Gas Prices: How Oil Companies Use Business Intelligence To Maximize Profits
Every day, oil companies harness gushers of data to assess market conditions for a gallon of gas. Learn how they match the right tools with information to maximize profits.
Valero wants to make its BI faster overall. Now most reports use information from data warehouses populated each night with batch updates from SAP. But Hewitt says moving to a service-oriented architecture will enable more frequent updates, so the analysts can query more current data throughout the day. The company is working with SAP to implement SAP Exchange Infrastructure, or XI, to make that happen. Valero will still use WebFocus for what-if analysis and report presentation, he says.
Though the technology is changing, the purpose of the analysis isn't. Valero monitors the value of its inventory, along with sales and efficiency at its gas stations, to make adjustments to the price of its products as it watches demand and supply shift. Just because gas prices are soaring doesn't mean Valero has an easy ride. Aside from gasoline, the company makes asphalt, sulfur and other secondary products. These prices haven't increased as much as gasoline has, or in proportion to the rise in the cost of crude needed to make them. Valero has to balance its dependencies.
At UPS, there's data everywhere: on the packages, on the drivers carrying handhelds to record customer interactions, even inside those ubiquitous brown trucks. UPS vehicles contain a wealth of data drawn from more than 200 sources inside the trucks. And last year, the company found a way to cut its fuel costs, among other efficiencies, by putting this data together using telematics technology.
Telematics refers to systems used for transmitting data to and from vehicles. UPS's system uses off-the-shelf telematics software to help gather and compile the data from the trucks. Then, proprietary applications using in-house-developed algorithms allow UPS automotive and operations personnel to query and analyze the information.
In 2007, UPS piloted its telematics program on 334 delivery trucks in Georgia. Analysis of the data generated helped to cut the amount of time delivery trucks idled by 24 minutes per driver per day—for an estimated fuel savings of $188 per driver, per year. "That adds up to a lot of wasted fuel," says Jack Levis, a manager in UPS's industrial engineering group, "and a lot of carbons being emitted into air that don't need to be." UPS has more than 90,000 U.S. package drivers, so the potential savings could amount to millions.
In addition, many of the insights gained from the telematics system have been eye-opening and somewhat counterintuitive for the engineers in the automotive group. For example, UPS has typically scheduled fleet maintenance according to time-dependent factors. But engineers and other "data miners," as Levis calls them, discovered that UPS was replacing large components and parts on its delivery trucks when telematics showed that what actually needed to be replaced was just, say, an O-ring. "So rather than a thousand-dollar job, it was a $20 or $30 job," Levis says.
There's more to learn as operations analysts comb through the data looking for other efficiency patterns and safety trends. For instance, UPS delivery personnel may be driving unnecessary miles on their routes. "We've just scratched the surface on finding things," says Levis. (Read an expanded version of this story.)
-Thomas Wailgum
Managing X-Factors
Financial markets often move on fear and uncertainty. The problem is, no one can predict which direction commodity prices will go in or how much they will gain or lose.
On April 21, news spread that unidentified attackers had punctured a Japanese oil tanker with rockets while the ship was sailing to Saudi Arabia. That same day, Royal Dutch Shell announced that African militia fighters, protesting corporate oil activity on the Niger Delta, had damaged a pipeline in Nigeria. Worried about oil supplies, traders pushed oil to $117 per barrel, setting a new record.
Then there are less-violent but no less-volatile events. Hurricanes such as Rita and Katrina in 2005, say, or refinery explosions. Downtime at even one major refinery from a fire or explosion can drag down earnings at that company and affect the rest of the industry for years. Literally.
BP, the $21 billion British oil company, has paid in financial terms and human lives. In 2005, explosions and fire at BP's refinery in Texas City, Texas, killed 15 people and hurt 170 others. The refinery, which by itself makes about 2.5 percent of all the gasoline sold in the United States, had to be partially closed. Then it suffered damage from Rita and Katrina later that year and didn't reopen completely until this past February. BP's profits in the U.S. have dropped, in part because of the Texas City disaster, from $12.6 billion the year the refinery blew up to $7.4 billion last year, according to BP's latest annual report.
Chevron, meanwhile, noted in its annual report that although product margins for the oil industry were generally higher for 2007, profit margins on Chevron's refined products "were negatively affected by planned and unplanned downtime at its three largest U.S. refineries." Because of the problems, Chevron's U.S. refineries ran at 85 percent capacity for crude oil distillation in 2007, down from 99 percent in 2006. Chevron's U.S. downstream profits dipped to $966 million from $1.9 billion in 2006.
Smith, the EDS consultant, says competitors should have BI in place to assess an event like BP's Texas City disaster or Chevron's partial shutdowns immediately. "If I'm Shell, I should understand what's the opportunity" to fill gas orders that BP and Chevron might not be able to, he says.
The Federal Reserve Bank of Dallas has developed a model to forecast the price of gasoline that accounts for surprise events. Stephen Brown, director of energy economics and microeconomic policy analysis there, uses a combination of Excel and EViews, a Microsoft Windows-based application designed to perform regression analysis. EViews comes from Quantitative Micro Software, a privately held company in Irvine, Calif. Unlike most BI tools, EViews was designed specifically for analyzing time-series data. Advanced regression analysis capabilities aren't usually part of mainstream BI tools, although SAS and SPSS offer some. Universities sometimes provide such tools (for free, even), including Pennsylvania State University's EasyReg and University of Minnesota's Arc Software.
