Fuel prices, routes and uncomfortable decisions (Part 1)
CHICAGO — A new challenge was the last thing dry cleaners wanted to deal with as the industry continues to recover from the damage wrought by the pandemic.
When Russia invaded Ukraine in February, however, the ripple effects were quickly felt around the world. Beyond the humanitarian catastrophe this action created in Ukraine, the global economy quickly faced a crisis as international sanctions against Russia reduced the amount of oil available on the international market, leading to a dramatic rise gasoline prices.
Dry cleaners, already facing supply chain issues, labor shortages and shifting market demand, quickly found their expenses rising again. This was especially true for those operating on major roads.
So why have gasoline prices risen so dramatically and what should cleaners do to offset another spike in spending?
The global market
“We have this obvious impact from the fact that the world’s third-largest oil producer is essentially shut out of the market,” says Dr. Chris Kuehl, economist and managing director of Armada Corporate Intelligence. “Seventy percent of Russian oil has no market right now because there is no place to sell it.”
Yet, at first glance, it may be difficult to understand why prices in the United States were hit so quickly.
“When you look at the total amount of oil we would get from Russia, it was on average, per year, less than 2%,” Kuehl says. “We never did much business with Russia because it was just easier to do business with closer countries. To buy in Russia, you would have to put it in a tanker and then cross the Black Sea to get to the Mediterranean. Why would we go through all this? We just bought it from the Middle East, and they ship it to the Horn of Africa or through the Suez Canal, and we were good to go.
However, Kuehl thinks the impact on the United States becomes apparent when we look beyond American borders. Because many European countries are major importers of Russian oil, foregoing that supply has put more pressure on global markets as they look elsewhere to meet their needs.
“That’s what struck us right away,” says Kuehl. “Oil is a global commodity.”
So why aren’t other oil producers, foreign and domestic, increasing their production to make up for the shortfall? Kuehl thinks it’s because they’re taking a long-term view of the situation.
“The subtlest thing that is holding back the recovery is that the oil industry sees this current crisis as something temporary, or at least something that could be,” he says. “They believe, however unlikely, that there is a quick end to this conflict – negotiations are starting, there is a ceasefire, there is some kind of withdrawal – the world will react pretty quickly and say, ‘OK, Russia is responding, so let’s lower some of these sanctions and get some of this oil that we need. The oil industry expects people not to want to sacrifice themselves if they have an excuse to go back to their old ways.
Although the pandemic has receded, its impact on the American workforce is still being felt, and it is also a factor driving up gasoline prices.
“(Oil producers) are looking at the one thing that’s really driving demand for them, and that’s commuting,” Kuehl says. “They know that about 92% of our fuel consumption comes and goes from work. So while 60% of us are still working remotely, commuting isn’t back. They say, ‘Yes, we see this short-term demand, but the long-term demand is not there yet.’
Kuehl thinks producers simply don’t see any economic advantage in bringing more oil to market: “They’re not going to spend the money to drastically increase production, because it’s going to be seven or eight months anyway before that these efforts go online, only to find that this immediate crisis is over and we are still working remotely.
Check back Tuesday for Part 2 of this series, where we’ll look at the choices dry cleaners have to protect their bottom line.