Don’t Predict Oil Prices, Prepare for Them

When you’ve been an industry analyst for 27 years, not much really surprises you anymore, mostly because history has a habit of repeating itself. Or at least rhyming, as Mark Twain supposedly said.

“Oil Hits New Record; Is $200 a Barrel Coming?” ABC News reported in May 2008. A few months later, the global financial crisis hit and oil prices crashed to below $50 per barrel.

“Sky is the limit: Analysts warn oil prices could surge further” is the CNBC headline this morning. How high can oil prices go in the days and weeks ahead? The honest answer is that nobody knows. It’s also possible that prices could come back down quickly.

Remember all the “peak oil” predictions for both oil supply and demand? People are still making them, and they keep changing. See, for example, “Peak Oil Supply Is Back! (And Just As Wrong)” and “What now for peak oil? Unpacking a surprise twist in the fossil fuel feud.”

Nonetheless, oil prices do impact supply chains. So what are executives to do?

Don’t waste your time trying to figure out where oil prices will go. The better question to ask is: What will we do if oil prices go to $150… or $60?

Simply put, forecast accuracy around oil prices matters less than response readiness. Companies that pre-define responses to specific scenarios will make faster, better decisions when volatility inevitably hits.

For transportation managers, for example, that means defining in advance how you will respond when fuel prices move. What lanes would shift to intermodal if diesel rises 20 percent? At what point do you adjust routing guides or renegotiate fuel surcharges with carriers and customers? These decisions shouldn’t be made in the heat of the moment; they should be pre-defined so teams can act quickly when conditions change.

The bottom line is that in uncertain environments, speed and clarity of response matter more than perfect forecasts. Oil prices will rise, fall, and surprise us again — they always do. Companies that manage through the volatility best will be the ones that already know what they will do when it happens.

Source: Talking Logistics/Adrian Gonzales