Lower Energy Costs Could Spell Relief

Energy costs are largely leveling off, and many experts foresee a continuing drop in price. Thus, an increasing number of manufacturing executives are shifting focus to supply chain issues rather than energy costs.

But by recognizing that recent high, unstable energy pricing affects virtually every aspect of the supply chain, manufacturers are forced to select transportation as a main focal point according to Industry Directions’ second annual study on the impact of energy costs on supply chain strategy, “The Energy Cost Factor: Transforming the Supply Chain to Offset Margin Squeeze.”

Reduced costs for manufacturers may mean less of a trickle-down for distributors because of expected declines in transportation costs.

In recent years, the main factors behind rising energy costs have been brought upon by Hurricane Katrina, which forced refinery shutdowns in the Gulf Coast region; production capacity affected by political instability in producer countries; and increased rates of demand in both developed and developing nations.

In July 2004, on average, a barrel of oil sold for $41 and gasoline sold nationally for about $1.90 a gallon before its price began to climb.

Over the last two years, costs for gasoline, has exceeded $3 per gallon in major geographic markets and the price per gallon of diesel has risen over 50 percent.

Oil dipped briefly below $50 a barrel near the end of January and with gasoline prices trailing falling oil prices by a few weeks, lower prices could spell relief for manufacturers at least for the short term Jones said.

Donald Jones, Ph.D, vice president and senior economist for RCF Economic and Financial Consulting Inc., Chicago, said it’s not farfetched to think that prices might fall back to that level in the coming year.

“I think the price of oil will stay lower for a good part of the rest of the year,” Jones said. “With the way oil prices are going, prices are going to continue to go down through the summer. ”

The combination of a mild winter and oil producers’ relaxing production restrictions, oil demand has eased and is once again turning into a buyer’s market. Jones said that producers are in disarray and a few members of the Organization of the Petroleum Exporting Countries (OPEC) want to cut production to shore up slumping prices. OPEC’s main supplier, Saudi Arabia, has rejected those pleas for now, however.

Morgan Stanley, New York, recently surmised in its Freight Pulse survey that manufacturers shipping by truck can expect to see costs grow slightly, but at a slower pace than recent years.

The company based these projections off of feedback from companies that use various modes of transportation — truckload, less-than-truckload and rail.

While signs point to a more positive shipping environment, distributors will undoubtedly need to remain on top of the dynamics affecting transportation costs in 2007 to ensure their costs are kept in check.