Oil: Black Gold

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As we enter the New Year, the symbolic oil-related television characters, Jed Clampett and J.R. Ewing, come to mind as gasoline prices are above $3/gal. nationwide and oil prices are nearing $100/barrel. For those of you old enough to remember the Beverly Hillbillies’ theme song, it mentioned “black gold,” and that appears to describe oil very well in today’s environment.

Oil is a great influencer, not only of the agricultural economy, but the general global economy. Six of the past eight recessions in the last 50 years were linked to oil. The only two that were not linked to oil were in 1961 and 1969 and they were related to the expansion period of the 1950s and the war in Vietnam, respectively.

Approximately 70% of oil is produced in military and politically sensitive areas of the world, which makes it an issue for the decade, not just the next year. Any flare up in these sensitive regions will result in wide swings in prices of petroleum and oil-based products.

With 70% of the U.S. economy driven by consumers and services, a gasoline price above $3/gal. is critical and could offset any gains made through taxes and overall economic stimulus. Moving forward into spring, oil prices above $4 could be the factor that stalls GDP growth and moves the U.S. and global economies back into recession.

Fertilizer purchases are on many producers’ minds as they plan for the upcoming year and growing season. High demand in India and China along with supply issues due to the regulatory environment could result in the return of a situation similar to a couple years ago. This New Year is shaping up to be an interesting year for the food, fiber and fuel sectors, as well as consumers.

 

Editor’s note: Dave Kohl, Corn & Soybean Digest trends editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at sullylab@vt.edu.

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