How will oil prices affect the supply chain?

A few years ago the concern was rising oil prices. Since the mid 90’s many companies have tried to reduce operational costs and achieve a lean supply chain by putting emphasis on outsourcing manufacturing and facility consolidation. The underlying basis behind these trends was cheap oil. Quite recently the price of crude oil dipped below $48.48, the cheapest it has been since 2008. So what happens when oil prices go down?

Looking into the not so distant future, oil prices are expected to get back closer to $90 or $100 a barrel, but it will most likely be a long and gradual rise. Growth in China has slowed, Europe remains on the brink of another recession, and the U.S. is going through an oil boom.  Anyone of these factors would have an impact on oil prices, but the combination of all three would be hard for oil companies to overcome.

Most of us notice the drop in oil prices when we come to fill up our cars. The price of unleaded petrol has in recent days been as low as £1.00 per litre, the lowest it’s been since Nov 2007. This leads to big savings at the pump, which is great news for retailers since consumers will have more disposable income.

While retailers are likely to benefit from lower fuel prices, the sector that is best positioned to take advantage of falling oil prices is the transportation sector. Airlines and shipping companies love what has happened to oil prices. For these types of companies, energy costs represent a huge amount of their overall costs of doing business, so falling oil prices enable them to grow their earnings very quickly.

Optimistically speaking, retailers and chiefly the transportation sector should see a reduced cost in their supply chain which in turn will allow more money for investment and growth, while also bringing in the cash from consumers who can afford to spend more on goods and services.

19th January 2015