Oil Dependency and the LBM Supply Chain

(This originally appeared in the August '10 edition of Merchant Magazine and Building Products Digest.)

The oil spill in the Gulf of Mexico is a huge environmental calamity, but it should serve as a wake up call for the LBM supply chain for another reason. Why? The spill will certainly have an impact on local economies and local LBM dealers. But the spill is emblematic of a much bigger issue, the end of cheap oil. And that will shape the future of this industry, bringing tough challenges and green opportunities.

Many analysts are pointing out that most, or all, of the world’s easy oil has been extracted and what’s left is vastly more challenging, energy intensive, and expensive to get – pumping oil from 5,000 feet deep on the floor of the Gulf is but one example. Meanwhile, according to a US Department of Energy report, new oil discoveries are lagging consumption. And some analysts have pointed out that the point of peak oil production may have been reached, or may be reached soon.

Peak oil, as the phenomenon is known, is based on the work of a Shell Oil geologist, M. King Hubbert, who showed that just as an oil well reaches a peak in production long before the oil deposit runs dry, so too, does an oil producing region have a peak in its production curve. Once the peak is reached, production volumes flatten out, then decline. Add the fact that worldwide demand for oil is growing, (car sales in China and India are going through the roof!), and if we are at or near a peak oil situation, then oil prices will surely rise and perhaps very rapidly.

The LBM supply chain is predicated on cheap transportation costs. When fuel prices rose dramatically during the summer of 2008, many distributors and dealers took hits to their already thin margins. While that price spike was due, at least in part, to Wall Street speculators, it provided a taste of what an expensive oil future will bring – higher transport and commodity costs, and marginal businesses going bust.

So, how can you prepare and create resiliency within your organization? First, start shifting your own product mix. Identify those products most vulnerable to rising oil prices and find better alternatives such as local and green products. This will also help you meet the rising demand for such products as the green building movement continues apace. Look especially at those solutions that help your customers, (or their customers,) become more sustainable or self reliant. Also, find opportunities to supply a greater range of need within your community or operating area. If gas prices rise dramatically, your customers will be looking for one-stop shopping.

Dealers and distributors should also be actively seeking ways to reduce gasoline or diesel use within their own operations. Electric vehicles or diesel trucks that run on locally-sourced waste cooking oil might be viable options. Increasing drop ships, from manufacturer to dealer, or from distributor to end-user, will help, too, but only marginally.

Finally, get involved in community efforts to create local resiliency to oil energy shocks. Transition US, (www.transitionus.org,) is a new and growing network of groups throughout the country – 69 at last count – aiming to find ways within their own communities to reduce their dependence on oil. Groups like these are gaining influence with local policy makers, and their efforts naturally support green building and like-minded local businesses. Your involvement will help you identify emerging opportunities, make important connections within your community, and get support for reducing your own oil dependency.