Petroleum prices should remain high for the foreseeable future, while natural gas prices should remain low and electricity prices are likely to increase slowly.
Demand is likely to remain high for nitrogen, potash and phosphorus fertilizers, but production costs will have much less impact than commodity prices.
A potential waiver of the renewable fuels standard (RFS) would result in little change to commodity prices.
That’s the energy and fertilizer outlook in a nutshell, but Henry Bryant, research associate with the Agricultural and Food Policy Center, Department of Agricultural Economics, Texas A&M, offered details on what’s driving those prices during the recent Southwest Ag Issues Summit in Austin.
Hurricane Isaac, Bryant said, caused relatively little disruption of short-term or long-term energy supply. “Isaac didn’t do a lot of long-term damage to the infrastructure, and facilities were soon back on line.” The impact on the global market was about 1.5 percent. “Isaac was not a terrible problem and occurred when there was a fairly high stock of crude in the Organization for Economic Cooperation and Development countries.”
Looking a bit farther out, for the next 18 to 24 months, he says, non-OPEC countries, including the U.S., will have “a lot of new production in 2012 and more in 2013. High prices spur production.”
Petroleum prices have been high, “but not as high as in 2008.”
Forward pricing could be an iffy venture, Bryant says. “We expect prices to be relatively flat, with not a lot of increase.” The range of “confidence intervals” shows a possible spread of $45 a barrel to $180 a barrel. “We don’t expect prices to spike to $120.”
Little effect from RFS
Recent requests for a waiver on the Renewable Fuels Standard, sought because of the drought and potential effects on the 2012 corn crop and price, would have little effect on blended fuel prices or diesel, he says.
“In the short-run, gas will remain in the upper one-half of the five-year range for this time of year. Diesel will remain in the lower half of the five year range for this time of year.”
Consumption is down over the last few years, he says, because people are driving less and cars are averaging more miles per gallon. Exports are also higher.
Refineries are also retooling to produce “relatively more diesel and relatively less gasoline,” he says. “Diesel prices remain high compared to gas, but we expect no high gas spike.”
Wholesale gasoline prices should range from $2.50 to just under $3 a gallon, he says, with diesel from just above to just below $3 a gallon.
Long-term, crude oil extraction will remain a key component of petroleum price. “Risks are really high for crude oil extraction,” Bryant says. “The easy stuff is gone — now it’s deep, offshore, Alaska, etc., and with a steadily increasing cost of extraction.”
For proven reserves, he says, chances of recovery are 90 percent “under current economic, political and technological conditions.” For probable reserves, the chance of recovery falls to 50 percent, and for possible reserves, it’s 10 percent.
“Possible reserves are so risky because of geological uncertainty, expense and susceptibility to reserve infill.” Recovering possible reserves, Bryant says, likely will demand improvements in technology.
The natural gas outlook is better. Isaac caused a temporary “shut-in of 4.7 percent,” but no damage to infrastructure. “It is coming back on line rapidly,” Bryant says. “And Isaac occurred during a period of relatively high stocks.”
Shale gas is making a significant contribution to increased natural gas supplies and lower prices, he notes. “Long term, there is a lot of shale gas, and prices should remain low.”
Natural gas is “increasingly used to produce electricity,” keeping cost increasing at a slow pace. “With natural gas, power plants can satisfy peak loads and can turn it on and off quickly.” Coal stocks are also “substantial; a lot is available — and electricity still uses a lot of coal.”
The last three years have put some stress on energy, with the “three hottest summers in decades. Last winter was generally warmer, but some months were warm and some were not.” The rate of price increase for residential electricity has dropped to 1 percent to 2 percent over the past few years, Bryant says, and he anticipates about a 1 percent rate of increase going forward.
So, what effect do energy prices have on fertilizer prices? Not a lot, Bryant says, though the difficulty in manufacturing the products may play a role. Potassium, for instance, faces a “substantial barrier to entry into the market,” with a six- to eight-year lag time to get a new operation up and running.
“That results in production cycles that can lead to price hikes,” he says. The U.S. currently imports 80 percent of its potassium, mostly from Canada, but new capacity is coming online in North America.
Potassium prices hit historical highs in 2008, dipped a bit in 2009 “as the economy fell apart,” but ran back up in 2011. “The price is high because the demand is high,” Bryant says. Production cost doesn’t have much of an effect on prices, because “demand goes up as commodity prices go up.”
The phosphate outlook is similar to potassium, but not as bad, he says, with lower production costs and shorter lead time — three to four years — to get new production.
The U.S. produces a lot of phosphate, Bryant says, but also exports a lot, about one-third of production. New production is coming online in Morocco, Saudi Arabia and Brazil.
“High demand means high prices,” he says, “and we expect high demand to continue. A high correlation exists with the price of phosphate and the price of corn.”
Nitrogen production costs are tied to natural gas prices, which “vary according to location.
“U.S. ammonium production saw a significant drop from 2000 to 2006. From 2008 through 2010 net imports were declining. The U.S. nitrogen fertilizer industry is regrouping and rebuilding.” The U.S. is a low-cost producer, he notes, but “Russia is the lowest.”
U.S. nitrogen import and export rates currently “are steady.”
Also, as with potassium and phosphate, the price of nitrogen is closely correlated with the price of commodities. “With all three nutrients, demand is the story,” Bryant says.
He doesn’t expect fertilizer prices to drop anytime soon, “unless several conditions are met.” Those include continued low natural gas prices and reduced crop prices. An RFS waiver would have little effect, he says.
The bottom line for farmers and ranchers continues to hinge on close scrutiny of all inputs, including energy and fertilizer. Efficient use of nutrients and conserving energy when possible, as well as smart shopping, will be crucial for successful producers.