Rising Fuel Prices: Known and Unintended Consequences to Sustainability

Tracking supply chain trends is a game-changer when it influences strategic planning. Together they can lead to competitive advantage.

Tracking trends, like fuel prices and sustainability issues, enable you to manage change and budget for optimal results.

Trends suggest rising fuel prices will delay strategic sustainability goals, in general, and the net-zero carbon mandate, in particular. And they also affect your profitability.

Achieving global net-zero is an international goal. There is an International Energy Association Agency (IEA) study, an International Maritime Organization (IMO) Strategy, and a US. government Executive Order.

Their goals and objectives are similar. The end-state for shipping calls for a 70% reduction in carbon emissions by 2050 using 2008 as the baseline. The U.S. goal, meanwhile, calls for net-zero emissions by 2050 from federal operations. Achieving these lofty goals depends heavily on technology.

Let’s focus on the shipping industry because it’s international in scope.

The driver for change in shipping is technology. The development of battery, scrubber, and engine technologies loom large. So does new ship design.

The combination of policy and innovation has made the achievement of net-zero carbon by 2050 feasible. These clean energy goals seemed within reach­—until now.

Now, with rising fuel prices, achieving these clean energy goals by 2050 seems unlikely.

We’ll explore some risks and impacts on sustainability goals. We won’t take an exhaustive look at the consequences. But this blog post will explore some first-order risks and impacts. .We’ll home in on what affects your strategic plans and your profitability.

Known Risks and Impacts of Rising Fuel Prices

A McKinsey report (Jan. 2022) identified eight risks and impacts to sustainability. Here are three caused by spiking oil prices that should inform your strategic planning.

  1. Retail gas prices jumped to $3.50 per gallon. As of April 18, 2022, gas prices have climbed even higher. AAA reports gas prices for regular between $3.66 and $5.70. Mid-grade gas sells between $3.90 and $5.90. And premium sells for $3.90 on the low end and $6.05 on the high end. Kansas has the lowest prices at the pump, whereas California has the highest.
  2. In November 2021, India, Japan, South Korea, the U.K., and the U.S. declared their intent to tap their strategic reserves. On March 31, 2022, President Biden declared the release of 180 million barrels of oil from the strategic oil reserve over six months. That comes to 30 million barrels of oil released per month or 1 million barrels of oil per day.
  3. The U.S., along with other countries, plans to provide an aid program (Low Income Energy Assistance Program) to assist five million low-income families. This puts pressure on inflation not just in the U.S. but internationally. It amounts to spending money that’s not in any country’s budget.

The report lists more impacts from other sources, such as labor and supply shortages, extreme weather, and supply chain disruptions.

Besides the expected consequences to net-zero carbon, there are more consequences from rising energy prices.

Unintended Consequences of Rising Energy Prices

  1. As prices between High-Sulphur Fuel Oil (HFSO) and Low-Sulfur Fuel Oil (LSFO) widen, more shipping companies will outfit their ships with scrubbers. They will do so in greater numbers because they now have an economic incentive to do so.

“The spread between HSFO and very low sulfur fuel oil (VLSFO) was $102/mt in both Singapore and Rotterdam… That’s up from $63/mt in Singapore and $39/mt in Rotterdam last June 1.” (JOC.COM)

Previously, economics incentivized shippers to pursue new technologies rather than scrubbers. Scrubbers represent an intermediate fix. With the spread, expanding use of scrubbers will likely increase industry-wide. That would delay the adoption of new technologies for a long-term solution.

  1. The WSJ reports that banks are trimming lending for Green initiatives and expanding lending for fossil fuels. The Russo-Ukrainian war is driving banks to underwrite more bonds and loans. That reverses a recent trend favoring clean-energy projects.

Major banks underwrote more oil-and-gas debt in the first quarter. They include JP Morgan Chase, Citigroup, Wells Fargo, Mizuho Financial Group Inc., and Société Générale SA.

It is unlikely this is a long-term trend, given the policy direction favoring Green initiatives. However, it will probably derail the 2050 end-state goal. The longer the war drags on, the greater the delay in reaching the 2050 mandate.

  1. A third unintended consequence is the opening up of federal lands for oil exploration. Previously the Biden administration took a hard line on offering new leases for drilling.

But rising energy prices have softened the administration’s position.

On April 15, 2022, the Biden Administration announced it would allow drilling on federal lands. Oil companies can begin drilling immediately. But that policy reversal came with some restrictive conditions indicating the priority of sustainability.

First, it opened up 144,00 acres for drilling. That’s only 20 percent of what the oil industry had proposed. Second, the administration increased royalty fees oil companies must pay the federal government. To the oil industry, these measures seem more like constraints than incentives.

They amount to a stop-gap solution the problem, which is one of capacity and not of resource availability. Industry stakeholders would like to revive construction of the Keystone XL pipeline. They insist it’s a better solution because it expands capacity.

Whether the Keystone XL project gets revived is moot, but the administration is against it. If gas prices continue to climb, this latest measure may fall short of its intended impact. Consequently, the expansion of drilling on federal lands may expand.

Are You Prepared for Rising Fuel Prices’ Unintended Consequences?

This year remains a year of challenge. We are in a time of transition from pre-pandemic times. The immediate concerns of rising energy prices are affecting strategic imperatives for sustainability. They’re also affecting profitability.

This might be a good time to adjust your strategic plans. But where should you start?

You could start by seeking a 3PL partner who is adept at strategic planning. The key is to focus on near-term objectives, while working towards long-term goals.

Anticipate – don’t follow the trends. Anticipating trends makes it easier to side-step/mitigate the effects of rising energy prices. You can achieve profitability and long-term sustainability goals.

If you’re unsure about your next steps, contact American Global Logistics.

We can help you balance your strategic goals with near-term objectives for competitive advantage.

Contact American Global Logistics today if you’re concerned about the impact of rising energy prices. We’ll help you minimize your risks and maximize your opportunities.