Oil Update: Specter of $100/barrel

From the January-February 2019 edition of Supply Chain Management Review.

January-February 2019

Truth be told, I was not a Boy Scout, or at least not a very good scout and not for very long. But I think there are some lessons for supply chain managers in the Scout motto: Be prepared. When I Wiki’d it this…

Browse this issue archive.

Access your online digital edition.

Download a PDF file of the January-February 2019 issue.

Download Article PDF

This column is my annual update on oil pricing that began with my first two Insights columns, 12 years ago.* I began researching the topic when I began the launch of MIT's Supply Chain 2020 Project in 2005. Prior to last year's update, I had been espousing a reduction of oil consumption in global supply chains by slowing them down and developing cost- and energy-efficient networks, in contrast to cost- and asset-efficient ones. The position was based on two major demand-supply assumptions.

While oil would be readily available into the foreseeable future:

1. its price would rise in the long-run as demand for it rose with robust global economic growth; and
2. oil extraction costs would continue to rise over time because it was getting harder to extract it from the earth.

Last year's update

Last year I noted that both demand-supply assumptions no longer held, as postulated back then. As a result, prices had not drastically risen over the long run as expected. So, I re-analyzed the historical oil pricing data in last year's column. My analysis postulated that recent oil prices appeared to have flattened to an “era of cheaper oil” (in contrast to “cheap oil”).

From the demand side, the first signs of cheaper oil appeared as a precipitous drop that was the result of the Great Recession, which drastically depressed worldwide economies. Hence the demand for oil.
This was followed by a three-plus year period, termed the “$100+ plateau” before reaching cheaper oil. Today that plateau still ominously looms in the rearview mirror as a reminder of what could happen if
worldwide economic and supply conditions reach the levels seen prior to the recession.

SUBSCRIBERS: Click here to download PDF of the full article.

SC
MR