Extension Responds: Katrina's aftermath
How Hurricane Katrina will affect energy and fertilizer costs
By: Pat Walsh, Biological Systems Engineering, University of Wisconsin-Madison/Extension Sept. 2005
The devastating impacts of Hurricane Katrina on Louisiana and Mississippi are taking a toll on the national agricultural economy because of the strategic location of these states for agricultural shipping and fuel production, processing and transport. Fuel supplies, already tight due to increases in global demand, have been greatly affected by damage to fuel production, transport and processing plants in the South. As these facilities come back on line, the pressure on supplies will decrease. However, we should expect long-term effects.
Wisconsin agriculture, industry and families rely on natural gas. In addition to being a fuel, natural gas is used to produce nitrogen fertilizers. The availability and cost of natural gas profoundly affects the ability of Wisconsin’s farmers to compete in today’s tight agricultural markets.
The most recent predictions of energy experts suggest that natural gas prices will continue to rise. It is difficult to predict how high prices will rise because of unknown factors, such as weather, on demand. However, the state’s largest utility, We Energies, predicts that prices for natural gas residential heating fuel may increase 40 to 45 percent or more over last heating season. That prediction appeared in an article in the Milwaukee Journal-Sentinel. An increase in natural gas prices could increase electricity rates. Natural gas powers most new base electrical capacity in Wisconsin for environmental reasons.
Federal predictions for price increases are even higher. For the Midwest, the U.S. Department of Energy, Energy Information Administration Short-Term Outlook, issued Sept. 7, 2005, predicts natural gas prices may rise 69 to 77 percent, and propane prices may rise 39 to 43 percent. This month, forecasters predicted diesel fuel prices will average $2.71 per gallon, a record high, both in current price and when adjusted for inflation. Weather conditions and the speed of the recovery from Hurricane Katrina may affect the actual range of the expected increased costs.
The effects of the natural gas price increases on fertilizer prices could be equally dramatic. The Fertilizer Institute states that 70 to 80 percent of the cost of producing ammonia goes pay for natural gas. One ton of ammonia requires an average 33.5 million Btu’s (or 335 therms) of natural gas. How these increases will affect fertilizer prices is unclear. Previous natural gas price increases have caused some fertilizer plants in North America to close. Others have cut production.
A harsh winter will make the problem of rising natural gas prices even worse. Natural gas prices are driven by supply and demand. Unless natural gas use decreases nationally due to conservation or improved efficiency, a colder than normal winter will increase demand and drive up prices.
THE REASONS FOR INCREASING NATURAL GAS PRICES
The reason for this precipitous rise in natural gas prices is simple. First, Hurricane Katrina affected the production and supply in the United States, driving up the price, at least in the short term. Second, demand continues to grow while the normal supply is stagnant and storage inventories have fallen. According to the Department of Energy, 92 percent of new electrical generating capacity now under construction in the United States is gas fired. Use of natural gas for power production is expected to continue to grow over the next decade. Natural gas is the most popular choice for home heating. Since natural gas is relatively clean (compared with fuels like coal) and easy to transport, demand will continue to grow. The current high price of oil on the world market also favors use of natural gas in industrial and commercial facilities.
On the supply side, however, production is near maximum levels. The United States gets 99 percent of its natural gas from North America (85 percent from the U.S. and 14 percent from Canada). It would take years to expand natural gas production in North America or to arrange to import large quantities of liquefied natural gas, even if national policy mandated these actions.
THE BOTTOM LINE
Wisconsin farmers probably will pay more for natural gas and fertilizer this winter. The size of the increase is unknown, but it may be large. Improving efficiency in the use of energy and fertilizer remains the best way to reduce the impact of these price increases. .
INFORMATION AND ASSISTANCE RESOURCES
- USDOE Energy Information Administration http://www.eia.doe.gov/
- Wisconsin Focus on Energy program http://www.focusonenergy.com/
For more information: Pat Walsh, 608-265-8152, pat.walsh@ces.uwex.edu
Sept. 20, 2005
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