January 11, 2006

LINCOLN, Neb. — Barring another major disruption, gasoline and diesel prices are expected to hold steady in 2006, a University of Nebraska-Lincoln agricultural economist says.

With world demand for energy growing faster than crude oil is being produced, Nebraskans will have to continue to budget more money for gasoline and diesel expenses, said Dennis Conley, agricultural economist in the university's Institute of Agriculture and Natural Resources.

Unleaded fuel soared to more than $3 a gallon in 2005 and diesel to about $2.75. Prices have dropped but consumers shouldn't expect big price declines in 2006. Even before hurricanes Katrina and Rita hit the Gulf States this fall, crude oil prices and wholesale gasoline prices were increasing, Conley said. It was Hurricane Katrina then Hurricane Rita that damaged many Gulf Coast oil refineries that really spiked prices.

"This created severe shortages. In terms of production capacity in the world market the amount of carryover is still at its lowest levels ever," Conley said.

Limited supplies and reduced refining capacity mean even a minor disruption in 2006 will again send prices soaring.

Conley said gasoline and diesel prices are following similar patterns. He expects unleaded gas prices to be around $2-$2.30 and diesel prices to be around $2.40-$2.60 in 2006.

Fuel prices actually were relatively low for much of the 1990s, Conley said. Today's prices seem high compared with the recent past but they're actually comparable to early 1980s prices.

"Paying $2.40 for gas is the price we saw 22 years ago in the early 1980s if we were to figure in inflation," he said. "Since that period, prices were a lot lower."

Crude oil, diesel and gas prices all are trending upward, he said.

However, world demand should decline somewhat in 2006.

"With the rise in price people aren't buying as much gas anymore," Conley said.

While most fuel prices are trending higher, natural gas prices should go down in 2006. Natural gas is plentiful and price increases reflected distribution disruptions caused by the hurricanes.

"When the hurricanes hit, natural gas went up to $14 per thousand cubic feet because it disrupted wells, pipelines and delivery," he said.

Now, natural gas is down to $12 per thousand cubic feet, and the projection for 2006 is around $8 per thousand cubic feet. It is difficult to project how natural gas prices will impact nitrogen fertilizer prices, Conley said, but fertilizer prices are still going to be higher in 2006 than in 2005.

1/11/06-SAK

Dennis Conley - Ph.D.
Agricultural Economics
Professor
(402) 472-2034

Sandi Alswager Karstens
IANR News and Photography
(402) 472-3030

Department: Agricultural Economics