Oil Rising … and What it Means for Spend Management

With all the focus on rising China prices of late, it's possible to lose focus on commodity prices that can have significant impact even closer to home -- and even for those avoiding global sourcing. Indeed, oil futures have been rising significantly of late, and as of last week, had jumped 12% to nearly $80 a barrel, according a story on CNN. According to the story, the "recent run-up is the result of heightened tensions overseas, expectations of a pickup at refineries (read more demand) and overall a tighter supply and demand picture." Part of the fear, according to the article, is due in part to ExxonMobil's and ConocoPhillips's departure from Venezuela after Chavez nationalized (i.e., stole) a number of their investments.

And don't expect prices to ease in the late summer and fall months because "the tight supply-demand picture magnifies the effects of any supply disruption -- such as a hurricane in the Gulf of Mexico or even a possible war with Iran -- as there is less spare capacity in other parts of the world to pick up the slack."

In my view, sustained oil prices at $80 or $80+ a barrel will result not only in higher logistics and supply chain costs for companies, but rising raw material costs as well for such categories as plastics, resins, foam and all types of energy. And for China -- which never seems to satiate its commodity appetite -- it will bring rising prices for finished goods, especially considering that companies sourcing from the region will in effect be taxed twice for rising commodity prices. Once for commodity price increases. And twice for lower -- or eliminated -- export tax rebates for suppliers and/or export tariffs (both of which will be magnified by the rising cost of raw materials, even though Chinese suppliers are only contributing to the "value-add" portion of the China price). And let's not forget that most Chinese companies can't afford to lock-in long term pricing for raw materials to reduce risk and variability.

Jason Busch

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