Oil and Iran Could be the story of the week
The weekend brought with it several significant developments that all collectively are helping to push oil prices higher. To the degree that the freight goods sector has vulnerability to fuel price escalation and their customers and general economic activity is also subject to the price of oil, any developments leading to a spike is worrisome news for most companies in the transportation sector.
There are two primary types of crude oil traded around the world. West Texas Intermediate is the primary form of crude traded as "US oil". This is the oil that many people commonly refer to when they discuss the price of oil for the US consumer. However, Brent North Sea Crude is a better gauge of what the rest of the world is paying for crude oil. Since many companies in the US are multinational and source products from all over the world, their suppliers and the costs to move those goods through the supply chain from manufacture to consumption is largely impacted by Brent prices. Finally, most of the crude oil imported into the United States will carry Brent forward contract prices with them.
With this in mind, there were two key developments that worked to move oil prices higher, and pushed Brent to record levels. First, Iran took a preliminary swipe at the West by curtailing crude oil sales to Britain and France (two of the three largest economies in Europe). Brent prices moved upward on the news. In a related, but separate event, Iranian warships transversed the Strait of Hormuz - under the watchful eye of US and British naval forces. Although there was no outward engagement, there is concern that tensions appear to be moving in a more contentious direction - and appear to be not easing.
In addition, there were reports out of several different international agencies on Sunday that Saudi Arabia and Russia both were experiencing less in output. That came as a bit of a shock because both countries said that they would be among the long-term contingencies for Europe if they were to initiate and discontinue purchases of Iranian oil this summer. The move by Iran simply called the European's bluff and moved the timeline up.
Second, as a sign that the Chinese Central bank could be getting worried about growth, the China Central Bank eased lending to help free up spending and add some slight help to the Chinese economy. China is exposed to Europe in a massive way - it is China's number one trade partner. This temporary move by the central bank worked to make markets more optimistic - pushing Brent prices higher.
There seems to be a significant focus on fuel and crude oil prices lately. This is for good reason.
- Fuel costs are the second largest expenditure for most carriers.
- In 2008, the trucking industry logged more than 4,000 bankruptcies when crude oil hit $147 a barrel (and the subsequent increase seen in the gasoline and diesel market). The hardest hit segment was the trucking companies with between 5-25 trucks.
- By the following spring, there were three major regional airlines that filed for bankruptcy and shut down - largely as a result of the impact of higher fuel prices.
Raw material costs including anything with plastic or petroleum-based products will increase in price. Consumers shifted from eating out to eating at home more and moving to cheaper proteins for food. We also saw changes in house buying behavior - which is one of the reasons why the housing market was hit so hard in the third and fourth quarters of 2008.
In comparison to other economic metrics, fuel costs are perhaps one of the single most impactful on the global economy. It affects so many facets of business management from supply chain management to product pricing, yield, consumer spending, etc.
With that in mind, consider these facts:
1. Brent North Sea Crude set an all-time high price last week (arguably at a weaker demand peak - especially from Europe).
2. Gasoline and diesel retail prices are higher today than they have ever been at this time of year.
a. Scheduled maintenance of refineries will begin in the spring.
b. Cut-over from winter to summer blended fuels will temporarily also cut supplies.
Because of the global economic recession and the temporary drop in fuel prices between 2008 and 2009, the world was lulled into a false-sense of security regarding oil supply and price security. Alternatives were not developed with enough haste to help prevent at least one more fuel price spike. Given geopolitical tensions around the world, that spike could be closer than expected.