While it’s unlikely, think about efficiency
Higher crude oil prices are forecast for the rest of 2012, says Neil Gamson, an economist with the U.S. Energy Information Administration (EIA). "There have been some supply disruptions in the Middle East and Africa—Sudan and South Sudan," he says.
In its March short-term energy outlook, EIA projects imported average crude oil prices will peak at $117 per barrel in the March to June period, and U.S. regular-grade average gasoline prices will peak at $3.96 per gallon in May. Nearby gasoline futures imply a 2% probability that the futures price at expiration will exceed $4.35 per gallon, consistent with a monthly average regular-grade gasoline retail price of $5 per gallon, Gamson notes. EIA projects on-highway diesel fuel prices won’t top out until August, at $4.24 per gallon.
On-highway diesel fuel, which moves in tandem with crude oil prices, is expected to average $4.15 per gallon in 2012, falling to $4.11 next year. But the overall long-term trend has been higher. Last year, on-highway diesel prices averaged $3.84, nearly 7% lower than this year’s projected price.
"We are likely in an era of slowly, gradually increasing oil prices. We have already gone through a psychological shift in terms of what we now call high prices," says Matt Roberts, an agricultural economist with The Ohio State University. "Four years ago, $4.50 diesel was shocking." Annual on-highway diesel fuel prices averaged $3.80 per gallon in 2008, according to EIA, but prices spiked to $4.80 that summer.
While $5 per gallon gasoline and $6 per gallon diesel fuel are unlikely this year, Roberts thinks producers need to prepare for those prices. "Think about energy efficiency," he says. "I’m not saying we need to look at developing hybrid combines, but look at ways to reduce drying costs and the number of passes you make through the field."
Plenty of geopolitical wild cards could push oil prices higher or lower, Gamson says. Several countries outside the Organization of Petroleum Exporting Countries (OPEC) are currently undergoing supply disruptions. If these disruptions intensify, new non-OPEC projects come online slower than expected, or OPEC members don’t increase production as expected, prices could surpass EIA projections. An active hurricane season could also disrupt supply.
Demand factors could also come into play. "What happens with the Chinese, Indian, Russian and Brazilian economies will have an impact on oil demand and prices," Gamson says. EIA’s projections are based on 3% growth in real gross domestic product globally in 2012 and a 2.2% gain in the U.S.
With energy prices as high as they are, Roberts recommends that producers not hedge fuel costs.