Petrol Prices: Adding Fuel to the Fire
Whether it’s the impact of the pandemic or the war in Ukraine, there’s no escaping volatile prices for oil and gas and related products
For procurement professionals, uncertainty is never a good thing. Managing risk is a big part of what you do, and you’ve coped with ongoing months and unpredictability. First, demand collapsed with the pandemic shutdowns. Then demand skyrocketed as consumers emerged and got on with life the best they could. Then Russia invaded Ukraine, throwing much of the world’s hydrocarbon production into turmoil.
The EU gets 40 percent of its natural gas and 25 percent of its oil from Russia and Asia. Given the prominence of Russia in global production, oil prices have risen dramatically, given the uncertainty caused by the conflict between Russia and Ukraine. Today oil prices are at the highest levels in a decade.
Logistics and transportation were, of course, hard hit by higher fuel prices. That contributed greatly to the boom in ocean, air, and highway freight rates and fuel surcharges. Transportation could account for 50 percent or more of a company’s logistics expenses.
But the impact spread even further than fuel. Oil and gas producers try to read the tea leaves of supply and demand, with conflicting signals worldwide. Exploration and production are capital-intensive, time-consuming endeavors, so there’s always a lag between rising demand and resulting supply.
When producers shut down production, many skilled workers left the professions for other positions. Like other companies, producers of upstream and downstream products struggle to attract and retain workers with the required skills.
The Only Certainty is Uncertainty
Fuel costs will continue to impact supply chains. For most inbound freight, the choice of carriers falls to the vendor or shipper. But the costs are passed on to you. For shipments that your organisation manages, monitor carriers’ application of fuel surcharges to recover higher costs. It’s critical to monitor and audit the application of surcharges to make sure the carrier is charging the appropriate amounts. In the case of fixed-rate contracts, procurement may have the opportunity to renegotiate the fixed-rate portion or convert the contracts to fuel surcharge agreements.
Crude oil and natural gas, including natural gas liquids, are feedstocks to many raw materials used to produce products like paint, resins, chemicals, and fertilisers in the downstream petrochemicals and specialty chemicals industries. As the prices for hydrocarbon raw materials fluctuate, the prices for those products don’t always respond in kind.
Build resilience into the supply chain to accommodate local and global disruptions. The options should be scalable and flexible to respond in the short term. Adjust business plans and supply chain strategies to flatten out short- and long-term disruptions.
Ongoing volatility raises the difficulty level for pricing negotiations. A should-cost analysis would have to consider the fuel price for logistics operations and chemical feedstocks. To capture the benefits of declining prices, procurement must understand the cost basis of feedstocks, evaluate current market dynamics, and develop a plan to capture associated savings opportunities from the supply base. With the shortage of oil and gas supplies, some production processes may no longer be financially viable.
The ripple effect of higher fuel costs is still circling the world. European organisations will most likely experience increased heating, gas, and fuel expenses. Disruptions to global supply chains for fuel will affect food and pharmaceutical prices, affecting food security in poorer communities around the world.
Prepare for the Unexpected with Procurement Considerations
Audit freight billing. Freight billing and auditing services help companies ensure invoices and payments align with contracts. They can reduce costs from misapplied fees and surcharges by 50% or more.
Innovate in the supply chain. When fuel prices are in flux, innovative management can help you regain some control. Look for flexibility in logistics arrangements through near sourcing or onshoring vendors rather than an extended global supply chain. Building up inventories can reduce the need for more frequent deliveries. Products and packaging can be redesigned to require less space during shipping.
Understand raw material and feedstock pricing. Some feedstocks like methane are made from different sources such as natural gas and coal. If rates for natural gas are falling, look for sources where you can take advantage of lower costs. If switching sources is not likely, ask suppliers for competitive relief in exchange for better contract terms.
Be aware of fixed-price contracts. Fixed price contracts may not automatically adjust based on market dynamics, so look for alternatives like volume tier discounts or formula-based pricing. During times of oversupply, prices could fall drastically, so be aware of market dynamics.
Monitor contract pricing. If you have formula pricing, review the timing for price changes so you can benefit from falling prices sooner. However, if prices rise again, your organisation will pay more, faster.
The oil and gas industry is cyclical, and significant price changes are not unusual. Staying on top of the supply chain and developing end-to-end visibility has never been more critical. Identify issues as soon as possible so your supply chain can adapt quicker, based on data-driven decision-making.
