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

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

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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

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Oil Production U.S. Finite Natural Resources

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

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M. King Hubbert In 1956, M. King Hubbert predicted U.S. oil production would peak in the early 1970s. 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. 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 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. In 1971, Hubbert's prediction came true.

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U.S. Oil Production Peak

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Oil Production World

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US Energy Information Administration www.eia.doe.gov

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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.

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When Does Crisis Occur?

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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?

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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?

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

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

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ScenarioResult 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

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

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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

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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

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Out Of Oil Alternatives? Hydroelectric / Tidal SolarWind Nuclear Fission Nuclear Fusion Cons: cost / resources / yield / scalability / environment / safety / politics / technology

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U.S. Energy Consumption

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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

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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

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

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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

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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

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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

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Potential Impacts Consolidation of freight Rail, Water + fewer small loads 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

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Potential Impacts contd 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

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

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Potential Impact contd Deglobalization Local sourcing strategies Near/On-Shoring instead of Off-Shoring Manufacturing more near customer Increase in Capital Costs Squeeze small firms

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Potential Impact contd US Made Mexico Made China Made India Made Vietnam Made Korea Made Mexico Made US Made EU Made SA Made

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

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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

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

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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

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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

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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

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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