Brace yourself for still higher gasoline and on-highway diesel fuel costs in 2011. The big question: Just how high will prices go?
Crude-oil prices were relatively tame through much of 2010, notes Bob Young, chief economist with the American Farm Bureau Federation (AFBF). “For most of the year, they bumped around in that $70 to high-$80/barrel range,” he says. “But the overall trend was up, with the year finishing around the high $80/barrel mark.”
With economies in China, the U.S. and elsewhere slowly digging out from a prolonged downturn, the trend line for oil prices will likely continue its slow-but-steady upward push at least through the first half of 2011, Young says. “Our expectations for between now and June are that they’ll stay in a relatively narrow band, maybe topping out at around $105-110/barrel.”
Beyond June, what happens with oil prices will hinge mostly on actions taken by OPEC countries. “If they decide to lift production targets, the crude oil price will likely stay in that $100 range,” he says. “But if they decide not to expand production, things could get very exciting. I wouldn’t be surprised to see prices shoot to $125/barrel or even higher.”
Producers should consider locking in prices on gasoline as soon as possible, Young advises. For on-highway diesel, he says, it might be worth waiting a few weeks until the home-heating season ends to forward contract at least some supply. “At this point in time, I just don’t see anything coming along that will pull prices down.”
The retail price of regular-grade gasoline will average $3.17/gallon this year, 39¢ higher than the average in 2010, according to the U.S. Energy Information Administration (EIA) forecast in its January 2011 Short-Term Energy Outlook. There is also “significant uncertainty surrounding the forecast,” notes EIA, saying there is “more than a 25% probability that the national average retail price for regular gasoline could exceed $3.50/gallon in the June-September period in 2011 and an 8-10% probability that it could exceed $4/gallon in August and September.” For on-highway, retail diesel fuel, EIA expects an average price of $3.40 in 2011. Last year’s average was $2.99.
Note: For another point of view on this topic, listen to this audio interview at hayandforage.com.