Peak Oil: Impact on Supply Chains, Preparation, and Response

1. Fox River APICS Chapter Peak Oil: Hit or Myth? Mike Sheahan, CLM, CIRM, CFPIM msheahan@emailta.com Transformance Advisors, Inc. www.transformanceadvisors.com

2. Peak Oil Background & Predictions What is the impact on supply chains? What can we do to prepare, respond?

3. “Oil is a finite resource… The critical question is: when is the date of the maximum daily amount of world oil production – the peak? After that, oil will be an irreversibly declining resource facing increasing demand which cannot be met.” —Walter Youngquist Peak Oil

4. Oil Production – U.S. Finite Natural Resources

5. World’s foremost oil producer & exporter World’s largest exporter of manufactured goods World’s foremost creditor nation Self-sufficient in nearly all resources World’s foremost oil importer World’s foremost importer of manufactured goods World’s foremost debtor nation Jobs fleeing to other countries U.S. in 1950 U.S. in 2008

6. In 1956, M. King Hubbert predicted U.S. oil production would peak in the early1970s. Was widely criticized by many oil industry experts and economists. In 1970, the U.S. oil industry celebrated its biggest production year in history with no end in sight. In 1971, Hubbert's prediction came true. M. King Hubbert

7. U.S. Oil Production Peak

8. Oil Production – World

9. US Energy Information Administration www.eia.doe.gov

11. Following U.S. oil production peak, the U.S. maintained economic growth by importing more oil from other nations. Following global oil production peak, world will not be able to compensate by importing more oil from other planets. What worked before…

14. When Does Crisis Occur?

15. Deffeyes: 2005-2009 Simmons: 2007-2009 Youngquist: 2007-2008 T.B. Pickens: 2005-2007 Campbell: 2010 BP: 2010-2015 Hirsch et al: 2016 Global Oil Peak: When?

16. Saudis, Kuwait, Iran, all major fields now in production have increased the stated reserves since 1971 even though there have been NO NEW discoveries. How Accurate?

17. 5 super giant oilfields make up 90% of oil output and 3 giant oilfields make up another 8%. These oilfields are between 40 and 60 years old. All are reaching point of decline. Half of “proven reserves” are “questionable.” Remaining oil is harder to produce. Shedding Light on Saudi Arabia 2005

18. Peak output occurs as ½ of supply is gone No viable new sources “Proven reserves” are “questionable.” Remaining oil is harder to produce. Out of Gas: The End of the Age Of Oil 2004

19. Scenario Result Wait for peaking Start crash program 10 years before peaking Start program 20 years before peaking Shortages are large and long lasting Delays the peaking, but still produces shortages Avoids the problem and provides a smooth transition

20. Responses to Peak Oil End of civilization as we know it Major disruptions & profound changes We are in for a bumpy transition Technology and substitutes will arrive Someone will find more oil Expectations for Change

21. “The world has never faced a problem like this. Without massive mitigation… the problem will be pervasive and will not be temporary. Previous energy transitions were gradual and evolutionary. Oil peaking will be abrupt and revolutionary.” The Hirsch Report U.S. Department of Energy February 2005 The Hirsch Report

22. Oil sands / Tar / Shale Bio-Mass / Bio-Fuel - ethanol Natural Gas/LPG Coal / Coal to Oil Geothermal Pros: on-going / sustainable / renewable / available / cost effective when oil is high Out Of Oil – Alternatives?

23. Hydroelectric / Tidal Solar Wind Nuclear Fission Nuclear Fusion Cons: cost / resources / yield / scalability / environment / safety / politics / technology Out Of Oil – Alternatives?

