Natural gas fuels SCM energy debate

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Surplus oil production capacity cushions oil prices from surging demand and unplanned outages or other disruptions in oil production and delivery, notes Derik Andreoli, Ph.D.c., senior analyst at Mercator International LLC. He adds that, historically, when surplus production capacity declines to 1.5% of total liquid fuels consumption, oil prices increase and become much more volatile.

“This year, surplus production capacity fell from 3.0% of total consumption to 1.7% by August, but rebounded to 1.9% in September. With such a thin cushion, any price forecast will be loaded with uncertainty,” he says. “If global oil demand picks up faster than producers are able to add capacity, prices will surge, and any credible threat of disruption will have the same effect. Alternatively, production disruptions currently amount to more than 2.0% of global capacity, so if just half of these bottlenecks are relieved, surplus capacity could rise to a comfortable level and price pressures would ease.”

With these caveats in mind, Andreoli says weak demand in emerging markets, continued efficiency gains in Europe and the U.S., and continued growth in domestic production of shale oil will likely cause oil prices to decline slightly through the first half of the year. Then current price levels will spike in the second half of 2014 as the pace of global economic growth accelerates.

“As a result, diesel prices are likely to remain elevated, and alternative fuels - especially compressed natural gas - will continue to sell at a steep discount on an energy equivalent basis, even as natural gas wellhead prices rise,” he says. “Recently my firm modeled dozens of fuel price scenarios in order to evaluate the feasibility of CNG and LNG fleet conversions from a firm-level cash flow basis, and we have concluded that conversion offers significant savings in many, but not all, cases.”

Over the coming year, adds Andreoli, shippers can expect the rapid adoption of CNG alternatives, but the current fleet is so small that even a doubling of the number of natural gas vehicles will not dent diesel demand.


About the Author

Patrick Burnson
Patrick Burnson is executive editor for Logistics Management and Supply Chain Management Review magazines and web sites. Patrick is a widely-published writer and editor who has spent most of his career covering international trade, global logistics, and supply chain management. He lives and works in San Francisco, providing readers with a Pacific Rim perspective on industry trends and forecasts. You can reach him directly at [email protected]

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