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The Long and Short of Energy Prices

8:00 PM, Mar 18, 2011 • By IRWIN M. STELZER
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Nuclear’s one hope is a dramatic rise in the price of natural gas. Which some forecasters are predicting will be one consequence of the pressure on oil prices from the uprisings in the Middle East, and the pressure on coal prices from rising demand.

Until the extent of the unrest in that volatile region became obvious, it was common belief that whatever happened to the supply of oil, the Saudis would be there to bail out consuming nations in the event of supply interruptions. No longer. The curtailment of supplies from Libya showed that Saudi excess capacity might be less than the Kingdom’s rulers claim, and that Saudi crude is unusable in many refineries, which were built to handle the sweeter, lighter stuff from Libya. Worse still, for the first time there is a possibility that the House of Saud might not be able to remain in power without overt American help should a Shiite uprising in its oil-rich region threaten.

A leading oil industry executive, active in the Middle East, expects that if the regime is threatened, America will intervene militarily to shore it up. But given the Obama administration’s dithering before agreeing to participate in  a no-fly zone in Libya, and its insistence that it cannot intervene anywhere without the blessing of something called “the international community”, markets are no longer certain that the US stands ready to defend the Saudi regime. “Saudis spooked by wavering US” reads a headline in Friday’s Financial Times. The Saudi kingdom is spooked enough to tolerate $100-oil without raising output, and to begin questioning the role of the dollar as the world’s primary reserve currency. With the Saudis less willing to cater to the US, and seeking alternative security arrangements, high oil prices might be with us for a long time.

As will an increase in coal prices. With $100-oil an unattractive fuel for generating electricity, and nuclear power a political hot potato, at least for now coal is the answer. Germany’s plan to shut down its older nuclear plants will force it to replace about one-third of its electricity generating capacity with coal-based power. Other countries will follow suit, France excepted. Coal prices have already risen about 10% in the Atlantic basin, and might well rise more when Japan, at the moment unable to import coal because of damage to ports and to coal-fired generating stations, starts to recover.

With nuclear more or less out of the picture, oil too expensive for extensive use in power stations, and coal becoming more costly, it is little wonder that prices of natural gas are on the rise. Whether they will rise enough to make nuclear economic I doubt: there is just too much gas to be found around the world for demand to press hard upon supply, especially since we now know how to produce the virtually limitless supplies of shale gas.

But hope breeds eternal in the breasts of advocates of nuclear power, even though they know that their problems were not all made in Japan.

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