High Oil Prices Another Logistical Headwind In Retailers’ Supply Chain Struggles

The combination of oil prices hitting a six-year high and average gasoline costs at a seven-year high is exacerbating an existing headache for retailers who are already contending with supply chain woes.

U.S. crude prices have risen almost 60 percent this year as the global economy reopens and crude inventories fall at the fastest rate in decades. In the U.S., this means average gas prices over $3, according to AAA, almost $1 higher than a year ago and the steepest prices in nearly seven years.

Warren Patterson, head of commodities strategy at ING Groep, said in a note obtained by The Wall Street Journal that the market needs to see supply increasing or else risk global oil inventories falling by 2 million barrels a day in the third quarter and by even more than that in the fourth quarter.

While this may be good news for gas stations and related convenience stores, any dollars that go into consumers’ fuel tanks represent money that can’t be spent at other retailers who are trying keep customers focused on them as life returns to a pre-pandemic normal.

Supply Chain Woes

Higher gas prices also add to the list of supply chain issues that logistics companies and retailers are already struggling with. Over the past month, shortages of shipping containers, plastics, labor and semiconductor chips have slowed the global supply chain, making the distribution of goods slower and more expensive than usual. Even Amazon’s Prime Day was threatened by logistical issues.

Companies also are grappling with the ransomware attacks that threaten to take down digital — and physical — infrastructure, with one recent attack on information technology firm Kaseya impacting as many as 1,500 companies worldwide.

All of this is complicating the comeback for the U.S. economy, and especially the retail industry. According to a recent letter sent by the National Retail Federation (NRF) to President Joe Biden, over 97 percent of retailers have been impacted by port and shipping delays and 70 percent say they have had to add two to three weeks to their supply chains.

Though some retailers have been using artificial intelligence to optimize their prices, 75 percent of retailers have had to pass along some increased costs to consumers and 85 percent say they are experiencing inventory shortages because of ongoing supply chain disruptions.

Last month, Nike told analysts and investors that it expects supply chain delays and higher logistics costs to persist throughout its 2022 fiscal year, which ends May 31.

The Biden administration is pushing OPEC to reach a “compromise solution” that would increase output and lower prices, Reuters reported Monday. If the standoff goes unresolved, though, analysts told the Wall Street Journal that higher supplies and lower prices could come anyway as OPEC members are tempted by the rising prices in the oil market.

Strong Demand 

To be sure, increased gas prices and demand for fuel also signal potential economic strength, especially after nearly 18 months of scarcely traveled roads and empty shopping centers. More people buying gas means more people with expendable income and a desire to spend — the lifeblood of the retail industry.

Over the Independence Day holiday weekend, shoppers were expected to spend in record amounts, with the NRF projecting a total of $7.52 billion spent — up nearly $1 billion from 2019 because of consumers’ pent-up demand.

Last month, the NRF revised its forecast for the year, saying retail sales are likely to grow between 10.5 percent and 13.5 percent to a total over $4.44 trillion this year.

“It has become clear that the U.S. economy and retail sales are growing far faster and more steadily than anyone could have expected just a few months ago,” said Jack Kleinhenz, NRF chief economist, in a statement. “We are seeing not just unprecedented growth from months of pent-up demand as the economy reopens but momentum as well.”