$20 per Gallon

I am reading an interesting book, Chris Steiner’s $20 per Gallon: how the Inevitable Rise in the Price of Gasoline will Change our lives for the Better. It describes how business and society will change as gas changes from $6 to $8 to $10 to $12 to $20 per gallon. It is a very thought provoking. However, I think it misses on some the ramifications on supply chain.
Steiner’s premise is UPS will do great as more people use e-commerce rather than drive to a store. Further, Walmart (and all big-box retailers) will be hurt as people also walk to a local stores for staple items. Steiner paints a future utopia that looks like 1950s small town America – like the idea, but believe the Author’s social belielfs have hurt his objectivity. Walmart will actually do better and the smaller retailer will be hurt further. Walmart is a one-stop shop and I believe consumers will be more likely to go to “just” Walmart rather than a series of smaller retailers (even by walking). Further, Walmart’s efficiency at logistics will be an even greater advantage over other retailers as petroleum costs increase.
As petroleum cost increase, the “last mile” problem becomes the more fundamental issue. Half the cost of shipping an item from China is in the delivery to a customer’s home address or for the consumer to pick it up at a store. To say another way, more gas is used to drive the last mile than the other 6000 miles combined. I do not see major companies changing the majority of their supply chain – most manufacturing will not come back from low cost countries because petroleum cost increases. The only exception would be for items that are shipping air freight. Anything that ships via container ship will not change. You will see more inland water transportation (Europe already there), more West Coast port diversion to East Coast (glad Panama is widening the Canal), and more multimodal shipping. However, that all helps large organizations with scale and strong logistics. As petroleum costs increase, more focus (and resources) will be spent to improve efficiencies. Railroads and inland ports will do very well. However, parcel carriers, especially those focused on air shipments will do very poorly. You will see less parcel shipments as that is the most energy intensive shipping. The one opportunity I see is for parcel carriers to use their store operations (UPS Store and Fedex-Kinkos) as drop points for customer pick up. This is similar to the JC Penney Catalog pick-up centers of 25 years ago.
What to do as a supply chain professional? With any major investment, do a sensitivity analysis of what would the payback be if petroleum costs tripled in price? What if it was 5 times as expensive (as “peak energy” doomsayers believe)? How easily would it be for you to handle multi-modal shipments? How close is a rail head to your major shipping points (better be less than 40 miles if you expect to shuttle). The sweet spot for inter-model will decrease in distance to 300-500 miles from 750 miles.
In addition to looking long term, what about short term emergency planning? What if there is a sudden increase in petroleum costs due to terrorism, war, or natural disaster? How would your company handle a sudden tripling of cost of petroleum? How quickly could you change your prices and contracts? Transportation companies and many commodity based businesses have mechanisms to quickly institute price changes based on market changes. If you are in a very different business, how would you handle a massive change, especially if you have contract prices in place? Do you have contracts based on a delivered price?