Energy supply

Sometimes I wonder if we are paying the real price for energy, especially the price for oil used in transportation: Bear in mind that fifty percent of oil is used in vehicles. Recently, the price of gasoline at the pump hit another record high. Nobody started screaming though. Perhaps it’s still a bargain. It is for me.

The volatility of oil prices in recent years would indicate that we don’t pay the real price for energy, but a false one. It’s a price which everyone subconsciously knows is far too cheap. But as long as we benefit we don’t complain.

Obviously many geo-political factors cause the oil price to fluctuate. But the real question is whether you can call the magnitude between 30 dollar and 150 dollar per barrel a fluctuation.
If you look at oil supply and oil demand than supply will be finite and consumption will increase with growing populations and development of countries. Considering our huge dependence on oil and the current volatility in price, the real price must be higher.
In real life the vast majority of today’s supply chains (at least the ones in low margin industries with long product lifecycles) are based on false oil prices with manufacturing in low-wage countries, long supply chains, frequent deliveries and low inventories.
What if the real price of energy is about to hit the surface? Logically, everyone will switch tactics and try to lower transport costs. This will mean less frequent deliveries of higher quantities and thus higher inventories. Another consequence will be the increased use of cheaper (thus slower) modes of transportation. And this means even more stockpiling in order to manage the effects of higher oil prices.
Calculations by Massachusetts Institute of Technology in Boston show that if oil prices rise, higher inventory costs will contribute more to the rise in logistics costs than the shipping costs. The cure would be worse than the disease.

A better solution is at least to be aware that we are paying a false price for oil today and we will be paying the real one in the future. This means that the supply chain strategy has to be adjusted: bring supply closer to the market and reduce the length of the supply chain thereby lowering stock levels.
For those who do not accept and believe there are plenty of alternatives, it might be worth remembering that the wind turbines are not just running on wind. They are also heavily subsidised.

 Jaap-Willem Bijsterbosch
Managing Director
TruEconomy Consulting