Just In Time -- Oil and Vinegar

July 10, 2008
The only thing worse than the rising cost of oil is not having enough of it to stay in business.

I recently attended an international conference for the oil & gas industry, held in Germany (where, by the way, it costs about $8.00 for a gallon of gasoline, roughly twice what it is here in the United States). For those convinced that the manufacturing industry's escape clause from the high cost of energy is in alternative fuels and sources, here's some sobering news: Nearly 90% of the world's primary energy supply is from non-renewable sources, namely oil & gas, coal and uranium. And those same non-renewable sources will continue to be the dominant sources for the next several decades, at least. Oil alone accounts for 38% of the world's energy supply, and according to current projections, in the year 2030 oil will still account for 38%. What we don't know, of course, is how much it will cost then.

If you want to know why it costs so much to buy a gallon of gas today in the United States, you can blame it on speculators, or geopolitics, or the oil companies, or the Chinese, or OPEC, but ultimately, you've got to blame it on arithmetic. Consider: The United States produces roughly 5 million barrels of oil per day, according to the Energy Information Administration (EIA), but it consumes about 21 million barrels of oil per day, so that extra 16 million barrels have to come from somewhere. The problem is, the demand for oil is a worldwide competition today, with virtually every country on Earth vying for every drop of crude they can get. There is no Third World any more when it comes to oil consumption; every oil-producing country is keeping more and more of it for their own use.

The U.S. Congress, in its often-questionable wisdom, is floating the idea of basically taxing U.S. manufacturers for their carbon emissions (i.e., energy consumption) at a rate that will eventually make it economically unfeasible to continue relying so heavily on non-renewables. Legislators are also keeping a close eye on their counterparts in the U.K., where there's serious talk about issuing every British citizen a carbon ration card. In any event, it's a pretty sure bet that the U.S. federal government will eventually levy a new "green tax" that will end up costing manufacturers (or at least, those who are still in business) hundreds of billions -- maybe even trillions -- of dollars over the coming decades.

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See Chain Reactions: David Blanchard's blog about supply chain management.
If nothing else, the soaring cost of oil is bringing people together in unexpected ways. According to a Pew Research Center survey released in early July, virtually half of those polled now believe that energy exploration should be a higher priority than energy conservation and regulation. Intriguingly, that opinion is shared by all sorts of people -- Democrats, Republicans and independents; men and women; conservatives, moderates and liberals; young, middle-aged and senior citizens; college graduates and high school graduates. Perhaps we've reached the legendary "tipping point" where the sheer weight of everybody agreeing on something sets change in motion. If $4.00 a gallon can level the philosophical playing field, imagine what $5.00 a gallon could do.

The question of the day, though, is: What, if anything, can a U.S. manufacturer do to remain competitive when the cost of running its operations keeps increasing every day? Alas, there are no "silver bullet" solutions, but the one strategy that seems to be paying off is to implement energy-efficiency initiatives early and often. While alternative energy sources have a definite long-term role in manufacturing, many companies are fighting for their corporate lives right now and can hardly afford the upfront investment it requires to reconfigure their facilities.

So here's a hint to Washington: If you want manufacturers to embrace alternative energy, you'd better incentivize them to do so sooner rather than later because if you wait too long and if oil prices continue to skyrocket, there won't be much manufacturing left in the United States by 2030 for you to tax any more.

David Blanchard is IW's editor-in-chief. He is based in Cleveland. Also see Chain Reactions: David Blanchard's blog about supply chain management.

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