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Volatility to continue: Where are energy prices headed?

What's going on with gas and oil prices? Crude oil prices hovering around $58 per barrel are now down significantly since almost making $80 in July.

Arkansas consumers are enjoying much lower fuel prices at the pump than they've been used to paying.

But strong global growth continues to fuel an increasing demand for oil, and we haven't seen the last of high oil prices and volatile price swings, warns Bobby Coats, Arkansas Extension agricultural policy economist.

“In a nutshell, consumers and farmers should continue to expect fairly strong price volatility as long as global demand remains strong,” said Coats. “My expectation for the immediate future is that global oil demand will remain strong and continue to grow.”

Coats believes oil prices are near, if not at, bottom, but they will generally trend upward until Christmas, then move down again.

A quick look at the history of fuel prices shows how demand has affected prices.

In 2004, oil prices were at $41 per barrel while in 2005 prices averaged $56 per barrel, according to government statistics. The oil price average for 2006 is expected to be nearly $67 per barrel and nearly $66 per barrel in 2007.

That translates into average gasoline prices of $1.85 per gallon in 2004, $2.27 in 2005, $2.58 in 2006 and $2.51 in 2007.

Average diesel prices for the same period are $1.81 per gallon in 2004, $2.41 per gallon in 2005, $2.73 in 2006 and $2.66 in 2007.

“Demand and oil cartel supply adjustments should have prices pushing back up to $75 over the next few months. Then, a pullback in oil prices back down to $60 or below by the spring of next year wouldn't be unexpected.

“If the demand for oil is still growing at that time, and I expect it will be, then the price will start pushing up to a level sufficient to bring supply and demand back into balance, which could exceed this year's high in oil prices.”

Coats said emerging economies, such as China, are increasing their demand for energy, and this puts pressure on the supply.

“World oil consumption is currently at 84 million barrels per day and growing. The emerging economies are consuming more than 42 million barrels, and the developed countries consume around 41 million barrels per day with demand growing in both developed and emerging economies.”

Other world issues such as North Korea's saber rattling and Iran's nuclear ambitions have a significant impact on oil and gas. All the unrest in the world has boil-over potential and, collectively, adds a premium to oil prices.

What should farmers do to reduce their gas and diesel expenses?

“Picking the tops and bottoms in the energy markets is difficult, but producers can watch the energy price trend and try to take advantage of pricing opportunities. There's no reason to think that energy prices aren't going to continue to be volatile.

“When prices reach a favorable level, producers might want to top off their tanks. In other words, buy what you can afford or need. You can be fairly assured prices will push back up.”

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