Influence of Oil Prices on Logistics Decision



Influence of Oil Prices on Logistics Decision

Introduction

Reducing operational expenditure has been the main agenda for many organizations since the mid of 1990s, and it was doable as well and lead to moderate supply chain expenses by achieving manufacturing subcontracting, off-shoring, plant justification, and facility alliance. The factors that made the above target achievable were reduced oil prices. Previously, transportation expenses were used to be only a small percentage of overall cost of operational expenses (Simchi-Levi, D., 2011). But rising oil prices have been badly affecting supply chain networks and distribution strategies. It has added significantly to the cost of business operations. According to latest Global Logistics Monitor, Transport intelligence has reported deriving affects of higher oil prices on logistics and transportation decisions (worldtradewt100.com, 2012). Few strategies can be proposed in order to address the above mentioned issue, such as changing logistics locations that helps in reducing transportation costs, efficient distribution networks should be established, supply chain managers and distributors should consider engaging into more partnership activities to make the process work efficiently, provision of more than one distribution center in one geographic location and many more (facilitiesmagazine.com, 2012).

Discussion

Reasons for Increase in Oil Price

Year 2012 witnessed drop in oil prices for some time but it remained high through out the year. The decrease in prices was mainly due to strength of US dollar and increased oil production in USA. These two factors have stabilized the price of oil for quite some time in USA but as per analysts it would have a reversing affect at the end of year. Factors that have participated in the decrease of oil price are increase of 1.5% in USA's crude supply in April as compare to last year and strengthening of USA dollar. As per analysis of IS Energy information Association oil prices are projected to increase by 104 $ per barrel and the costs associated to it will beat average of $110 per barrel (Spears, L., 2012).

As per American Petroleum Institute API, increasing crude oil production in USA may increase the value of oil stocks to 374.8 million. However, the demand of oil and energy has risen significantly in emerging markets such as China, India etc. for quality transportation means. According to Money Morning Chief Investment Strategist, the demand for oil may increase by 25% in 2015 i.e there would be an increase from 89 million of barrels in a day to 105 million of barrels. Therefore, it could be forecasted that 25% increase in demand of oil may lead to 25% increase in price as well. This would be translated into a jump of $90 per barrel to $112 per barrel in terms of price (Spears, L., 2012).

In addition, higher demand is not only a reason of higher demands in today's times. Other reasons may include political situations and practices of wars, strikes, and tyrants requiring consumption of crude oil. According to experts, there are three factors that could contribute to soaring prices of oil to up ...