A Lesson From Negative Oil Price: a Call For Smart Electrification

The COVID-19 pandemic shows how interdependent our economies are. No one region in the developed world can survive without goods from others, from toilet paper [roll-eye emoji] to PPE, and transportation is the essential activity that keeps the world spinning the way as we know it.

Trucking is essential business. So is the technology required not only to power the industry but also to increase its cost-efficiency and sustainability.

But there’s room for improvement. There are opportunities to eliminate efficiencies, reduce the industry’s environmental impact, and dislodge our economy’s dependency on oil-producing countries.

The recent event on oil prices is a perfect illustration that the way we’re fueling this vital part of the economy is inefficient (and medieval, even) and unreliable.

OPEC sneezes and the market spins into a frenzy.

On April 20, 2020, the price of US oil turned negative for the first time in history.

Why? The oil production process isn’t set up to respond to market demands. Instead, it’s at the mercy of geopolitical factors that the transportation industry has no control over.

We can’t win. The price of oil goes up, the price of toilet paper goes up. The price of oil plummets, the stock market nosedives.

To understand “what just happened?!?!” we need to look at the crude oil supply chain.

Why Oil Price Turned Negative During COVID-19

As non-essential travel is paused and two-thirds of the world’s airplanes are grounded, the demand for oil plummeted dramatically. This caused a ripple effect in the supply chain because:

    • It’s impossible to start and stop the massive machinery used in oil production and distribution on a dime. In fact, oil producers have to keep pumping oil and pay to have it take off their hands (hence, negative oil price) instead of shutting down the operation.
    • The supply chain is complex and lengthy. At best, it takes a few weeks to transport crude oil from the production site to the refinery. The oil pumped before the demand dropped was already in a tanker when the market crashed. Suppliers and many intermediaries in the supply chain are stuck.
    • There’s very little data or analytics capabilities for suppliers to forecast and respond to changes in demand so they kept pumping even when the demand has fallen. Barrels of oil aren’t just numbers on paper — they need to be stored and storage is costly.
    • Oil is traded in the form of futures contracts with delivery timeframes 4-12 weeks into the future. Oil futures have only been feasible due to a large amount of information available on the economics that underpins supply and demand in the airline industry. However, the prediction (and therefore production) is driven by historical trends, instead of real-time data. The current crisis has uncovered how energy trading is detached from reality.

 

The Crux of the Matter: Forecasting and Responding

Using fossil fuels to power the modern economy is a crude solution.

The concept of trading in futures contracts only works if we have a valid forecasting model that can respond to market fluctuations.

The oil supply chain got into a bind because it can’t respond fast enough to changes in demand due to (1) the lack of data and (2) the complex and lengthy supply chain.

Whether the energy is coming from dinosaur juice or leprechauns cranking a generator, you need (1) data, (2) the ability to leverage the data to make decisions (i.e., analytics) in real-time and (3) the system/infrastructure that can support the execution of the data-driven decisions.

The better control we have over energy supply and pricing, the more we’re able to stabilize the economy. (Right now the oil price is down but the pendulum can easily swing the other direction — not if but when.)

Combining electricity and analytics can give businesses a responsive forecasting model plus the ability to react to real-time demand:

    • The production of electricity can be ramped up or tempered down much quicker than the production of crude oil. In addition, the sites of production are much closer to the sites of consumption, eliminating the extensive lead time required to get the energy to where it’s needed.
    • With our patented technologies, we can track usage, collect data, and apply advanced analytics models to understand supply and demand in real-time. This allows suppliers to adjust production, storage, and distribution. The String Cells also act as energy storage units and can be transported to where they’re needed using existing infrastructure.

 

By combining data and analytics with a system that can respond to changes in market demand, we can have much better control over energy production and distribution. The drastic reduction in waste and overcapacity will minimize fluctuation in pricing and offer every business along the supply chain more predictability and therefore, higher profitability.