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Logistics Amidst the European Energy Crisis

By: Tyler Kaufman

On February 20, 2022, Russia invaded Ukraine, provoking an onslaught of challenges for global economies, exchange rates, and supply chain issues, particularly logistics. To fully grasp the complexity of this matter and the challenges ahead, it is important to identify why these issues are arising. In the following paragraphs, the reader will understand Russia’s impact on energy, European economy (exchange rates, tariffs, sanctions) and how logistics in Europe are currently being compromised as a result of Russia’s invasion.

For several years, Russia has been a major provider for European energy. Providing 56.2 billion cubic metres of gas to Germany (BBC) , it is an understatement to consider Russia the primary fossil fuel source for Europe. Close behind are Italy and the Netherlands, importing a combined 42.4 billion cubic metres of gas. After Russia invaded Ukraine, sanctions were placed on Russia as an indirect punishment of the invasion, as Ukraine, not yet apart of NATO, is still an important piece of Europe. Given Europe’s investment in Russia’s natural resources, the previous facts provide a perfect storm for an energy crisis, which residually affects logistics. Although BBC writes: “However, the European Union has said it will cut gas imports from Russia by two-thirds over the coming year,” this does not solve the issue for Europe: winter is on the horizon.

Another result of the Russian invasion has been its effect on exchange rates. The value of the Euro has been on the steady decline (compared to 1 USD), which places pressures on suppliers, logistics, and the overall economic health of the impacted countries. Given the trends of globalization, the issue of weakening exchange rates is not a promising aspect for global commerce. In August, the Associated Press wrote about the Euro falling below parity with the dollar: “More than anything, high energy prices and record inflation are to blame. Europe is far more dependent on Russian oil and natural gas than the U.S. to keep industry humming and generate electricity.” (AP) With these facts, there is concern for inflation and increasing energy prices, which suggest an unhealthy economy amidst a nearby war.

So, what do these factors mean for logistics? On a smaller scale, small business owners are feeling the economic pressures and it is affecting their business. Owners that need to transport items do not have a 3PL or warehouse are left with driving to make their deliveries. If these small business owners are making several deliveries a day, the operating cost is driving down their profits. Rising energy costs combined with a weakening Euro is making these small business owners worrisome and frustrated. On a larger scale, the energy crisis has been a catalyst of skepticism and speculation as Europe heads into winter. Europe responded to Russia shutting down their gas operations by diversifying their energy supply as one article writes: “buying more liquified natural gas, as well as introducing measures to reduce demand and save energy.” (Aljazeera) Similar to finding a supplier alternative or a third party logistic company, Europe is finding ways to alleviate their issue and circumnavigate the dwelling crisis.

Let’s discuss the relevant aspects of the crisis in relation with SCM373. Europe is home to several ports which function as a global transportation hub, which in turn supplies Europe with everything imaginable. With slowing economic growth in Europe, Ocean container rates from Asia to Europe have dropped heavily. There have been rate cuts in the freight market, which illustrate incremental spending in Europe. Besides the freight market, other industries are taking a hit. As the New York Times writes, “High energy prices are lashing European industry, forcing factories to cut production quickly and put tens of thousands of employees on furlough. The cutbacks, though expected to be temporary, are raising the risks of a painful recession in Europe.” (NYT) With essential commodities of paper, metal and other energy-rich product production seeing decline in demand, their logistics are slowing and struggling to meet demand. Considering these pressures, companies are pressured to find EOQ in ROP for their logistics, since the energy crisis is creating turbulence and stress for businesses. Finding these measures has not been easy since the decline of freight, industry and the Euro has not been steady, rather a decline at an alarming rate.

Sources:

BBC: https://www.bbc.com/news/58888451

AP: https://apnews.com/article/dollar-euro-parity-explainer-9f7eb3fe4b87704d7f9e77a0f8c7f123

Aljazeera: https://www.aljazeera.com/news/2022/10/4/how-bad-could-europes-energy-crisis-get-thiswinter

NYT: https://www.nytimes.com/2022/09/19/business/europe-energy-crisis-factories.html

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