Impact of Crude Oil Prices on Various Partners in the Supply Chain
From the average consumer’s perspective, crude oil price fluctuations are most likely only noticed when paying at the pump. But as anyone in the petroleum industry knows, the crude oil market can be volatile, and the supply chain is long and confusing. The various behind-the-scenes factors that influence oil prices have an immense impact on each part of the crude oil supply chain, from offshore rigs all the way to our gas tanks.
Supply chain management (SCM) departments play a significant role in the oil and gas industry. Understanding and even predicting market and supply chain trends is an essential part of the business. DTN Refined Fuels Demand helps fuel buyers measure market demand and volume, allowing them to make better, more profitable decisions.
But how exactly does the cost of crude oil impact different parts of the oil supply chain? Let’s take a brief look at the crude oil supply chain to start.
The parts of the crude oil supply chain
As crude oil makes its way from the oil field to individual homes, it passes through various parts of the supply chain:
- Production: Crude oil is extracted in oil fields either on land or at sea. This first step includes exploration and drilling to find underground oil reserves.
- Port of Call: These ports serve as the main entrance and exit locations for crude oil imported or exported.
- Short-term Storage: After extraction, crude oil can stay at a short-term storage facility until it continues along the supply chain.
- Refinement: Domestic refineries utilize chemical processes to separate and transform crude oil into usable consumer products.
- Distribution: At this point, the product can be sent for use at power plants, in airplanes, or as essential manufacturing feedstock.
- Terminal: Ethanol and other brand-specific additives (e.g., detergents) are added to the gasoline at the terminal.
- Point of Sale: The gas is transported to the final point of sale, such as retail service stations and convenience stores.
With a better understanding of how crude oil moves through the supply chain, we can better see how oil prices impact the various supply chain partners.
How crude oil price fluctuations affect transportation in the supply chain
As a general rule, profit margins in any industry relying on the transportation of goods are affected by the cost of oil. When oil costs go up and gas prices rise in response, transportation costs for materials and finished products go up as well.
In general, businesses have a few options to choose from in response to an increase in transportation costs:
- Change to a more cost-effective means of transportation; for example, using ground transportation instead of air.
- Use more regional warehouses to reduce the distance needed to move products.
- Decrease profit margins or cut costs elsewhere in the supply chain.
- Pass the increased cost along to the customer.
Businesses within the oil and gas industry are more limited in this regard, at least in the earlier stages of the supply chain. It is not an option to simply move production to a cheaper or closer location.
The location of an oil field is the location where the oil was initially discovered. These fields are often in remote, less populated areas. So, reducing the distance between supply chain points by using a more regional location is not a choice. Oil producers must drill where the oil is, not where they wish it were for the sake of convenience.
In many cases, changing to a more cost-effective method of transportation is limited as well. Due to the heavy weight and hazards of moving combustible crude oil, there are few opportunities to switch to alternative, cheaper transit methods. These alternatives also often take more time, leading to delayed deliveries and a cascading strain on the overall supply chain.
How crude oil price fluctuations affect procurement in the supply chain
An increase in oil prices can be the result of high demand and limited supply in the market. These variances might happen because of a disruption in the supply, such as extreme weather that temporarily stopped refinement or political tensions that put production or transportation in jeopardy.
Such disruptions within the crude oil supply chain can put a squeeze on fuel buyers. Industries dependent on oil (which is almost every industry on the planet, to one degree or another) will not be able to procure the quantities of refined fuel products needed for their businesses. These shortages are especially impactful for those who rely on spot transactions instead of futures contracts.
When facing a supply chain crunch, fuel sellers will often prioritize those with contracts already in place, potentially not having enough left over for those who need a real-time purchase.
How crude oil price fluctuations affect consumer sales in the supply chain
Crude oil price fluctuations are especially visible for fuel buyers who operate at the end of the supply chain and sell directly to consumers. Since crude oil is the main component of gasoline and diesel fuel, gas prices naturally follow when crude oil prices go up. Profit margins are already slim at this stage in the supply chain. With such tight margins, individual gas retailers often have little choice but to pass along the price increase to their customers.
It’s time to rely on accurate, up-to-date data to power your supply chain management strategy
Internal inventory management and accounting systems can only tell you so much. In a volatile market like oil and gas, unpredictable spikes in wholesale rack demand can catch buyers off guard. This volatility makes market analysis and prediction challenging to master.
With DTN Refined Fuels Demand, you can benefit from a comprehensive data feed with both current and historical trends customized to your needs. By answering many of the daily questions facing fuel buyers, DTN enables customers to maximize fuel market opportunities with confidence.
Try it out for yourself and experience the competitive advantage DTN Refined Fuels Demand can offer your business today.