Already August and Fuel is Still Cheap!

Back in January of this year I published an article on LinkedIn called ‘Gas is cheap and this is my new grocery getter!’ that was not published in our website blog.  In the article I mentioned low oil prices may slide all the way through summer.  Instead of me paraphrasing my January article it would be better if you went and read it at which will save me a load of typing.  I’ll wait while you read it.

Okay… all done?  Now that we are heading into the end of the summer season it seems some of the experts were right.  Fuel prices did remain lower as a result of low oil prices and I am still cruising around in my grocery getter.  Summer is almost over, what now?  Enjoy the low fuel prices just a little longer than prepare yourself for another ‘new economy’ by the end of 2016 or sooner.  It appears the Saudi Arabian propensity for not reducing oil productions to maintain price stability has had its’ desired effect, destabilizing Saudi competition whether that competition be US shale oil companies or oil dependent countries.

On a global level there are more countries that pay the rent through oil revenue than the everyday names of Saudi Arabia, Iran, Kuwait, and Iraq.  Each country, whether well know or not, has one thing in common with each other, which is a breakeven sales price for a barrel of oil.  Below is the short list of oil producing countries as well and their estimated breakeven price (rounded to the nearest dollar) for a barrel of black gold.  I have also added USA shale oil producers’ collective breakeven price average.  Price variations are the result of the differences of difficulty of extracting oil due to geographical challenges, dangerous environments, and civil unrest.

Libya $184

Iran $131

Algeria $130

Nigeria $123

Venezuela $118

Saudi Arabia $106

Iraq $101

Russia $98

United States Shale Oil Producers $75

With the price of oil settling around $50 as of today and a summer high of $65, it’s not hard to imagine there is more than a little belt tightening going on. Russia alone has lost over $150 Billion in GDP due to low oil prices and has not reacted well to it. They are cranky and they are broke. The only country not named the USA that isn’t sweating bullets on the list is Saudi Arabia.  It’s not that the USA isn’t suffering.  There has been a string of bankruptcies of USA based shale oil companies with plenty more expected.  These companies failing have put a weight on the economy.  Any benefit garnered from cheap fuel costs is largely over shadowed by lost energy sector jobs as well as billions in unpaid financing.   Even though energy production is very important to the USA, it is not the country’s single GDP.

So what now?  More of the same for a little while would be my guess.  Saudi Arabia has gobs of cash reserves left and there are still some shale oil producers breathing.  Longer range I would prepare for the day Saudi Arabia allows OPEC to slow production of oil to bring prices to a profitable level, at least profitable for Saudi Arabia.   This will enable them to ‘run the oil table’ for the next decade as the rest of the oil producing competition recovers from the great cash famine of 2015.

What does all of this mean to logistics and transportation?  Transportation consumers will be especially hard hit when the time comes.  Transportation companies have been busy figuring out where to spend all the money they have been saving on fuel costs.  When fuel prices head north in 2016 I wouldn’t count on transportation companies to bite the bullet as well as they did enjoying the extra cash generated from cheap fuel.  Rate hikes will be across the board and they will be significant enough to impact the economy as energy costs force prices higher of all goods to possibly even further stifle the economy.

Heading out of 2015 and into 2016 with healthy cash reserves and being prepared for higher costs across the board will be paramount.  In planning your transportation leave a wide flexibility for fuel costs.  Most transportation buyers know why ‘Fuel Surcharge’ exists and is quoted separately, but they seldom prepare for large variances in fuel costs when it comes time to move the freight.   For the upcoming year it just may be the right time to start planning for it.  Saudi Arabia will be turning down the oil spigot fairly soon.