Today, I felt curious about supply chain pricing normalization and correlation of critical steel raw material and labor cost drivers in Oil & Gas, against the price of oil, from the end of 2014, when Oil started to dive.
A classic supply chain squeeze!
While Oil WTI collapsed roughly 60%, it is interesting to notice a few points:
1/ Oil & Gas field labor stayed roughly flat during the same period... and now shows a 6% increase from the end of 2014. Got to protect these good'ol field boys hey...! Who in Oil & Gas has not heard the classic: "Can't cut that cost Mr. the CEO! If I cut their rate by $1/hour, they will go across the street, then it's the end of the world..."! One of the best organized labor crowd out there if one asks me. Granted the oil patch is no picnic and dangerous, but if you are curious, go spend a few days at a well site, watch how it works and pay attention to productivity... A fascinating planet... A few light years away from planet 6 sigma and lean manufacturing...
2/ Steel suppliers were generous and gave back roughly 20-40% price reduction in 2015, but hey... even if it is half to 2/3 of WTI's collapse of 60%, these suppliers do not work with the same operational margins than E&P companies. So it was clearly a survival move for them.
3/ As soon as the price of Oil started to ramp-up again, roughly around the end of 2016..., everyone was jumping on the price increase bandwagon... "Party time again boys...!". Granted other sectors and industries are also influencing these supply chain, but it's the hard reality...
4/ As of today, WTI is still 31% lower than at the end of 2014...! And yet, all critical supply chain cost drivers are up 15-28% on the raw material side, and 6% on labor side. I almost forgot: Natural gas prices have been totally depressed/flat since the end of 2014... so energy/electricity cost for mills & fab shops has rarely been so affordable...
This is obviously an amazing and unsustainable situation. It's to wonder if someone in Oil & Gas companies is looking out to protect margins and looking at supply chain data...
While hope is not a strategy, Oil & Gas companies better hope for WTI closer to $100/bbl... but wait! If that happens, supply chain costs will skyrocket even higher....! Boards & CEOs may want to pay attention to that CPO... but wait... who at Oil & Gas companies board talks to the CPO at every board meeting...? [long silence... very long silence...]. Pheww... Luckily, let's ask beloved CFOs which excel spreadsheet line(s) need(s) to be cut, and wonder CFOs will magically make it happen... of course... As shown in graph above.
In any case, stay safe and watch your supply chain costs. Many wars were lost due to broken supply chains, and many companies had to re-structure because of out of control supply chain & operational costs. And debt financing is not the answer...