Supply chain managers should keep a watchful eye on energy

While diesel and other fuel rates have been in steep decline recently, supply chain managers should continue to keep their guard up.

Derik Andreoli, Ph.D.c., a senior analyst at Mercator International LLC and Logistics Management’s popular Oil & Fuel columnist, said the volatility of energy expenses will be a given this year.

“Oil and fuel markets are extremely complex, and forecasting price moves requires insight into both supply and demand for oil, diesel, gasoline, and dollars,” said Andreoli. “Since the beginning of May, crude oil prices have fallen by a staggering 22 percent. “This decline was largely due to the rapidly evolving opinion among Wall Street oil traders that tight oil markets were set to soften.”

But he noted that this sentiment is certainly not out of line with the news flowing from Europe or the recent lackluster performances of emerging markets—especially China.

“As Greece continues to dance with default and expulsion from the Eurozone, Moody’s has downgraded France’s credit rating, and bond yields across the PIGS (Portugal, Italy, Greece and Spain) have skyrocketed. As borrowing becomes more expensive, the only choices that are available are to cut spending or leave the Euro. Neither of these options is attractive.”

Andreoli added that the problem with austerity is that spending—be it by the government, consumers, or businesses—greases the wheels of growth. The problem with leaving the Euro is that the value of the drachma would plummet, causing Greece to muddle through a prolonged recession.

“The irony, of course, is that the underperformance of Eurozone economies has kept the value of the Euro suppressed against the level that it would be if every Eurozone economy performed similarly to Germany. As a consequence, Germany’s exports remain cheaper than they would otherwise be. Germany is the only country that is strong enough to pull the Eurozone out of its slump, but seeing that the country has for years benefitted from a dysfunctional Euro, it won’t likely throw out a life preserver until the alternative to ‘muddling through’ looks relatively more attractive.”

Andreoli said that as the Eurozone skirts recession European oil demand remains suppressed. So too are European imports from China and other emerging markets, which suppresses economic activity in these countries.

“Of course, MENA (Middle East and North Africa) oil consumption was also significantly reduced as the Arab Spring chopped away at economic activity leaving a wide swath of economic disruption across the region,” said Andreoli.