Continuing volatile oil prices forecast, but dim future for coal fired power

Standard & Poor’s forecasts that oil prices will continue to be volatile, and warns that new coal-fired power plants are probably not a viable alternative for the U.S. power sector.

RENO, NV - 

Although Standard & Poor's is forecasting that West Texas Intermediate (WTI) oil prices will remain at $75 per barrel through 2010, analysts admitted that "this is more of a confession of ignorance than a forecast."

Meanwhile, S&P warned that coal-fired power plants are becoming increasingly unpalatable to political leaders and special interest groups.

In a recent report, Credit Analysts Andrew Watt, Phillip Baggaley, Richard Cortright, Kyle Loughlin and Chief Economist David Wyss declared that "the one certainty, it seems is continuing uncertainty. Oil prices will probably remain volatile, creating problems not only for the global economy but also for the industrial sectors that are heavy users of crude and refined products, especially airlines, chemical plants, electrical utilities and freight transportation."

The analysts said they anticipate worldwide oil demand to increase rapidly over the long term "because of the strength of the Asian economies. Chinese energy use continues to grow at a double-digit annual pace, and China is rapidly catching up with the U.S. in total energy consumption."

"India is smaller in terms of local GDP and energy usage, but its appetite for oil is growing nearly as rapidly," they said. "So even with a weaker U.S. economy and sluggish growth in Japan and Europe, energy demand should eventually rise."

S&P suggested that rolling back oil consumption is difficult, noting the lack of compliance with the carbon emissions goals in the Kyoto accords.

Meanwhile, finding oil and natural gas is becoming more difficult. "Exploration companies have already looked in the easy places. Now they're eyeing sites that are more difficult to operate in, either politically or geographically," the analysts said.

"Deep-sea deposits can be tapped, but at a high price. Tar sands and shale oil are possible, but they're also expensive. How far and fast energy prices will rise is uncertain, but the direction seems all too clear," according to S&P's analysis.

However, S&P analysis revealed that the U.S. economy is less vulnerable to higher oil and gas prices. "That's because of conservation, improved efficiency in production, and the shift to more services and less manufacturing. Indeed, American consumers now spend only 5.6% of their after-tax income on energy-down from more than 8% in 1981 and 1982."

COAL'S DIM FUTURE

Although S&P concedes that "coal is likely to remain the dominant fuel used for power generation in the foreseeable future, natural gas has become increasingly important because the new generation capacity built in the U.S. in recent years has been almost exclusively gas fired."

"The increasing focus on greenhouse gas emissions has made new coal-burning plants unpalatable to many influential leaders and interest groups," according to S&P. "Proposed coal plants in Florida and Oklahoma have been rejected, and new coal facilities elsewhere are almost certain to face similar opposition. While the political environment for nuclear power is considerably more favorable than it has been for decades, no new nuclear unit is expected to become operational before the middle of the next decade at the earliest."

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