oil fields every year. Just look at what's happening in Mexico! The country's state-owned oil company, PEMEX, is the third-largest provider of imported oil to the U.S. And it is facing catastrophic declines. Production in November fell 8.2% from the same period a year earlier. At the root of this is a three-year, 40% decline at Cantarell, Mexico's largest oil field and the third-largest oil field in the world. Even worse, Pemex's daily oil production may drop by a third — to 2.1 million barrels — in just nine years. Yes, there is more oil to be found in the world. But the cheap oil is fast disappearing. Every new barrel we find will likely be more expensive, and that's why $150 may only be a signpost on the way to $200 a barrel! Make No Mistake, OPEC Wants Triple-Digit Oil Prices! The Persian Gulf princes are all in favor of triple-digit oil. Chakib Khelil, the current president of the Organization of Petroleum Exporting Countries, recently told reporters that $100-per-barrrel oil is "not necessarily very high." He added, "There is enough oil in the market." So when OPEC meets next month to discuss production quotas, don't hold your breath for an increase in production. The fact is that with oil at these price levels, OPEC members are pumping near flat-out to rake in the bucks. They need that money — the economies of many big oil-exporting countries are growing so fast that their domestic need for energy is drying up their exports. What the Future Might Hold In addition to the comments in these Newsletters, here are some observations. On President Bush’s recently completed trip to the Middle East, he asked the Saudis to increase their oil output. While only time will tell whether this request fell upon deaf ears, a couple of experts have noted this: First, according to Lehman Brothers analysts, OPEC countries will increase their use of oil by 4%. And if that sharp growth continues, it means several of the world's most important suppliers may need to start importing oil within a decade. Second, the OPEC countries, who are notoriously secretive about their reserves, may already be producing at, or close to, their peak capacity. If this is true, OPEC may not have extra oil to send our way. According to a report from CIBC World Markets, crude exports could drop by as much as 2.5 million barrels a day by the end of the decade. That is about 3% of global oil demand — and MORE than the current spare capacity in the oil markets. Now that you have taken the time to educate yourself, please keep in mind that there are measures that you can take to improve the effect this will have on your company. Since fuel economy measures are being put into place, and alternative fuels may offer sustainable, renewable resources in the future, other companies are making commitments that set an incredible example. Consider that one of the largest retailers has committed to doubling the miles per gallon for its fleet in the next few years, and a major grocery chain has switched totally to bio-diesel fuel. Read our suggestions again. And if you’re interested in some cost saving strategies, let me know. TranzAct is committed to not only increasing your awareness of these vital issues, but supporting some solutions. One final note; We recently learned that some of our competitors like to “borrow” our Briefings and call them their own. In fact, one of them sent me a slick mailing that was almost a verbatim copy of one of our Briefings. That is why we trust you can appreciate the fact In the meantime we will keep you posted on developments in this area with updates, briefings and our weekly newsletter, TranzNews. |
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