24. U.S. Energy Consumption

25. The sum of all costs associated with producing and delivering products and services to the place where they generate revenue – your customer's door or point of use. Total Landed Cost Survey at the APICS 2007 International Conference: Only 14% have used total landed cost analysis with various scenarios of future energy costs

26. “The big question I have is how a spike to $100 oil might impact sourcing, offshoring, and network strategy decisions. At the heart of network strategy is the balancing of trade-offs across inventory, transportation, and operating costs - while meeting customer service. Almost by definition, the result of that calculation should be different at $100 oil than it would be at $30.” Dan Gilmore Supply Chain Digest Summer 2005 The Trade-Offs

27. International: 40’ container, Asia → U.S. $ 20 per barrel = $ 3,000 $135 per barrel = $ 8,000 $200 per barrel = $15,000 (projected) Domestic: $10 increase in oil per barrel = 4¢ per mile increase in transportation Transportation Costs

28. A high tech hardware contract manufacturer found offshore cost savings of only 0.8% on a product where significant revenue losses might arise if supply chain disruptions occurred. The reason is that labor costs, as a proportion of total costs, were small. The far lower average wages were almost completely offset by increased logistics costs Labor vs. Energy

29. “We have a paradigm that manufacturing will go to Asia and we are faced with the ‘reality’ of managing complex supply chains with long lead times. Could it be that sound strategy coupled with rigorous total landed cost analysis will favor lean supply chains that support customers in local markets? Follow the leaders like Honda and Toyota.” Mike Loughrin July 2006 A New Paradigm

30. Costs WILL increase until suitable alternate for petroleum is found Network Optimization skill-set becomes competitive advantage Managing for Minimum Cost Increase Competing for Maximum Service Level Protocol = Dynamic vs. Static Rethinking Network Optimization Dynamically

31. Consolidation of freight Rail, Water + fewer small loads Move from air to ground / truck to rail Fewer shipments/less JIT Longer lead time to market Economies of scale/larger lot sizes Potential Impacts

32. More frequent re-alignment of distribution networks & supply chain optimization Shared SCM resources - 3PL Higher inventory at DCs Improved service/less expediting Flexible supply chain strategies Potential Impacts – cont’d

33. Pressure on profit margins Trade off product cost for transportation cost More segmentation of markets > Mass Customization more important > Limiting Options/Features Integrated packaging/product design Potential Impacts – cont’d

34. Deglobalization Local sourcing strategies Near/On-Shoring instead of Off-Shoring Manufacturing more near customer Increase in Capital Costs Squeeze small firms Potential Impact – cont’d

35. US Made Mexico Made India Made China Made Vietnam Made SA Made Korea Made EU Made Mexico Made US Made Potential Impact – cont’d

36. Lean Supply Chains Supplier Relationship Management Lean Enterprise Customer Relationship Management Supply Chain Management is a core competency

37. Continue learning - Peak Oil Routinely assess total landed cost (data accessibility) Craft a lean supply chain Dynamic Management Focus - SCM skills in your org Call to Action

38. Twilight In the Desert Matthew R. Simmons, 2005 The Long Emergency James Howard Kunstler, 2005 Out of Gas: The End of the Age of Oil David Goodstein, 2004 The Coming Economic Collapse Stephen Leeb, 2007 Beyond Oil Kenneth Deffeyes, 2005 Bibliography

39. “More than any other time in history, mankind faces a crossroads. One path leads to despair and utter hopelessness. The other, to total extinction. Let us pray we have the wisdom to choose correctly.” Woody Allen, 1980 Side Effects: My Speech to the Graduates

40. The Impact of Oil Price on Supply Chain Strategy Brooks A. Bentz, Accenture – brooks.a.bentz@accenture.com David Simchi-Levi, ILOG and MIT – dsimchilevi@ilog.com Bob Gosier, Accenture – robert.gosier@accenture.com 4th June, 2008

41. “In light of this newfound high-cost fuel reality, firms must rethink their supply chain strategies by questioning long-held assumptions about transportation costs and putting management decisions through new economic equations… Supply chain executives must prepare for the new realities.” Mike Kilgore & Gary Girotti Chainalytics Aug. 26, 2006 Rethinking Strategies

42. Today, rail will move a ton of freight an average of 410 miles on just one gallon of diesel fuel. One gallon of diesel fuel will move a ton 59 miles by truck