Rising oil prices boost input costs, squeeze margins

By Sara Wyant

© Copyright Agri-Pulse Communications, Inc.

WASHINGTON, April 4, 2012 -A principal topic of debate on the campaign trail as members of Congress take the next two weeks off is the concern over how growing oil costs are consuming an expanding share of a family's budget. Lawmakers are returning to constituencies with questions - if not anger - over the unceasing rise in gas prices. And both sides are trying to parlay the issue into political flash points in the upcoming presidential election.

Meanwhile, farmers and ranchers are seeing the rising cost of fuel squeeze margins - either directly through combustion of fossil fuels, or indirectly through use of energy-intensive inputs, especially fertilizer. Over 2005-08, expenses from direct energy use averaged about 6.7% of total production expenses in the U.S. farm sector, while fertilizer expenses represented another 6.6%, according to USDA's Economic Research Service.

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Republicans say President Obama and Democrats are doing nothing to address oil and gas prices, citing in particular the administration's delay of the northern portion of a pipeline proposed to bring oil from Alberta's tar sands south to American refineries. They also cite Democratic efforts to repeal oil and gas industry tax breaks, which they say would increase the price of gas.

Democrats are trying to paint Republicans as serving the bidding of big oil companies, citing GOP lawmakers' refusal to repeal tax credits for the oil industry and contending that killing the credits will do little to raise gas prices. House Minority Leader Nancy Pelosi, D-Calif., said the Democratic Policy and Steering Committee plans to hold a hearing on the role of oil speculators in rising gas prices - an event expected to generate more partisan talking points for Democrats on the campaign trail. Democrats also say money saved from repealing the tax breaks could go toward benefits that would promote cheaper biofuels and other non-fossil-fuel sources of energy.

On the farm front, David Kohl, a Virginia Tech economist, told the Associated Milk Producers Inc. annual meeting last week that margins will be “compressed” by increasing input costs, including fuel. He said some 80% of all input costs are related to the price of oil, which is hovering around $106 for a barrel of West Texas Intermediate crude oil (WTI), $11 dollars higher than last year.

The DOE's Energy Information Administration (EIA) forecasts the cost of oil for refiners, who must rely on other, more expensive supplies than just WTI crude, to climb to $115 per barrel this year.

With prices high, political charges also have been exchanged about the lack of oil production in the United States. However, a recent Congressional Research Service report indicated that U.S. oil production has fluctuated wildly over the past five years, but is actually trending upwards.

As for concerns about the lack of productivity from oil and gas leases, the reports notes that many leases expire without exploration or production ever occurring. The CRS says among reasons for the lack of productivity is a lack of rig or equipment availability (particularly offshore), high capital costs, skilled labor shortages and leases in the development cycle (for example, conducting environmental reviews, permitting, or exploring) but not producing.

Other reasons cited by the report include legal challenges that might delay or prevent development, no commercial discovery on a lease tract, holding leases (due to a the lack of capital or held by “speculators”) to sell or “farm out” at a later date, an inability to secure extensions on non-producing leases; and an inability to secure a large number of contiguous lease tracts in an effort to maximize return on investment.

Gas prices will average some $3.79 a gallon this year, compared with $3.53 in 2011, the EIA says, adding that the 2012 price will spike to nearly $4 per gallon through the summer driving season. The EIA says diesel prices are expected to run around $4.15 a gallon through 2012, compared to $3.84 last year. Gas and diesel prices are already running considerably higher for farmers at this point compared with the same time last year, driven by increased demand brought on by warmer weather and earlier field preparation.


Original story printed in April 4th, 2012 Agri-Pulse Newsletter.

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