Adapting to high fuel costs

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What happens if fuel prices continue to rise? With oil now at $120 a barrel – double that of a year ago – and with Opec warning that the price of crude could reach $200 a barrel, the cost of transporting goods looks set to rise.

So what impact will this have on the supply chain? In many instances we might see a move away from holding stock centrally, with more local holding patterns coming into play. But the downside here would be less flexibility and possibly higher levels of inventory, all of which would be a little uncomfortable given the recent trend to lean logistics practices. Port centric logistics too may play an increasing role as the tide of imported goods from low cost countries rises.

A greater adoption of shared user services and the application of smarter scheduling techniques would also be likely consequences of higher fuel costs. Ensuring good vehicle usage and fill rates on both out and return journeys makes perfect sense in terms of fuel savings and, of course, improves the carbon footprint.

But don’t expect eco-fuels to help. Governments may be subsidising the use of crops for the development of ethanol production in order to enhance their green credentials – and perhaps, reduce their exposure to the vagaries of world oil producers – however, the economics of production and indeed the ‘green’ worthiness of the scheme is coming under increasing pressure. Above all else, Eco-fuel’s impact on global food prices is causing considerable concern.

One area where governments could help is in reducing taxes on fuel – by far the greatest proportion of the amount paid at the pump. But then that’s hardly likely. In fact a 2p rise in duty on UK diesel was due to be introduced in the last budget but was deferred to the autumn. Despite strong campaigning from the UK Freight Transport Association I very much doubt that it will be deferred for a second time.

With strong rising demand for oil from emerging economies, production restrictions in places like Russia and a weak US dollar, it would seem we are going to have to adapt to prospect of higher transport costs.

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