It's obvious that 2006 was a banner year for the energy sector as fuel prices soared to record levels, thanks in part to the war in Iraq and a bit of nasty weather. Upon closer examination, however, it appears that demand will continue to outpace supply in the U.S., a factor that has less to do with wars and weather and more to do with this country's inability to access its own resources. As such, the cost of doing business continues to rise, and logistics and trucking may be in a bit of quandary, as it is once again forced to streamline operations to offset high fuel prices.

While some signs indicate that the global manufacturing sector is preparing for a prosperous 2007 based on energy consumption, other entities are pointing to a much less enthusiastic future. The title of a recent, seemingly ho-hum Bloomberg News brief speaks volumes about the future: "Canadian Natural-Gas Prices May Rise on Stronger Factory Demand." The demand they speak of is the re-opening of U.S. factories from the holiday season. So perhaps this is a false sense of demand, but it is demand nonetheless.

Moreover, according to recent statistics from the Energy Information Administration, the industrial sector is expected to return to more typical output growth rates in 2007, reflected by industrial energy consumption. Consider this excerpt:

The industrial value of shipments in the reference case is projected to grow by 2.0 percent per year from 2005 to 2030 — more slowly than in the AEO2006 reference case (2.1 percent per year) due to a slight slowdown in projected investment spending, higher energy prices, and increased competition from imports. Delivered industrial energy consumption in the AEO2007 reference case is projected to reach 30.5 quadrillion Btu in 2030, significantly lower than the AEO2006 reference case projection of 32.9 quadrillion Btu.

The Wall Street Journal paints a much bleaker picture when it comes to the relationship between high energy prices and a stable manufacturing sector. The Gulf of Mexico Energy Security Act would open 8.3 million acres of the Outer Continental Shelf to oil and natural gas drilling, and it's a piece of legislation that is being held up in congress. As do many others, The Journal believes that this type of energy exploration could ease the supply/demand burden with which the U.S. is currently struggling:

Short supplies and high prices are punishing American industry, causing plant closures and job flight overseas. It is one of the larger economic messes in recent history, yet the political class barely mentions it — perhaps because the politicians have done more than anyone to cause it.

ShopFloor.org, the National Association of Manufacturers blog, earlier this year noted Washington's "rhetoric" around high gas prices, even putting into question the government's own energy statistics as referenced above by the EIA. Beyond that, NAM has compiled a handful of clear factors that drive gas prices, including the explosive growth in China and India, uncertainty and refinery capacity. NAM also brings to light certain truths about the oil industry in this excerpt:

For all the theatrical political venom directed at the oil companies, the US-based companies represent only 13 percent of the world's output, a mere drop in the bucket. The real powerhouses are the state-owned operations in Russia, China, Venezuela, etc. All the finger pointing, all the speeches about price-gouging and windfall profits won't change that simple fact. And it won't alter the law of supply and demand.

Beyond question, 2006 was a year that shed a lot of light on many different energy problems and potential solutions, but with a lack of concrete legislation being passed and alternative sources of fuel becoming more mainstream, high fuel prices will continue to put the squeeze on the logistics sector, as a business feature at The Vindicator surmises. The average annual price for diesel fuel has increased for four straight years, according to the Vindicator, and the national average for 2006 ($2.71) is double what it was in 2002. So how are trucking firms coping? Here are a couple of ways:

Southwind, which runs 30 trucks, spends about $35,000 a week on fuel. In order to receive a discount of a few cents a gallon, it agrees to pay fuel providers within 10 days of purchase. Southwind has to place its customers on tight payment terms or the business won't have the cash for daily operations.

Further:

Falcon Transport Co., a much larger company [which operates 1,100 trucks across the country], is looking to cut its operating costs with a new computer software program it installed a month ago. The system tells drivers when and where to buy gas based on the route being taken and fuel prices along the way. Don Constantini, president of the Austintown company, said fuel costs have become so large that the company can no longer rely on drivers to select refueling sites randomly.

The Vindicator piece also brings up the EIA, which has claimed that diesel prices have been running higher than gasoline because demand for diesel worldwide is rising faster than demand for gasoline. Also, a transition to cleaner-burning diesel has required more investments in refineries and higher distribution costs, the agency said.

Are the solutions to energy pain points as easy as they seem? Are investments in refineries and higher distribution costs the real culprits? Whatever your take, 2006 has certainly paved the way for what looks to be an even more challenging 2007.

Resources

Canadian Natural-Gas Prices May Rise on Stronger Factory Demand
by Gene Laverty
Bloomberg News, Dec. 29, 2006

Annual Energy Outlook 2007 with Projections to 2030 (Early Release)
Department of Energy – Energy Information Administration

Natural Political Gas
The Wall Street Journal, Nov. 17, 2006

Gas Prices Outpaced Only by the Rhetoric
by Pat Cleary
ShopFloor.org, April 25, 2006

Fuel prices drive up cost of doing business
by Don Shilling
The Vindicator, Dec. 3, 2006