Energy prices are at the top of many farmers’ minds as they fill combines and trucks during this harvest season.
It is clear that high fuel costs are eroding or eliminating farming profits, but they could also change global trading patterns.
Hurricane Katrina caused both oil and natural gas prices to spike. While prices might come down from their peaks in the next few weeks as production from the Gulf of Mexico begins to be restored, it appears we are in for an extended period of record high costs for transportation, heating and products made from petroleum and gas, such as nitrogen fertilizer.
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The U.S. Department of Energy last week said that natural gas spot prices are expected to range between 37 and 50 percent above the 2004 averages and could rise by as much as 71 percent in some regions of that country.
Canada is also in for higher natural gas costs. SaskEnergy has applied for a 27 percent increase effective Nov. 1. Terasen Gas in British Columbia has asked for a 13.3 percent increase for mainland B.C. effective Oct. 1.
The U.S. energy department said natural gas spot prices might ease next year, once the heating season is over.
The cost of a barrel of oil fell back to the mid-$60s US last week after peaking at about $70 in the panic following the hurricane.
Traders were calmed after the U.S. released 30 million barrels of oil from its strategic petroleum reserve, and other countries including Canada said they’d provide another 30 million.
But that is at best a stopgap measure. Although U.S. oil production will climb back as Katrina damage is repaired, and other producing countries will push up production, this capacity is restricted in its ability to match a predicted 2.1 percent increase in world oil demand in 2005-06.
The energy department said “worldwide spare production capacity is at its lowest level in three decades; in reality, only Saudi Arabia has any spare crude oil production capacity available. The Saudis would need to drastically reduce their heavy oil price in order to market it effectively. Lastly, the continued geo-political risks, such as the insurgency in Iraq and potential troubles in Nigeria and Venezuela, have boosted the level of uncertainty in world oil markets.”
Investment bank Goldman Sachs last March raised eyebrows with a paper that argued oil could rise to $100 per barrel some time in the next couple of years.
Jeff Rubin and Benjamin Tal, economists with CIBC World Markets in Toronto, supported that forecast in April. Last week, Rubin and Tal issued another report that speculated oil would hit $100 by the end of 2007 and that the resulting higher transportation costs would affect world trade patterns.
The two said high shipping costs could make China a less attractive export destination for North American goods. Exporters would have to focus more on nearby markets in Mexico and Latin America.
The report focused on manufactured products, but the impact would also be noted in grain markets. Certainly Australia, located much closer to China than Canada, will see its competitive edge increase in Asia.
