Rising Fuel Prices and the Impact on Supply Chain
You have probably noticed when filling up your vehicle with gasoline that fuel prices have been rising recently. What you may not be aware of is how these rising fuel prices affect the supply chain. In today’s blog article, we are going to discuss what is happening with fuel prices and why this has a significant affect on the supply chain.
Why Are Fuel Prices Rising?
Fuel prices are rising because oil prices are rising. In general, the most important factors that determine oil prices are supply, demand, and/or market sentiment. (There are also other lesser factors that play a role.) So, in theory, if supply (of oil) goes up, then prices comes down. If demand for oil goes up, then prices go up. And market sentiment is important because the price of oil is actually determined by the oil futures market. So, if those buying and selling futures think that the price of oil will go up, their actions today will actually drive the current price up, and the opposite is also true.
The main reason why oil prices are rising and expected to stay high for the next while is because of Russia. Russia produces about 10-12% of world oil and about 45% of that is exported. However, since Russia invaded Ukraine, many countries in the western world including the EU have imposed economic sanctions on Russia to limit or ban buying Russian oil and petroleum products. If Russia does not contribute oil to the world market, this significantly reduces supply and drive the price upward.
Another factor driving oil prices up is lack of refinery space in the US to process oil that they have. The US has plenty of oil supply, but they do not have adequate numbers of refineries to process this supply. This further pushes the price of oil upward.
Fuel prices have been rising rapidly, and they are expected to remain high for at least the next year. High fuel prices dramatically affect the cost of transportation. Trucks and trains typically run on diesel fuel. Airplanes run on jet fuel, and container ships use bunker fuel. Diesel, jet fuel, and bunker fuel are all products that come from oil refineries and are derivatives of oil. Of the three types of fuel mentioned above, bunker fuel is the dirtiest and is a leftover carbon-intensive product after oil has been refined.
So, if fuel prices rise, then the overall cost of transportation rises. When transportation costs rise, then those who ship products increase the price of the product to cover the increase in the price of shipping and getting the product to market. And if the manufacturer increases the cost of his or her product to manage increasing transportation costs, then the end buyer or consumer will have to pay a higher price for the product.
We have offered you, above, a somewhat over-simplified view of what is happening with both the price of oil and its effect on the supply chain. Shipping and logistics professionals study what is happening with the price of fuel, the cost of shipping, and they try to find the most cost-effective and efficient way to ship the products of clients.
If you need some help with your shipping and logistics, please contact Overseas Container Logistics in Vancouver at (604) 295-8236, and let us help you find the best solution for your shipping needs.
Overseas Container Logistics (OCL) is a 3PL commercial freight-forwarding company based in Richmond, British Columbia.
If you have any questions about this article or would like to talk to us about your transportation and freight needs, give us a call at (604) 295-8236.