David Bennett, Associate Editor

February 10, 2006

5 Min Read

If recent reports are true, the world's energy crisis just got worse. Kuwait, long assumed to have some of the world's largest oil reserves, may actually have much less.

In late January, Petroleum Intelligence Weekly, an energy industry newsletter, said internal Kuwaiti records show the nation's oil reserves are only about half the 99 billion barrels previously cited. If there, the 99 billion barrels would translate to about 10 percent of the world's reserves.

Even without the news out of Kuwait, Rob Hogan would have had a hard time finding anything positive about energy-related costs for the 2006 cropping year.

“They brought in the pin-headed economist to give you the bad news,” said the Arkansas Extension economist/farm management specialist at the Arkansas Seed Growers Association meeting in Brinkley, Ark., on Jan 19. “Producers in business are still around because they're the cream of the crop. They're the best around. There aren't any part-time producers left. If they are, they don't depend on agriculture for a living. The fact that you folks are still in business means something. You're as good as it gets, as flexible as it gets.”

Over the last 12 months, the price of crude oil has gone up about $19 per barrel, or 42 percent.

“Any way you cut it, that's a lot. Wouldn't it be nice if (agriculture commodities) went up 42 percent? All petroleum derivatives have been affected by the crude oil price. That has caused increased production costs for farmers.

“So the Big Daddy question is: what are we looking for crude oil to do over the next few months? The U.S. Department of Energy (USDOE) is expecting that through 2006, the price of crude will climb. They say the price will begin to decline in 2007.”

USDOE expects current prices to be the low for 2006.

“Wouldn't it be nice if we could just turn a valve and get some more crude oil? If we could do that, supply would come up and price would go down.

“Well, the only problem with that is there isn't enough spare oil to be had. The accelerator is about flat on the floor, now. The world is producing just about all the oil it's capable of.”

To produce more than we are now, “there must be more exploration and drilling. That's got to happen because there is continuing demand and growth across the world.”

The energy train continues to pick up speed. Many Asian countries currently have economies “on fire.” They're developing at a tremendous rate and need massive quantities of energy.

“In the United States, they're predicting about a 1.7 percent increase in demand in 2006. That includes gasoline, jet fuel, heavy heating oils, diesel and other products. By 2007, the demand increase will be 1.9 percent.”

Hogan's analysis goes back to 2004 because “with the hurricanes, 2005 was a strange year. The first half of 2005 resembled 2004. The last half was more like what's expected in 2006.”

In 2006, the average price for crude will be near $63 per barrel. It will break off to about $59 per barrel in 2007.

“They believe that 2006 diesel prices will average around $2.55 per gallon. That's expected to drop to near $2.41 in 2007.”

Natural gas will be about $14.60 per million cubic feet in 2006 and will drop to just under $14 in 2007.

“This year, we're facing a 12 percent increase in the price of crude. There will be another 5.6 percent increase in the price of diesel. Including 2005, that's a rise of about 40 percent in diesel cost over 2004.”

Natural gas “isn't much different than diesel. Electricity costs are also expected to rise about 2.4 percent.”

What about fertilizer?

Hogan said spot prices for natural gas in January will be somewhere around $12 to $13 per mcf. Economists expect the price to drift down through 2006-2007.

“That means they're expecting natural gas growth and demand to be flat. That's good — but I'm not sure why it translates in the market as it does. They're projecting the prices of anhydrous and urea to continue their climb into the $300 to $400 per ton range.”

The correlation between natural gas and anhydrous ammonia shows that, on average, a 10 percent increase in the price of natural gas should mean an 8 percent increase in the price of anhydrous. With the same increase in natural gas, there will be a 7 percent increase in urea's price.

“Anhydrous could jump $500 to $700 per ton. Urea could jump to $400 per ton. Phosphate could reach around $450. Potash could be over $300. That's a lot of money, a tremendous amount of money.”

During 2006-2007, the USDE is expecting total domestic energy demand to increase annually about 1.4 percent.

“They expect the price of all petroleum-based products to increase through 2006 and relax a little in 2007. Someone asked me, ‘Why?’ A lot of times you see a run up in price, and it gets a little too strong before there's a correction. I think 2007 may be a ‘correction’ year.”

Bottom line

Hogan said this is what the numbers above will mean to producers:

  • Diesel fuel at about $2.55 per gallon.

  • Urea costs near $420 per ton.

  • Potash will cost around $315 per ton.

  • Increased irrigation costs of 65 percent to 75 percent.

“I did some calculations on irrigation costs — taking into account the new energy projections along with maintenance and labor costs. For furrow-flood and border irrigation, producers will be facing $2.59 per acre inch. That's calculated with an operation burning diesel and lifting water with a 100-foot head.”

For center pivot, the cost will be $4.79 per acre-inch. “That's kind of tough to swallow.”

Is there anything producers can do?

“Maybe so,” said Hogan. “How about hedging some of your inputs? That's possible in an indirect fashion. You can kind of hedge diesel fuel because it tracks very closely with heating oil. Most of the time, diesel fuel is about 80 cents per gallon more expensive.

“You might also buy a call on some natural gas. There's an obvious price correlation between it and urea.

“Other than that, though, it's going to be a difficult year.”

e-mail: [email protected]

About the Author(s)

David Bennett

Associate Editor, Delta Farm Press

David Bennett, associate editor for Delta Farm Press, is an Arkansan. He worked with a daily newspaper before joining Farm Press in 1994. Bennett writes about legislative and crop related issues in the Mid-South states.

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