History indicates fuel prices will drop

COLUMBIA, Mo. – Gasoline and diesel prices are high and probably will remain so for several years. But give them time and pump prices will come down, said Ray Massey, a University of Missouri Extension agricultural economist.
His viewpoint. Fuel prices will go down because natural resources, like timber and common metals, historically have always trended down, not up, Massey said. He emphasized that his opinion is not held by all economists.
The recent increases in fuel prices are mostly related to supply, not demand problems, Massey said. When those domestic supply issues are resolved, that is, gasoline and diesel refining capacities are increased and consumer use drops, then prices will drop, Massey said.
World demand for crude oil will remain high with growing energy consumers like China. That affects the price of oil but only accounts for a portion of the price at the pump.
Refining is the issue. Massey said that the recent spike is an anomaly caused more by events like Hurricane Katrina.
“Most of the problem we’ve had with high prices has not been with obtaining crude, it’s been with refining it,” Massey said.
“The demand side is a permanent problem. The supply side is temporary. As soon as we bring supply up, the prices will go down.”
Massey said there is a general principle taught in economics that the cure for high prices is high prices.
In this case, Massey said, as the price of gasoline and diesel increase, there will be more incentive for companies to build refineries, which will increase supply and lower prices.
Oil underpriced. Massey said some of his colleagues believe oil is under-priced and should be taxed significantly more, an opinion he disagrees with.
He also said many economists believe that the cost of natural resources increases as the world’s supply is diminished. He said technology and the transition to other energy sources will over many decades replace oil and bring real prices down.
Ron Plain, also an MU Extension agricultural economist, agreed with Massey’s prediction. He said commodities tend to increase in price slower than inflation, meaning the real cost to consumers goes down.
“History would say Ray is right,” Plain said. “I think it is going to play out that way. It already has. Gasoline prices are already $1 lower than a few months ago.”
Predictions. Plain is predicting that 2006 fuel prices will be lower than 2005 and 2007 prices lower than 2006. Either way, farmers in the Midwest region will likely get through it, the pair said.
Massey, citing a survey by the USDA, said that energy accounts for only about 5 percent of the cost of producing corn. For soybeans it’s 3 percent. Those energy costs include diesel, gasoline, propane and electricity costs.
Fertilizer prices. Fertilizer, on the other hand, accounts for 17 percent of corn production costs and 3 percent for soybeans.
Massey is not so optimistic about fertilizer prices, which are typically correlated to natural gas prices. Ammonium nitrate, a common nitrogen fertilizer, is made from natural gas.
Other common fertilizers are made from ammonium nitrate.
Domestic supply of natural gas is limited for the time being. Massey said internationally there is a huge capacity to produce ammonium nitrate, but because of security concerns – the fertilizer is explosive – importation will be limited.