How increasing fuel prices are affecting supply chains

Fuel prices are rising, rapidly. Long gone are the days of 2020 and cheap fuel, with roads and airports relatively empty due to COVID-19. As the world learned how to accommodate safety measures put in place to combat the spread of COVID-19, energy demands rose in 2021, causing fuel prices to increase across the globe.

Why did fuel prices increase?

Prior to the escalating situation in Eastern Europe, the global fuel market was already having trouble satisfying global need. As western countries made plans to switch to greener solutions, drilling companies slowed production in the US, and investments in new wells dived.

Overall oil inventories were also falling rapidly, with OCED industry inventories being around four percent below their five-year average in July 2021, according to World Bank insights in late 2021.

Further challenging the fuel market and making energy prices increase is that some key producers of crude oil and fuel exist in unstable environments. Countries like Ecuador, Kazakhstan, and Libya have been plagued with natural disasters and political turbulence for years, hindering output.

Conflicts and inflation influencing supply chains

Russia, as the world’s second largest producer of oil and natural gas, supplies much of the world with their energy. The EU, which gets 40% of its natural gas and 25% of its oil from Russia and Asia, are reliant on Russia for supply. Given this weighty role played by Russia in global production, oil prices have risen dramatically, given the uncertainty caused by the conflict between Russia and Ukraine. Today, oil prices are at levels not seen in almost a decade. JPMorgan Chase & co. warned that any disruptions in oil flows could send oil to $185 a barrel. A lengthy conflict in Eastern Europe could further add to rising prices of crude oil.

Because of the conflict between Russia and Ukraine, Russian petrochemical products are being sanctioned against, which in turn has sent market prices higher. Supply chains may need to be reconfigured around alternative supply points where production is still viable, such as American drillers stepping up their output and helping ease the economic turmoil the world may face. Other key producers, like the OPEC countries, are also increasing their production. As energy prices rise, US fracking production will increase, and we can expect that greater volumes of Liquefied Natural Gas (LNG) will be shipped to Europe.

Further disruptions to global supply chains

As the situation in Eastern Europe continues, global supply chains are further disrupted. By choosing to omit oil and gas supplies from Russia, some production processes are no longer as easily accessible, due to missing raw materials such as crude, or are no longer financially viable as the cost of oil and gas rises.

As diesel prices rise, so do other costs. This ripple effect will be felt across the world. European consumers will most likely experience rises in heating, gas, and gasoline bills. Disruptions to global supply chains for fuel may also affect food prices, increasing insecurity in poorer communities across the globe as well as economic protectionism.

The ripple effects of increasing fuel prices

Given rising energy prices, the search for cheaper options will intensify. Cost effective options include: Liquefied natural gas in Qatar and around the Gulf of Mexico, US-based LNG from fracking, and sustainable energy offerings in offshore wind farms and solar energy parks.

With more costly fuels, the cost of cargo movement could rise and cause further delays and backlogs for industries, creating long and short-term ripples across supply chains and affecting business agility. Supply chains will have to infuse more flexibility into logistical set-ups, creating alternative opportunities through potential near and far sourcing options, accommodating local and global disruptions. The key is that the resilience activity is scalable and responsive, to be switched on and off as needed, not only from a supplier perspective, but also on a company level. Simulating your supply chain needs and focusing on the elements that are critical will allow for timely adjustment of business plans and supply chain actions when you need to pivot.

How to tackle high energy prices

At this point, it is still very difficult to predict what the conflict in Eastern Europe and the supply chain bottlenecks and sanctions will have of effect on economies, prices, and supplies. But as global disruptions remain ever present, staying on top of your supply chain and having end-to-end visibility have never been more important. Building that mid-term plan and identifying possible issues early on, will allow you to plot out your supply chain and will make it easier to react quicker, and make decisions based on data versus time.

As a way to tackle the high fuel cost increases, digital innovation may be key for many companies, resulting in solutions that could change landscapes. While inflation and fuel costs continue to rise, so might also business growth as companies are forced out of their regular habits.

What does your action plan look like?