By David Ripplinger, Bioproducts and Bioenergy Economist and Assistant Professor

NDSU Department of Agribusiness and Applied Economics

As many of us sat down to a Thanksgiving feast, a decision with large, long-term impacts was being made in Switzerland.

You may have missed the news that OPEC (Organization of the Petroleum Exporting Countries) was unable to reach an agreement on limiting member-nations’ production and that oil prices fell below $70.

Why did this happen? Saudi Arabia has decided to declare war on U.S. shale oil and punish Russia and Iran for supporting regimes in Syria and Iraq by keeping a glut in global oil supplies and driving down prices.

The result is good news for U.S. motorists. Regional retail gasoline prices have fallen about 40 cents per gallon since Halloween. As I write, 2015 gasoline futures are trading between $1.80 and $2, which is consistent with retail prices of $2.70 and $2.50. This is extra money in consumers’ pockets, at least until they find another place to spend it. For farmers and industry, diesel fell 20 cents after the announcement.

The news is mixed for renewable fuels. Lower gas prices will mean more travel and gasoline use. Depending on how far gasoline prices fall, this could mean more ethanol blending. Also, as Scott Irwin and Darrel Good at the University of Illinois recently pointed out, it could lead refiners to refine higher-octane gasoline, leaving ethanol out of the blend.

Of course, the renewable fuel standard still is on the books, and I think the Environmental Protection Agency would be hard-pressed to have mandated ethanol levels less than about 10 percent of the gasoline blend. Lower oil prices will hurt the development of new ethanol markets as governments and motorists have access to cheaper oil, at least for a little while.

As a North Dakotan, the issue also is fiscal. Our state is booming because of shale oil. Large revenues are being realized and investments are being made. To a point, lower oil prices mean less revenue because tax is collected on the basis of value. However, the Saudis are trying to reduce prices to a point where shale oil is unprofitable. That means less production, and you can’t tax oil that isn’t produced, sales that aren’t made and so on.

The big question: What is the break-even cost of Bakken shale oil? Estimates range from $28 to $85 a barrel.

As I’ve written earlier, U.S. agriculture and energy are forever intertwined. As agriculturists, we need to pay as much heed to the Chinese diet, travel behavior of Americans and sheiks of Arabia as we do the rains in Brazil.

NDSU Agriculture Communication – Dec. 2, 2014