WASHINGTON, Dec. 17, 2014-U.S. crude oil prices closed below $60 a barrel last week, the lowest level in over five years and nearly 50 percent below last summer’s peak.

This sharp plunge is welcome news for drivers filling up with gas below $3 generally and below $2 a gallon at stations in more than a dozen states, including Oklahoma, Ohio, Louisiana and Virginia. But sub-$60 U.S. crude oil raises many market-roiling questions:

·         How low could prices go now that some analysts see $40 as a possibility?
·         How long could prices stay at $60 or below?
·         How much of U.S. oil production will be idled if prices stay at $60 or below?
·         If oil and therefore gasoline prices stay low, could ethanol and renewable energy development be derailed?

·         What are the chances of oil snapping back to over $100 a barrel if there’s a supply disruption – or if OPEC decides to change its keep-on-pumping policy?

In the past, OPEC has stepped in to maintain prices by cutting production. But in an apparent reaction to the surge in U.S. oil and natural gas production from hydraulic fracking, this time the cartel is keeping its production at 30 million barrels-per-day despite a shortfall in world demand. Plans to continue at this level come despite forecasts that world demand will remain anemic at least through the first half of 2015.

Reaffirming OPEC’s position this week, United Arab Emirates Energy Minister Suhail Al-Mazrouei explained that “We are not going to change our minds because the prices went to $60 or to $40.”

One answer arrived Monday. Libya is not a major oil producer. But fighting there among rival factions has choked off some oil exports. That relatively minor supply disruption is seen as the reason why international crude prices spiked up $1.25 Monday morning to top $63 a barrel.

Unless there are even larger disruptions over the next few months, expect low prices to continue at least through spring. That’s according to Angie Olsonawski, vice president for trading and economics at CHS Inc., a leading energy, grains and food company and the nation’s largest member-owned cooperative, with refineries in Montana and Kansas and its own Cenex brand, the largest farmer-owned petroleum brand in North America.

Angie Olsonawski, VP for trading and economics - CHS, Inc. 

“We’re trading around $56 a barrel right now. I think the downside from here is limited,” Olsonawski said in an Agri-Pulse interview. “I think the market will tend to bottom out in the $50 range.” She doesn’t expect oil to drop to $40 or below because so much of today’s ramped-up U.S. production comes from shale oil in North Dakota and Texas where production costs are high. She says that even $60 oil “puts some of this production below break-even costs.” So the prospect with $50 oil is that “we start seeing drilling rigs decrease and production grow at a slower rate,” which in turn would ease the current price-depressing world oversupply situation.

Along with at least a few more months of oil in the $50 to $60 range, Olsonawski expects continuing volatility, driven by three unexpected developments:

·         year-on-year oil production growing faster in the U.S. than anywhere else;

·         oil demand in China and developing countries overall below expectations, and

·         “the fact that OPEC has stepped aside and seems to be content with letting prices fall for now.”

Olsonawski concludes that oil in the $50 to $60 range “is very positive for the overall economy and positive from an agriculture standpoint. . . . It should be a boost to the economy and the lower energy prices free up money for other uses.”

Professor Scott Irwin at the University of Illinois at Urbana-Champaign sees no guarantee that prices will remain low. He points out that “If no major wars break out in the Middle East, I think we are going to stay below $70 for a while. But that’s a big if.”

Scott Irwin, University of Illinois 

Irwin says the key question is whether there’s been a shift to sub-$70 crude oil “because a lot of economics change above and below around $70 or $75 crude oil.” Judging that using hydraulic fracking to extract shale oil becomes uneconomic in many areas with oil in a $65 to $75 range, he says today’s low price “removes much if not all of the incentives for further expansion” of expensive production like in the tar sands in Canada. Based on the fact that the Saudis could cut production to maintain world prices but haven’t, he concludes that “the price will go as low as and for as long as the Saudis want to squeeze the parties that they want to squeeze.”

Even with the current prospect of continuing low prices, Irwin says the most important point is the enormous uncertainty” involving prices. “Look at the trading ranges we have experienced since 2007 . . . We are just one really big conflict in the Middle East away from completely switching gears and heading the price back up.”

Irwin also warns that “At current corn prices around $3.60 a bushel, if ethanol prices return to their typical relationship to the now-much-lower gasoline prices, profits in ethanol production evaporate.”

For more of Irwin’s perspective on what lies ahead for ethanol, see the Dec. 4 Farmdoc blog in which he and Darrel Good conclude that a deciding factor will be EPA’s long-overdue decision on the volume requirements it sets for the Renewable Fuel Standard (RFS). They write that “Declining gasoline and increasing ethanol prices have created concerns that ethanol and corn demand could be adversely affected. Our analysis suggests this risk is overstated. Key to our analysis is the assumption that RFS mandates are likely to return to statutory volumes for 2014 and beyond. So, even with an extended period of high ethanol to gasoline prices, domestic ethanol consumption would be supported at the 10 percent blend wall.”

Despite China’s recent pledge to generate 20 percent of its energy from renewables by 2030, the ExxonMobil view illustrated in the chart below is that fossil fuels will continue to dominate in 2040. ExxonMobil forecasts that despite their rapid growth, “because they make a relatively small contribution compared to other energy sources, renewables will continue to comprise about 5 percent of the total energy mix by 2040.” 

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