Peak Oil: Time To Tell the CEO

Peak Oil: Time To Tell the CEO

Since 2004, the transportation industry has been warned about the challenges of "peak oil" - the point at which global petroleum extraction peaks and supply begins to lag behind demand. Several forums and articles have discussed peak oil and its impact on supply chains.

Yet the following statement in a recent Business Week article by the head of the global supply chain practice for Accenture,  "Fuel prices just shot up so fast that everyone was caught flat-footed," indicate that even the smartest guys in the room still do not get it.

Your CEO is undoubtedly concerned about high fuel prices and maybe even so concerned you find yourself explaining your transportation budget. The CEO is wondering when things will return to "normal."

Your job is to gently but firmly tell that CEO this is the new normal and life will never be the same. Furthermore, it will take significant leadership and change management from the top to survive because all your strategies based on the continuation of cheap oil are obsolete.

Here's why: Oil fields go through predictable depletion. Production increases until roughly half the oil is pumped and then falls back down the slope to zero. This pattern was first recognized by Shell geophysicist M. King Hubbert, who unveiled the concept in 1956 and predicted oil production in the "lower 48" states would peak in the early 1970s - which it did. Others have updated this model, which became known as Hubbert's Peak, and current scholarly predictions call for conventional oil production to peak between 2005 and 2012 - just about now.

Since 2002, the price of a barrel of oil increased from $20 to $140. Since 2005 worldwide production has been stuck on 85 million barrels per day. In mid-2006, world demand - primarily from China, India and oil exporting countries - equaled and began to exceed supply. In 2007, demand exceeded supply by 1.1 percent.

This is the definition of peak oil - supply unable to meet demand. Nothing nefarious, no manipulation by evil speculators, only Economics 101 - supply and demand - as more than two billion people come into the industrial age.

Unfortunately, none of the many "solutions" readily substitute for cheap oil. The key to all substitutes is Energy Returned on Energy Invested - how much energy it takes to produce the energy found. For the huge oil fields found in the 1960s, EROEI is 100 to 1. Oil production today in deep waters and hard-to-reach places is 8 to 1. Tar sands are 3 to 1. Corn ethanol is 1.3 to 1. When EROEI goes up, prices must follow.

To offset the current 4.5 percent decline in existing fields requires producing more than 3 million new barrels a day every year. In just four years, the world will need the equivalent of a new Saudi Arabia just to keep pace. It is not going to happen. Couple these geological constraints with the geopolitical and aging infrastructure limitations, and the only reasonable assumption is that peak oil is here now. At some point not too far away, prices in the $200-$500 per barrel range are realistic and probable.

 

Now that you have your CEO's attention, it is time to suggest a plan of action, and that means rapid and radical change. Companies must immediately make supply chain and logistics the focus of the enterprise. The best chance to minimize the early impacts of peak oil come from conservation and eliminating waste in the system.

In a peak oil world, start with these three assumptions. First, cheap transportation is gone forever. Next, the world will localize again and the 12,000-mile supply chain will fast become obsolete. Finally, the supply chain will slow down. Expect the government to reduce speed limits, restrict operating hours in congested areas, set priorities for certain types of essential cargo (food, fuel, emergency services, etc.) and possibly ration fuel. 

In this high-cost energy world, everything will need a fresh, fact-based analysis. What are the impacts on transport costs of service levels, order quantities, packaging and inventory strategies?  What about networks, modal selection, plant and distribution center locations?

The new normal is that nothing will ever be the same. We are looking at the unknown and unpredictable.

Taylor is "head coach" of his own consulting firm, Awake! A 35-year logistics and supply chain industry veteran, he held senior positions at companies including Nabisco Brands, Ryder System, BNSF Railway and ServiceCraft Logistics.