Supply Chain Matters provides a brief follow-up to our recent posting, The Price of Oil: Saudi Arabia Officials Understand Principles of Supply and Demand.  One development that has certainly captured keen interest among procurement and supply chain executives is the current rising cost of oil and its implication to both commodity and service costs.  The Saudis, the world’s largest producer of crude, are reportedly very concerned that the current trend of rapidly rising energy prices will derail any global economic momentum or cause a repeat of the 2008 price run-up that not only precipitated the previous global recession, but caused transportation costs to skyrocket. The Saudi’s also understand all too well, the cornerstone principles of supply and demand, and we described how a plan is underway for the Saudis to debunk any notions that the current price run-up is about any fear of a supply shortage.

Today’s Financial Times features a column (paid subscription required or free metered view) authored by Ali Naimi, Minister of Petroleum and Mineral Resources for Saudi Arabia.  In his column, Mr. Naimi emphatically declares that high oil prices are bad news for the international economy and bad for oil-producing nations. He further states that while the Saudis do not control international prices, the bottom line is that Saudis would like to see a lower price, and are prepared to call the bluff of supply and demand economics.

According to Mr. Naimi: “There is no demand which cannot be met.” He further points to the Saudi current capacity to pump up to 12.5 million barrels per day, way beyond current demand levels, along with at least 57 days of ‘safety stock’ supply in storage to handle any supply disruption.  Inventories in Saudi Arabia and in storage facilities positioned across global regions are full.

The Saudis have been clear.  They fear a setback in world economies, particularly Europe, will seriously derail any global economic momentum.

Supply Chain Matters again reiterate that procurement and transportation management teams should read between the lines, since the Saudis are flatly stating that there will be no lack of supply to cover current global demand. They are, in essence, calling the bluff of market speculators who game the system for short-term gains.  Our advice is not to focus on the current headlines echoing high oil and energy prices but rather focus on the near-term supply and demand dynamics of energy markets. This should include negotiations with carriers and suppliers over fuel surcharges.

Bob Ferrari