Top Economic Drivers of 2017: Energy Prices
The beginning of a new year marks a time of planning. The FCC Ag Economics team wants to help you put your best foot forward into 2017 with an in-depth look at the top five economic drivers affecting Canadian agriculture this year. Check out the first post in this series and stay tuned over the following weeks as we dive into each driver in more detail.
From the production of equipment and crop inputs to the fuel required to transport products to market, energy is an important part of the Canadian agri-food supply chain. Energy prices may be volatile with an uncertain global supply throughout 2017. With their potential to significantly impact overall profitability, energy prices are our second trend to watch in 2017.
For more on our number one driver expected to impact Canadian agriculture, check out Top Economic Drivers of 2017: Canadian Dollar.
While all energy markets -- coal, natural gas, and oil -- are important to Canadian agriculture and agri-food, the biggest energy influencer will be oil. Oil prices declined from their mid-2014 peak of US$110 per barrel to US$30 per barrel at the beginning of 2015 on the strength of global surpluses. Prices rebounded somewhat through 2016.
We project average 2017 oil prices will be about US$50 per barrel, i.e., higher than they were in 2016, as stockpiles ease. Average fuel prices will also be higher, while prices for fertilizer and other inputs are expected to increase throughout 2017, while still remaining lower than the average 2016 prices. Prices should rise during periods of peak demand.
What can Canadian ag expect from oil supply and demand in 2017?
Alberta farm gasoline prices averaged $0.81 per litre in 2016 and farm diesel averaged $0.78 per litre. Our forecast of oil at US$50 per barrel means we expect average Alberta farm prices to range as follows in 2017:
- Gasoline: $0.85 – $0.88 per litre
- Diesel: $0.86 – $0.90 per litre
Fuel price trends in each province should roughly match the trends above.
Forecasts of muted world economic growth in 2017 suggest demand for oil won’t significantly change from 2016 levels. Instead higher oil prices in 2017 will reflect weaker supplies. Late-2016, OPEC (Organisation of the Petroleum Exporting Countries) announced production cuts of 1.2 million barrels a day to address soft oil prices and growing world supplies. Major non-OPEC producers, (e.g., Russia, Mexico, Oman, and Kazakhstan) have committed to produce 558,000 fewer barrels a day. The news had an immediate impact, raising oil prices by year-end.
The challenge will be to maintain production cuts as price increases give incentives to ramp up production. U.S. production, in particular, may increase in 2017 with looser government regulations and more profitable oil projects.
What's the bottom line?
Reductions in oil production in some parts of the world may be offset by production increases elsewhere, giving a sense of stability to oil prices. This isn’t likely to produce much inflationary pressures in the Canadian agri-food supply chain throughout 2017, and may even support profitability.
Our advice? Monitor oil production cuts throughout the year. Sustained cuts could easily push oil prices above US$50 per barrel.