Saturday, December 31, 2011

Price of Fuel Going Down as Supply Increases? Don't Bet on It.

It is arrogance to assume the US can control the worldwide price of oil and refined petroleum products (PP).  It is also delusional to think the oil companies will do anything other than what is in their best interest.

Practically, what those two statements mean is 1) Petroleum products, regardless of where they originate, will flow to the most economical location - it is fungible.  2) Oil companies could care less if the US is dependent on foreign oil or not (see 1. above).

We now have the interesting situation where US demand for petroleum products (i.e., gasoline) is lower than the supply.  The narrative has been when this occurs, prices will go down and that will spur more demand, a new "market clearing" price will emerge and all will be fine.  Of course, this assumes the US is a closed society and the only thing the oil companies can do (or want to do) is dump the excess oil /PP on the US market.  But, we learn, they have a second option.  They can export it to countries where demand is growing the price is higher.

This puts us into an odd situation: The US is now a net exporter of petroleum products.  The excess supply did NOT lower prices or wean us off of foreign oil.

So, if you are a trucker or shipper thinking all that shale gas and oil will ultimately lower your operating costs you may want to think about a "plan B".  It will merely get exported.

Friday, December 30, 2011

Thoughts on Economic Distortion

In transportation I have heard shippers say they do not want to negotiate too "hard" with carriers because they want to treat them as "partners".  I have always wondered what that meant.  What does "negotiating hard" mean and what does being a "partner" mean are key questions for both the buyer and seller of transportation services?

I submit they mean the same thing and tend to be emotional statements.  What I prefer is to work with transportation providers as an extended supply chain.  After all, unless one side is trying to get unfair or undo leverage on the other side we should be working together as a single entity for the common good of the ultimate customer.

What this means is there cannot be economic distortion in the discussions.  Economic distortion exists when one side has information pertinent to the discussion the other side does not have - some call this information asymmetry.  When economic distortion exists there is bound to be an outcome which is weighted to one side or the other in terms of value.  When that occurs the sub-optimum solution is obtained and it will ultimately lead to mistrust and a dissolution of the relationship.

I go from the premise that eventually all information will become known and will be available to both sides.  As soon as one side realizes they were disadvantaged by the other side not disclosing pertinent information the disadvantaged side tries to fight back and so begins the war of distrust and trying to "one up" the other side.

So my warning to the buyers is do not think you are somehow out maneuvering the transportation provider.  Ultimately, the real situation will be discovered and when it is you will be hit back and hard.  You may get a short term gain but at a long term price. To the suppliers / logistics providers: If you are thinking you have a long term sustainable business model by taking advantage of your customers by not disclosing proper information (costs, operational efficiencies etc) you are kidding yourself.  Sooner or later what you thought was secret will become known and when the customer realizes they have had the wool pulled over their eyes, they will dump you.

In the end, American business could save a lot of time, money and extraneous resources if this little dance did not need to be played out every time an arrangement needed to be made between buyer and seller.

This may not be a 10X idea but it certainly is a 10X program if properly implemented.  If a company and its suppliers really took this to heart I believe both sides would see dramatic improvement in productivity and efficiency thus driving the 10X change that we seek.  Lots of people talk about this, few if any actually do it.

Assume all relevant information will become available and save a lot of time by trying to take advantage of short term economic distortions.

Thursday, December 22, 2011

US To Be A Net Exporter of Petroleum Products in 2011

For you transportation professionals who bought into the idea if we drill and produce more oil, prices will go down.  Think again.  This article in Seeking Alpha shows the US will end the year as a net exporter.  Yes, the prices are not going down, the fuel is just going out.

Final HOS Rule Released and Sec. LaHood is on Santa’s Naughty List! - Article from Logistics Management

Final HOS Rule Released and Sec. LaHood is on Santa’s Naughty List! - Article from Logistics Management

Dodged a few bullets but the total work hours are down from 82 to 70. What is interesting, quite amazing and important is this gets phased in over 18 months. That is a lot of time for shippers and carriers to get ready and for lobbyists to get it overturned. Ok, I am a bit cynical but as the article points out, if there really was a "crisis" of safety on America's highways would we wait 18 months to implement a resolution?

Taking a Control Tower Approach - Article from Supply Chain Management Review

I am a big fan of the "control tower" idea and think it is absolutely a necessity. Whether you outsource it or not is an entirely different question. Outsourcing is a decision concerning what the core competency of your company is and where you want to put your capital to work. A manufacturing company who has a core competency in manufacturing may choose to outsource logistics. A retailer who believes their competitive advantage is logistics may choose not to.

Either way, you should embrace this control tower concept. It is an idea which has seen many lives over my 20+ years of logistics experience and it keeps getting better with age and technology.