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Supply Chain Challenges, Freight Transportation

Q&A with Chuck Taylor on the End of Cheap Oil

Alex Stark | March 10, 2011

This week's blog post is a Q&A with Chuck Taylor, long-time logistics professional and head coach at Awake! Consulting. Chuck speaks frequently on how companies must prepare for the end of cheap oil.  

What is your main message to logistics professionals on oil prices?  

Oil is now priced at over $100 per barrel.  Here is what I have been saying since 2005 when oil was $40 a barrel:

1.    The world is nearing a peak in world oil production.
2.    Oil moves 95% of the world's freight today.
4.    Most of the oil left is in the hands of OPEC (75% of proven reserves) with all the geopolitics that entails and we are seeing now.
5.    Supply chain professionals must understand this and prepare for the inevitable and begin to change today.   

Sometime between now and 2015 (earlier if events in Middle East deteriorate more) the reality of Peak Oil will cause prices to skyrocket and probably cause oil shortages. The economy won't be able to handle this and it will finally dawn on people in a visceral way that the End of Cheap Oil is really here and the only answers in that short term will be improved efficiencies and better use of resources. Business as usual will end.

Are companies complacent on this issue?

Some large companies have made energy strategy a priority.  Most companies have not and certainly our government has not.  It will take a crisis like the oil embargo in 1973 to get real action. Unfortunately, our country doesn't have a Liquid Emergency Fuel Plan, which is pretty incredible considering that we as a country use about 19 million barrels of oil a day (about 20% of world daily production) and over 50% is imported. Businesses should begin to develop their own strategies and plans.  Even if I am wrong about the exact date of the crisis, it never hurts to improve efficiencies and use supply chains more productively.  

How will supply chains change with the end of cheap oil?

As most competent supply chain people know, there are tremendous opportunities to take waste out of supply chains. Much of that waste will be taken out through better collaboration – both internally and externally. Internally, eliminating silos and Lean thinking are two of the best ways I know of.

Externally, collaborative strategies where separate supply chains begin to work together and share a common distribution infrastructure must become more prevalent. As Chris Kane, a visionary and leader in shared distribution, says, "...it is time to start looking more consciously beyond our own separate organizations to a wider universe of collaboration and... attain an enlightened, ideal operational state—'supply chain nirvana'..."

What steps can CPG companies take now to prepare for the end of cheap oil?  

I would begin by educating senior management that the Petroleum Age is coming to an end and begin considering the implications of Peak Oil in the planning process.

Questions to answer include:

·    What would be your company's greatest vulnerabilities in a petroleum/energy-short world?
·    Is fact-based information available about your company's energy use?
·    How is your business and network impacted at various fuel-price points - $5, $6, $7, $10 etc. per gallon?
·    Do sales/marketing/manufacturing/supply chain policies fit an energy-constrained world?
·    What can be done to remove complexity from the supply chain?
·    Do sourcing strategies consider Peak Oil (some 12,000-mile supply chains won't survive Peak Oil)?
·    Will your carriers and third parties add value in an energy-constrained future?

World oil production growth will eventually stop and production will peak.
The world has never faced a problem like the decline in world oil production.
This is an uncharted, unpredictable bridging period. So educate yourself so you can educate others. I wrote an article for Supply Chain Quarterly in 2007 that is still a good place to start.

I have also prepared a "Peak Oil Checklist" of over 50 things to consider.   Email me at chutay@msn.com and I will be happy to send it.