A barrel of oil is no longer a leaky cask. Rather, it is an economic concept.
As a result, creating value along the supply chain has evolved from streamlining operations to exploiting operational and commercial synergies. The emphasis has shifted from vertical integration and expertise in specialized energy sectors to a tightly coordinated system in which every opportunity to increase profit margins is pursued. The agile system has the potential to quickly address supply-and-demand imbalances through access to energy storage and a focus on spot sales rather than long-term contracts. A certain quantity of oil can only be produced once, but it can be traded multiple times to maximize profit throughout the supply chain.
Video Spotlight: Difficult Cooperation in the Oil Industry
This post is based on the Forbes article, Is a Complex Value Chain Squeezing Every Cent from a Barrel of Oil?, by M. Ashraf, June 23, 2021, and the YouTube video, The Terrifying Oil & Gas Shock of 2021|$10 Gas Spike, by MHFIN, July 5, 2021. Image source: Grassetto/iStock/Getty Images.
1. Why are vertical integration and specialization along energy product lines outdated? Are those systems essentially “leaky” barrels?
Guidance: Rockefeller, the founder of Standard Oil, implemented vertical integration to control the oil market. The company’s operations included the production of oil and barrels, refining, and transportation. Later, operations were disaggregated, and value chain silos based on expertise in specific energy sectors emerged. According to the author, these structures are outdated because they are too rigid to respond quickly to supply-and-demand imbalances and to seize financial opportunities as they arise in a highly volatile market. Maintaining operational silos no longer meets the demand requirements of a diversified energy market. Today, these structures are “leaky” barrels because they do not help minimize waste (e.g., inefficient processes, delays, unmet demand, excess supply, missed financial opportunities, etc.) at every step of the supply chain. Being a player at various points of the supply chain and across markets, without the financial constraints of asset ownership, offers new prospects for better integration, faster response, and greater profitability.
2. What is value chain optimization (VCO)?
Guidance: Value chain optimization (VCO) typically relies on optimal processes and linkages along the supply chain, from production to delivery to the final customer. It seeks profit maximization through waste minimization with effective demand and inventory management as well as tight cost control at the production, storage, and distribution levels. The overarching goal is to make quality products available to customers while maximizing profits throughout the supply chain with the help of big data analytics.
3. What are the potential disadvantages of the system described in the article?
Guidance: Although there is nothing wrong with achieving higher profit margins, the article focuses mostly on trading paradigms. In theory, the data-driven approach to decision making and tighter integration along supply chains and markets enable a smoother flow of goods from suppliers to final consumers and better order fulfillment performance. Yet, it is unclear at times how the increased financial exchanges actually improve value along the supply chain. Without adequate coordination (see video), the increased trading and speculation may contribute to further uncertainty and volatility, which would have a negative impact on energy prices and consumers’ pocketbooks.