Rising Fuel Prices and Energy Costs: Immediate and Long-Term Effects on Manufacturing
The manufacturing of raw materials into finished goods requires no small amount of energy, and the cost to produce that energy is rising significantly. With fuel prices at historic highs, many sectors of the manufacturing industry face rising production costs and perilous consequences as a result. From oil to natural gas, hydrocarbon costs are weighing heavily on manufacturing cost of goods sold (COGS).
Fuel costs extend across the supply chain
The manufacturing industry is heavily reliant on fuel, from the natural gas used to power production equipment to the diesel in the fuel tanks of freight vehicles. And because fuel is present at every level of the supply chain, manufacturers must account for these costs at every phase of operations. These costs add up, and they’re starting to amount to overwhelming sums that manufacturer are, in turn, passing on to consumers. Along with material scarcity and delays, the rising cost of fuel is a harbinger for inflation.
For some industries, rising fuel costs are especially cumbersome — to the point of failure. According to a recent report by Reuters, “some companies, including steel producers, fertilizer manufacturers and glass makers, have had to suspend or reduce production in Europe and Asia as a result of spiking energy prices.”
Stuck between a rock and a hard place
While manufacturing is attuned to the fluctuating cost of energy and materials, the current situation is a protracted one with seemingly no end in sight. Natural gas prices have doubled in the United States since the beginning of the year, largely fueled by the conflict in Ukraine. This has led to a spike in domestic electricity prices since many plants are gas-powered.
Diesel fuel is consequently on the rise as well. The capacity of domestic refineries is lower than it’s ever been and, given the choice to refine crude oil into gasoline vs. diesel, the focus is split. As a result, both fuels are seeing significant price hikes at the pump. For over-the-road truckers and other freight haul operations that rely on diesel, it means the cost to operate is up. As manufacturers pay more to move their goods, it only compounds the fuel-related costs on the back end of the production equation.
What can manufacturers do?
In short, manufacturers can’t do much without the aid of regulatory agencies — although, in time, prices are likely to level out as demand settles amidst geopolitical tensions. As refineries come online around the globe to pick up the slack left by Russian sanctions, supply will begin to balance demand. The problem is that this will take time.
In the meantime, the Biden Administration has already tapped into the Strategic Petroleum Reserve to release a small amount of oil. There’s also the prospect of establishing future price floors for restocking the reserve to encourage producers to ramp up production with certain guarantees. For natural gas, it’s important to pursue unconventional oil and natural gas development domestically to reduce reliance on imports.
There’s no swift solution for dealing with high (and rising) fuel costs. Unfortunately, manufacturing needs relief quickly. Without some degree of assistance, production COGS will continue to rise, perpetuating an entire cycle of inflation that only continues to get worse.