An Empirical Analysis of the Impact of Fuel Costs on the Level and Distribution of Manufacturing Inventory in the United States

While fuel costs have become an important factor in supply chain management, the impact of fuel costs on inventory levels and the distribution of inventories remains unclear. Location theory suggests that firms will relocate inventories to regions with lower fuel costs, leading to lower inventories in the states with higher fuel costs. In contrast, inventory theory suggests that firms will ship orders in greater quantity with less frequency when fuel costs are high, thus resulting in higher inventories in states with higher fuel costs. Using state‐level cross‐sectional, time‐series data for manufacturing industries in the United States during 1994–2006, we empirically examine how fuel price disparities impact the location and dispersion of inventories. Our major findings are that: (1) states with higher fuel costs have lower inventories ceteris paribus; (2) there are lower inventory deviations across states when fuel costs rise; that is, the inventory distribution becomes flatter; and (3) when fuel costs increase, states with higher production output increase their inventories, while states with higher expenditures (as indicated by higher GDPs) experience relative decreases in inventories, suggesting that inventories are relocated from points of demand to points of production. We further quantify that a 1 percent increase in the gasoline price for a state results in a 0.40 percent reduction in inventory levels in the state. Public policy and managerial implications are discussed.