Industry Focus Week for July 2013: The Oil Industry

Oil Rail Train
Source: Geograph
Last month we took a look at the retail industry and how its supply chain is affected with regards to recent news. We’re continuing the series this month by exploring the crude oil industry. If you have been keeping up with recent news, last Saturday the town of Lac-Mégantic experienced an unexpected tragedy when 73 black rail tankers carrying pressurized containers of crude oil was derailed.

The train was parked for an overnight shift change, the tankers decoupled from their locomotives for an unknown reason (as of yet) and rolled downhill without any drivers into the town centre, derailing and setting off a series of explosions. The explosions caused fires that lasted for hours; about 30 building were destroyed and a death toll of at least 15 with dozens unaccounted for.

This tragedy has given light to concerns of the logistics behind crude oil transport and below we will take a look at how development in the crude oil supply chain has changed with regards to the modes of transportation and the factors that affect crude oil costs.

Crude Oil Transport Shifting to Rail

The revival of oil trains in North America stemmed from the Bakken shale in North Dakota due to fracking (i.e. hydraulic fracturing) creating a huge amount of product that needed to be moved without too many options with regards to the pipeline. This led to the oil industry turning to rail to move crude oil to refineries at the East and West Coasts as well as the Gulf Coast. This growth led to huge shipments of oil. For example, in Canada’s railroads alone rail transport for crude oil has gone from 500 carloads in 2009 to a predicted 130 000 to 140 000 this year, according to the Railway Association of Canada.

Apart from being a highly efficient mode of transport for crude oil, costs for train transport can also be lower due to the crude oil in trains being made entirely of tanker cars of oil. This effectively creates an above-ground pipeline and is more cost-effective than traditional the traditional mixed cars of boxcars, flatbeds, etc. (a.k.a. ‘manifest trains’).

Supply Chain Factors that Affect the End Cost of Oil

We’d like to finish this off with a look at two main factors, with regards to the logistics and supply chain aspects of oil transport, lead to changes in cost for the end user.

Mode of Transportation – As discussed above, consumer end cost rises if we limit train movement. If you change the cost from intermodal/rail to truck transport, costs will increase. Equipment shortages can also affect the prices of oil as in order to supply the demand, companies will have to seek alternative modes of transportation in order to meet consumer needs. Disasters along the supply chain can have a devastating impact on the price of oil, something we have already been made aware of in 2010 when the BP oil spill on the Deepwater Horizon rig happened.

Supply & Demand – Obviously one of the biggest factors that affect the end cost of oil is how much we have available to distribute and how much we need. There are also global oil inventories that affect pricing. Global oil inventories exist to balance the supply and demand. When production exceeds the demand for oil, the excess oil is stored. This way, when consumption exceeds the current supply of oil, the oil inventories can be tapped to meet the demand but could end up increasing cost for the end user.

We hope you enjoyed this month’s industry focus on the oil industry. If you liked this blog post and you want to read more of our content, don’t hesitate to subscribe to our blog. Or if you want more logistics and supply chain content throughout the day, follow us on Twitter! If you’re interested in what we do as a 3rd party logistics provider, feel free to check out our core services. Otherwise, we’ll catch you next week!

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