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Fox River APICS Chapter
Peak Oil:
Hit or Myth?
Mike Sheahan, CLM, CIRM, CFPIM
[email protected]
Transformance Advisors, Inc.
www.transformanceadvisors.com
Peak Oil
Background & Predictions
What is the impact on supply chains?
What can we do to prepare, respond?
Peak Oil
“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
Oil Production – U.S.
Finite Natural Resources
U.S. in 1950
U.S. in 2008
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
M. King Hubbert
 In 1956, M. King Hubbert
predicted U.S. oil production
would peak in the early
1970s.
 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.
U.S. Oil Production Peak
Oil Production – World
Supply
Demand
87
86.5
Millions of barrels per day
86
85.5
85
84.5
84
US Energy Information Administration
www.eia.doe.gov
83.5
83
Q106
Q206
Q306
Q406
Q107
Q207
Q307
Q407
Q108
Q208
What worked before…
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.
When Does Crisis Occur?
Global Oil Peak: When?
Deffeyes: 2005-2009
Simmons: 2007-2009
Youngquist: 2007-2008
T.B. Pickens: 2005-2007
Campbell: 2010
BP: 2010-2015
Hirsch et al: 2016
How Accurate?
Saudis, Kuwait, Iran, all major fields
now in production have increased
the stated reserves since 1971 even
though there have been NO NEW
discoveries.
Shedding Light
on Saudi Arabia
 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.”
2005
 Remaining oil is harder to
produce.
Out of Gas: The End of the Age Of Oil
Peak output occurs
as ½ of supply is
gone
No viable new
sources
“Proven reserves”
are “questionable.”
Remaining oil is
harder to produce.
2004
Scenario
Result
Wait for peaking
Shortages are large and
long lasting
Start crash program 10
years before peaking
Delays the peaking, but
still produces shortages
Start program 20 years
before peaking
Avoids the problem and
provides a smooth
transition
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
The Hirsch Report
“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
Out Of Oil – Alternatives?
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?
Hydroelectric / Tidal
Solar
Wind
Nuclear Fission
Nuclear Fusion
Cons: cost / resources / yield / scalability /
environment / safety / politics / technology
U.S. Energy Consumption
Total Landed Cost
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.
Survey at the APICS 2007 International
Conference: Only 14% have used total
landed cost analysis with various
scenarios of future energy costs
The Trade-Offs
“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
Transportation Costs
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
Labor vs. Energy
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
A New Paradigm
“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
Rethinking Network Optimization
Dynamically
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
Potential Impacts
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 – cont’d
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
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 Impact – cont’d
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
US Made
Mexico Made
India Made
China Made
Vietnam Made
SA Made
Korea Made
Mexico Made
EU Made
US Made
Lean Supply Chains
Supplier
Relationship
Management
Lean
Enterprise
Customer
Relationship
Management
Supply Chain Management
is a core competency
Call to Action
1. Continue learning - Peak Oil
2. Routinely assess total landed cost
(data accessibility)
3. Craft a lean supply chain
4. Dynamic Management
5. Focus - SCM skills in your org
Bibliography
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
“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
The Impact of Oil Price on Supply
Chain Strategy
Brooks A. Bentz, Accenture –
[email protected]
David Simchi-Levi, ILOG and MIT –
[email protected]
Bob Gosier, Accenture –
[email protected]
4th June, 2008
Rethinking Strategies
“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
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