Diesel prices skyrocketed in early summer, leaving farmers burdened with up to triple the annual projected fuel costs necessary to operate. Read about the nuances of the fuel market and if there is reason to believe prices will recede soon.
In Germany, near the end of the 20th century, mechanical engineer Rudolf Diesel believed he could improve the efficiency of the recently invented internal combustion engine. Instead of relying on an ignition mechanism such as spark plugs, the engine that would go on to bear Diesel’s name would produce its combustion by directly injecting the fuel into air hyper-compressed by a piston at precisely the right time. Diesel theorized, correctly, that the more concentrated the air, the greater chance the fuel had to react with and ignite the oxygen molecules.
Eventually, a thicker type of fuel with greater energy density that perfectly complemented this engine would also bear Diesel’s name. These discoveries revolutionized industrial applications of the internal combustion engine, allowing for a more efficient and reliable form of power generation that would go on to be the standard in agriculture, construction, mining and countless other essential sectors of the economy. Diesel’s hypothesis for turning pressure into combustion, as it turns out though, would not only apply to engineering but to economics, as well.
For more than a decade, a perfect storm of macroeconomic factors has been steadily applying greater pressure to the global energy sector. From 2010 to 2019, the domestic U.S. oil and gas industry saw production grow, driven in large part by shale regions in Texas and North Dakota.
However, by the end of the decade, capital and labor investments began to see diminished returns even before the COVID-19 pandemic sent rippling effects through both supply and demand expectations. Investments in new production—particularly in the form of refining capacity—were already expected to be scaled back by 10-15 percent by exploration and production firms before COVID-19, based on concerns the market was oversupplied and incurring heavy debt, according to Federal Reserve Bank of Dallas. Investment shifts can have an outsize effect on markets, as constrained refining capacity serves as a bottleneck limiting the impact of expanded exploration and extraction operations.
In addition to this market-based pressure, there has also been a sea change in global policy priorities with momentum building each year toward more ambitious climate change mitigation strategies. As these green energy policies continue to grow in popularity, size and scope, investors are increasingly wary of the returns offered by traditional oil and gas investments. Despite increased production, SPNY—the S&P 500 energy index —only gained 6 percent in value from 2010-2019, compared to an 180 percent growth rate for the entire S&P 500 index.
According to Refinitiv data compiled by Reuters, the U.S. energy sector saw total earnings decline by 15 percent during that time period, while all other major sectors of the domestic economy grew by at least 28 percent. This capital divestment was compounded by the pandemic and its subsequent labor shocks. At a meeting with the Texas Grain Sorghum Producers Board, a representative of the Federal Reserve Bank of Dallas also noted the average shift on a drilling rig had risen to nearly six months, signaling a major scarcity in available labor that further inhibited production capacity.
These forces are like the compression stroke in the diesel engine, raising the pressure to such a degree that one triggering event occurring at just the right time—such as a large-scale military conflict involving one of the largest energy exporters in the world—could result in a devastating conflagration.
Before Russia’s invasion of Ukraine, global oil inventory was already at its lowest level since 2013 and down 8 percent relative to the five-year seasonal average. The subsequent sanctions placed on Russia’s oil and gas exports only exacerbated this scarcity and, in the process, ignited one of the most combustive hikes in gasoline and diesel prices in recent memory, affecting both consumers and industry alike.
In the weeks building up to this magazine’s publication, we have seen gasoline and diesel prices marginally recede from heights reached in early summer, but this offers little reprieve considering just how vertiginous those heights were. According to the U.S. Energy Information Administration, on-highway diesel fuel prices averaged $5.68 per gallon in the first week of July, up from $3.33 per gallon during the same week in 2021.
Few industries bear the burden of these heightened fuel costs as much as agriculture. Tractors and combines may be the most commonly recognized, but they are far from the only pieces of heavy equipment that need fuel on a modern farm. Producers across much of the Sorghum Belt must also foot the bill to power electrical generation of irrigation networks.
Work trucks used for field scouting and trailer trucks that haul grain to elevators or ports also contribute to a producer’s fuel budget. In 2016, the U.S. Department of Agriculture estimated diesel was the primary source of energy on U.S. farms, comprising 44 percent of all consumption—nearly double that of electricity, the second highest source.
Experienced producers may be able to prepay or contract diesel at slightly discounted bulk off-road rates, which eliminates the tax added for on-road uses. These options can defray slight increases in prices at the pump but offer little protection against increases like these of 50 percent and higher.
Perhaps the most challenging aspect of high diesel prices for farmers and ranchers is that, unlike other agricultural inputs, there are no real alternatives, nor is there the option to simply do without.
For example, fertilizer, one of the other agricultural inputs to recently experience skyrocketing costs following a perfect storm of supply chain challenges, can, at times, be scaled back in applications, albeit at great cost to yields. However, when it comes to fueling the heavy equipment that sows, cultivates and harvests crops, producers have no recourse but to absorb high prices at the expense of their bottom line.
Were it only one critical input seeing greater costs, relatively strong commodity prices may cancel that financial burden out,but fertilizer, gasoline, diesel and labor costs all rising at once pose a serious threat to a producer’s ability to stay in business.
The final stage of the combustion cycle in a diesel engine is known as the exhaust stroke, when the piston moves back up and ejects the exhaust generated by the combustion, clearing the way for the process to continue.
Along that line, there’s good reason to believe some of the factors putting upward pressure on fuel prices will recede. Market forces naturally seek an equilibrium. But many of the policies and incentives for green energy are likely here to stay.
As this transition continues, it is critical that legislators, regulators, trade associations like National Sorghum Producers and Texas Grain Sorghum Association, and all our allies across the agriculture industry work to ensure farmers and ranchers are not casualties of the next combustion as well.
This story originally appeared in the Summer 2022 Issue of Sorghum Grower magazine.