Winter’s oil price crash helps fuel costs, but long-term impact hard to discern
When commodities fall, there always are winners and losers. Global oil prices tumbled sharply over the past seven months, leading to significant revenue problems for some energy-exporting nations. Meanwhile, U.S. fuel consumers benefitted at the pump, giving retail sales a big boost during the fourth quarter of 2014.
Farmers should see benefits in the first quarter of 2015 by paying less for heat and fuel as well as for transportation of inputs and fuel needed to plant crops. The price of natural gas dropped significantly, which should lower the price of nitrogen. Freight charges to move corn to export should be affected positively.
At press time, U.S. crude oil prices had fallen below $50 per barrel—a sharp drop from the world oil price of $110 per barrel sustained over the past five years. The reasons for this change are twofold: weak demand in many countries because of sluggish economic growth and surging U.S. production, which has helped increase total supplies of global crude oil.
The impacts of an oil price crash are far reaching. One of the world’s largest oil producers, Russia, faces an interest rate hike to 17% in support of its troubled rouble. Oil and gas make up 70% of its export income.
In the U.S., the oil price decline is mostly positive for agriculture and will help moderate a projected decline in corn production, according to Pat Westhoff, director of the Food and Agricultural Policy Research Institute (FAPRI) at the University of Missouri. It should lower fuel costs at the farm level but could reduce corn prices. Yet the crash should improve net farm income more than lower crop prices.
Still, even a 40% reduction in direct fuel costs doesn’t compare to the cost of seed and fertilizer, neither of which has declined yet, notes Jerry Gulke, producer and president of The Gulke Group.
Black Eye to Ethanol? As the price of oil drops, it makes ethanol more expensive relative to gasoline, which could reduce the amount of ethanol used in E-15 and E-75 fuel.
“Our analysis suggests this risk is overstated,” notes Scott Irwin, ag economist, University of Illinois. First, Irwin notes, there is an assumption Renewable Fuel Standard mandates are likely to return to statutory volumes for 2014 and beyond. Even with an extended period of high ethanol to gasoline prices, domestic ethanol consumption would be supported at the 10% blend wall. “That blend wall represents a cap on domestic consumption for now, regardless of the level of ethanol and gasoline prices, because of the constraints on the expansion of the use of higher ethanol blends,” he explains.
Keep in mind with lower gasoline prices, people might drive more, which should push up the use of gasoline and ethanol in 10% blends.
A real threat, though, is a retreat in ethanol exports, Westhoff notes.
Yet exports likely will drop no more than a few hundred million gallons. “Overall, we see little risk of total ethanol use falling below 13.9 billion gallons, and consequently, corn use for ethanol of less than 5 billion bushels,” Irwin says.
Investors Exit. When oil fell to $40 per barrel briefly this winter, ag economist Dave Kohl got nervous.
“Since the 1960s, in every major economic recession, oil has had a role,” Kohl says. “Oil has deflationary pressures, so we need to really watch oil prices.”
One thing is for sure: The oil slump is driving a bearish sentiment in commodity investments. That’s because energy is used to produce or deliver almost everything. Keep in mind that this is not 2008, Gulke says. “We do not have a demand problem; it’s an oversupply problem, which is similar to our current slight oversupply of grains,” he points out. “Both are much easier to remedy than demand destruction. Markets overshoot on both ends of the spectrum. When the $145-per-barrel price was too high, we opened up exploration. Now, $45 is too cheap. Odds are that $65 oil keeps everyone happy.”
Only time, and the unfolding of geopolitics, will tell.
To read more about U.S. oil production, hear producer stories and learn the history of America’s energy boom, visit www.agweb.com/farmjournal/boom/.
By The Numbers
As of mid-January, the price of oil had reached its lowest point in years. Fuel buyers will benefit, though producers still face steady seed and fertilizer costs.
$50- Price per barrel for oil in January 2015
$110- Price per barrel for oil from 2010 to mid-2014
2009- Last year in which oil prices were lower than $50 per barrel