Supply Chain Matters readers have probably already heard, seen or likely experienced the current headlines regarding the significant run-up gasoline and diesel prices in the United States these past few weeks. The price of gasoline has increased 14 percent higher than just a month ago. The obvious question is whether this trend will continue into 2013 and what, if any, will be the impact on supply chain and broader commodity and logistics costs.

I certainly do not portend to be an economist or energy expert but as the saying often goes, the Internet is a wonderful resource to gain access to such views and insights.

My first destination was the U.S. Energy Information Administration (EIA) web site and its February 13th update of This Week in Petroleum. That update cites the closure of the Hess Corp. Port Reading New Jersey refinery as responsible for the current steep double-digit rise of fuel prices on the northeast part of the United States.  Other refinery outages caused by operating maintenance needs have exacerbated the current run-up. Recall that both the U.S. east coast, Gulf coast regions have been battered by severe wind and storms over the past few months and that has taken a toll on refining equipment. The average cost of diesel fuel in the U.S. is now 17 cents higher than last year at this time. However, the EIA indicates that prices should moderate as refining shortfalls are resolved, and forecasts that the average price of gasoline will be $3.55 per gallon in 2013, an 8 cent decline from the 2012 average.  Gasoline prices in 2013 are forecasted to be lower.

Turning to the Institute for Energy Research, a report titled Why are Gasoline Prices High and Rising? concludes that gasoline prices are increasing because world oil demand growth is outpacing supply output.  This is in spite of dramatic increases in U.S. domestic crude suppliers and decreasing U.S. consumption.  Rising political tensions across the Middle East and sanctions on Iran have exasperated world markets. This report also reinforces the current run-up of prices caused by the temporary refinery outages across the U.S.

Since roughly 70 percent of the retail price of fuel is made up of the inbound cost of crude that was the area this author wanted to focus on.  The IER report indicates that world crude consumption grew to the highest level ever in 2012, to a rate of 89.2 million barrels per day. That consumption is forecasted to increase by additional 1.05 million barrels per day in 2013. The current growth in consumption is attributed to the non-OECD Asian countries, which includes China.  IER cites a 500, 000 barrels per day increase in 2011, and an additional 420,000 barrels per day increase for China in 2012.  Apparently, Chinese and Asian consumers are living the mobility dream.

According to the EIA, the U.S. alone produced 6.4 million barrels per day of crude oil in 2012, the largest one year increase since before the U.S. Civil War.  However, the report notes that on-net, the U.S. imported 41 percent of the crude oil it consumed in 2012, thus maintaining sensitivity to world crude prices. The amount of fuel exported from the U.S. amounts to over 16 percent of current consumption.  The lure of higher priced global markets is too attractive to keep all crude in the U.S. This report further concludes that as the U.S. Federal Reserve has signaled its commitment to near-zero interest rates through 2013, oil and other commodity prices have begun another surge.

Readers may recall our previous Supply Chain Matters commentary related to global currency tensions on the increase adding to continued threats of currency devaluation.  With the global price of crude oil pegged to the value of the U.S. dollar, anytime the dollar loses value the price of crude is very likely to increase. The implication is that global crude prices may continue to fluctuate higher if currency tensions continue.

Finally, we have those pesky global hedge funds that cannot resist continued speculation on world commodity markets include crude and fuel supplies.

The takeaway of our commentary is therefore a conclusion of an uncertain answer as to whether increased fuel prices will extend into 2013.  It all depends. While U.S. energy prices may indeed eventually stabilize in 2013, all bets are off if global tensions and unrest heightens during the year.  While the Eurozone economies continue to struggle and consequently decrease daily consumption of energy, global oil demand continues on the increase, fueled by China’s and other non-OECD Asian country consumption needs. Speculators continue to play global markets.

Procurement and transportation management teams will therefore have to factor various scenario options based on the uncertainties we outlined. In negotiations for 2013 ocean and inter-modal transport contract services negotiation teams will need to be diligent, and not allow carriers open-ended fuel surcharges.  Sourcing teams in turn will have to factor some scenarios for increased costs on select commodities and component parts originating from Asia, due to energy factors.

Bob Ferrari