Spend Management and $200 / Barrel Oil

Over on Supply Chain Digest, Dan Gilmore recently suggested that we might see $200/barrel oil prices in the coming years (according to the article, Goldman Sachs is forecasting these price levels if world demand heats up again or we run into any supply-related disruptions). If prices hit these levels, what will the net impact be for procurement organizations? In short, it will be huge. Global sourcing decisions predicated on total logistics costs when oil was < $100/barrel will rapidly become cost neutral or even cost additive. And scarcity and costs in local markets could easily bring production in certain regions to a grinding halt as overall energy prices soar (as they did in China recently when coal plants, which were locked into fixed contracts in terms of what they could sell energy for, had to absorb the cost increase of rising fuel-stock costs).

Consider the impact on truckload shipments alone. Dan Gilmore ran some numbers in his essay on the topic and estimated "that if oil goes to $150 (a 50% increase), truckload shipping costs, however they get there (base rates or fuel surcharges), would rise about 8.5%. If it goes all the way to $100 (a 100% increase), TL costs would rise about 17% - an incredible number. Think of the impact on the bottom line of most shippers. For those interested, here’s how I got there for scenario 1: .25 (fuel as percent of TL carrier cost) x 50 (percent increase if oil goes to $150) x .67 (percent of oil in current diesel cost)."

In my view, $200/barrel oil could be so catastrophic from a Spend Management perspective that insuring it does not hit this level should be our governments -- not to mention the Chinese and Indian governments -- number one priorities. If I were running Washington, I'd sooner sacrifice a couple of seals in Alaska or risk offending a few sheiks in the Middle East than take this issue lightly. What do you think?

- Jason Busch