A perfect storm is coming

A Perfect Storm is in the making. An impending energy crisis has both global and national dimensions. Its global scope threatens to strike at the heart of economies, businesses and supply chains. 

Economies and businesses survived the pandemic and emerged slowly but successfully. Supply chains now appear to be at risk once again. 

Businesses are operating in a risk-on environment. Just as risks were being mitigated, geopolitical risks have increased to a level not seen perhaps since WWII.

The energy risks stem from a shortage of natural gas in Europe and a shortage of diesel fuel in the United States. Both are external threats that challenge the operation of businesses and supply chains. 

In this post, we’ll examine the impacts and threats posed to your business and your supply chain. We’ll address the causes without going into detail because they leave themselves open to political interpretation.

The ability to address the causes is for the most part beyond a business’s capabilities. These are clearly external issues left to governments to influence in a substantial way.

Hence, we’ll look at the practical aspects of the impending energy crisis and how to prevent and/or mitigate its adverse effects. Businesses have a role, but governments clearly have the lead on this issue.

First, we’ll tackle the impacts of the energy crisis affecting Europe. Then we’ll focus on the coming diesel fuel shortage.

The makings and impacts of an energy crisis

The International Energy Agency (IEA) recently announced natural gas markets are contracting. The IEA cited the war, sanctions, and production cuts for creating "the first truly global energy crisis". 

The Organization of the Petroleum Exporting Countries (OPEC) and its partners comprising OPEC+ to slash output by 2 million barrels per day (bpd). Concurrently, demand for oil is sitting at about 2 million bpd. That creates a 4 million bpd shortage.

The combination of oil demand growth and the reduction in output by 2 million bpd would be disruptive and possibly destructive. 

Prices would rise to unaffordable levels at a most inopportune time. That could then lead to demand destruction and possible political chaos. Businesses and consumers alike would be severely affected. 

They would disrupt stronger economies and potentially crush emerging economies. 

Hence, the world would find itself in an acute energy crisis with political-economic and financial consequences. It would hit Europe hard, given the loss of its gas supplies from Russia’s Nord Stream 1 and 2.

What’s uncertain is the duration of a downturn, which would affect the impact. Whether the impacts are regional or global would determine the level of disruption or destruction. The disruption to businesses and their supply chains would seriously impede global trade.

In summary, here are the effects of the natural gas shortage.

• An increase in forecasted energy demand by 1.7 bpd in 2023
• Continued rising prices for oil, natural gas, and coal
• Global or regional recession
• Energy rationing 

These factors would put output even greater pressure on supply constraints. 

The severity of winter would also heavily determine the severity of the outcome. A mild and short winter would cause disruptions. A harsh and long winter, a worst-case scenario, would be destructive.

Now, let’s go to the looming domestic energy crisis.

Does the looming diesel fuel shortage threaten the economy, businesses, and consumers?

First, it’s not clear whether a looming diesel fuel shortage is upon us. Some media outlets contend there is no shortage, but others contend the opposite. To reconcile this discrepancy, it’s best to look at the data.

For starters, inventory levels are down to less than 25 days’ worth of diesel. That’s the lowest in five years. But that’s not the sole critical data point.

The shortage reflects some issues discussed above. It also reflects the abnormally high demand coming out of the pandemic. As fuel prices rise, demand destruction will occur, causing demand to revert to the norm. Demand may also dip below that as inflation persists.

Since Europe no longer has access to Russian oil, the U.S. has been exporting oil to Europe. But this is insufficient as sanctions have had boomerang effects. So, a tightening of supplies in the U.S. would cause higher prices and reduce demand.

According to Ed Hirs, a University of Houston energy economics professor, the 25 days of supply would only be an issue if consumers panic. That said, the high price of diesel fuel will likely climb higher as the holidays approach. That would affect businesses and consumers alike.

Prices for Amazon Prime rose 17% to account for higher shipping prices. That includes ground and air shipping, with price increases reflected in expedited shipping costs. 

Although a diesel fuel shortage is not probable, it’s possible. Given the right set of circumstances, a crisis could manifest itself. If stakeholders temper their response to sensational headline news, we can avert a fuel crisis. That means no panic buying and no stockpiling of fuel.

At present, Prof. Hirs stated if the current situation holds at 25 days of supply… “the U.S. will not run out of diesel”. That’s not to say, 25 days of supply isn’t low. Compared to 2021, supply would stand at about 35–40 days of supply. 

Mansfield Energy offered a caveat. Mansfield Energy maintained consumers can expect pockets of shortages in diesel availability. Mansfield cautioned, "Some cities might run dry on diesel for a few days, at least at the terminal level. But the fuel supply chain is dynamic, and suppliers will rally to fill in any gaps in supply."

The bottom line appears to be that a crisis is possible but not necessarily probable. Given the low level of supply, Mansfield suggests some mitigating steps to avert a crisis.

Mansfield suggests the following.   

• Bulk fuel buyers should not order fuel without knowing if they have the tank capacity to store the fuel. Doing so would help avoid dislocations in supply.
• Companies could be issued emergency fleet cards that give access to fuel that is trackable.
• Companies could consider installing a small tank to store emergency fuel.

Although not ideal, these stopgaps can keep businesses and supply chains running. It’s possible to avoid major disruption. But all stakeholders must be on alert ahead of potential disruptions and dislocations.

How do you plan to navigate the coming energy crisis?

The risks in the energy space alone are daunting. They have the potential to disrupt or destroy supply chains, businesses, and economies. 

Risks to energy availability dominate the news because of its outsized effects. Also, the hastened transition to green energy sources further magnifies this disruption. 

Combined, they result in a Perfect Storm that affects businesses and supply chains. Under these conditions, supply chain risk management takes center stage. And it will remain center stage for the foreseeable future.

These energy-related risks breed greater unpredictability and instability, creating a more uncertain future.

Not knowing what the future holds, can you avoid and survive this coming Perfect Storm?

With our help you can avoid and survive this coming Perfect Storm.

American Global Logistics is a forward-thinking 3PL that helps it clients avert and mitigate disruption. We do that with our worldwide network of partners to ensure your products keep moving. Our worldwide network gives you options, allowing you to adapt swiftly and surely as needed.  

When you partner with AGL, you’ll benefit from close collaboration and coordination with us. We’ll be there before, during, and after a potential crisis. We know how to prepare for, avoid, and mitigate disruptions. 

Contact us if you want AGL's help to weather the coming supply chain disruptions successfully. 

We look forward to hearing from you.