Mass media in the U.S. has been featuring news commentaries regarding rapidly declining prices of gasoline and diesel this summer. Reasons cited are many, but hardly accurate. These reports contrast with all sorts of hype, fear and speculation that occurred earlier in the year.
If readers were following Supply Chain Matters, they would have known that that declining prices were bound to happen, because of the solid supply chain related principles of supply and demand.
In February and in March, as average self-service gasoline prices were hovering around four dollars per gallon, we penned two commentaries noting how Saudi Arabia had made plans to pump unprecedented levels of crude oil for a single purpose, to avoid energy prices triggering a global wide recession. The U.S. along with other global regions including Europe and Asia were targeted for increases in crude supply. As we approach the end of June, the average price of self-service gasoline is averaging about $3.50 per gallon, with prices as low as $3 per gallon in some regional areas such as the southern U.S. Pundits now speculate that the price of gasoline could average less than $3 per gallon by summer’s end.
On the demand side, continuing conservation, a cutback in driving habits, and a new abundant supply of natural gas have all contributed to a cutback in the overall demand for gasoline and diesel. Transportation fleets have been accelerated their efforts to convert to compressed natural gas fuel consumption.
As businesses and households bread a sigh of relief, they should say thanks to the Saudi’s and their efforts to debunk any notions that the price run-up was about a fear of a supply shortage caused by the Iranian or other crisis. Rather the Saudis have been clear. They fear a setback in world economies, particularly Europe, will seriously derail any global economic momentum, and the price of crude will not be the primary cause. Political considerations are obviously at play as well since the U.S. has a major Presidential election in the fall, and Europe’s electorate remains highly concerned to the effects of the ongoing financial crisis occurring across southern Europe.
Our advice to procurement and transportation management teams is to continue to focus on the near and longer-term supply and demand dynamics of energy markets. This summer is an ideal time to initiate negotiations with carriers and suppliers over current fuel surcharges that were initiated at the beginning of the year and are obviously adding to carrier profits, as witness to the latest State of U.S. Logistics report.