Did the price at the gas pump immediately following Hurricane Katrina get your attention? Good. Now here's some advice: Stay focused on the fuel. Don't let your attention to fuel price trends recede as the waters ebb from the streets of New Orleans.
Like many folks, I awoke the morning of Thursday, Sept. 1, with one clear and overriding objective: Gas up my wife's land barge as early in the day as possible. With the New Orleans flood waters still rising, it seemed clear that the cost of gasoline heading into Labor Day weekend would be climbing right along with the water levels.
I was right. I arrived at the local petrol purveyor at 6: 50 a.m. and paid $70 to fill up the tank. I headed across the street to work and set about my day figuring I had just saved myself a few bucks. It turned out, though, to be more than a few bucks. From my third-floor office window, I watched a story unfold that was being played out coast to coast.
When I tanked up just before 7 a.m., the posted price for regular unleaded gasoline was $2.99. By 10: 30 a.m., it was up to $3.11. At lunchtime, the posted price was $3.19. At the end of the workday, the price was up to $3.25. It continued climbing in the days that followed, peaking at $3.45 before receding (oddly in sync with the by-now-fetid flood waters) down to $3.19 as Labor Day weekend came to a close.
Yet for most people, the rising cost of a tank of gas may turn out to be the least of their worries. The effects of soaring fuel prices will ripple not only throughout the supply chain, but throughout the economy. Not that long ago, a market analyst estimated that 21 cents of every dollar spent in a grocery store represented the cost of getting the goods to the store and onto the shelves. But most people don't make that connection. For all the consumers grousing about the price of a gallon of gas, very few will connect the dots to that 50-cent increase in the price of a pound of russet potatoes or gallon of milk at the grocery store.
While the catastrophe that was Katrina focused the public's attention on rising fuel prices, it by no means caused the situation. What everyone seems to be forgetting is that the price of fuel had been climbing steadily in the 12 months before Katrina hit. The cost of gasoline soared some 132 percent from August 2004 to August 2005.
What was responsible for this surge was not a great catastrophe like Katrina; it was a change in market dynamics stemming from record global demand.
Today, emerging nations, most notably China, are experiencing unprecedented economic growth. Among the many by-products of that growth is the emergence of an enormous middle class with money to spend. Per capita income has nearly quadrupled in the last 15 years, and a few analysts are even predicting that the Chinese economy will surpass the U.S. economy in 20 years' time.
With road-building projects well under way and a Chinese auto industry that is growing as fast as—if not faster than— the rest of the Chinese economy, it's a safe bet that literally tens of millions of Chinese will soon be behind the wheel of their very first car. Their collective trips to the gas station to fill their tanks will translate to an exponential increase in China's fuel consumption.
It takes only a rudimentary understanding of the laws of supply and demand to see that as the world's demand for gasoline skyrockets, so will fuel prices.
The biggest concern for a logistics community with a heavy dependence on fossil fuels, then, shouldn't be how to overcome the short-term spikes in fuel costs in the wake of Hurricane Katrina. No. The biggest concern is how to maintain acceptable operations (both in terms of economy and efficiency) as fuel prices continue to rise. And they will. Significantly.
As with so many other things in business, it's prudent in this case to take the long view. Fuel prices could double yet again in the months and years ahead. Is your supply chain ready to meet the challenge?