November 21, 2007 / 3:17 PM / 12 years ago

TEXT-S&P on possible effects of $100 oil per barrel

(The following statement was released by the rating agency)

Nov 21 - As oil prices climb toward $100 per barrel, will consumers, airlines, and chemical companies foot the bill? In a special report published yesterday, titled “$100 Oil Revisited,” Standard & Poor’s Ratings Services looks at the effects of higher oil prices across several industry sectors.

“Because of all the uncertainties affecting oil prices, we continue to use conservative pricing assumptions when rating oil and gas producers,” said Standard & Poor’s credit analyst David Lundberg.

However, Standard & Poor’s does not expect to systematically upgrade companies in the exploration and production sector, especially with many of them struggling with threats to their credit quality. (See “Soaring Oil Prices: What Happens If The Trend Continues.”)

The series looks beyond the oil and gas industry to high oil prices’ effects on other parts of the economy. “So far, consumers have done an amazing job of ignoring high oil prices, not to mention falling home prices,” said Standard & Poor’s chief economist David Wyss, author of “American Consumers May Slip On Triple-Digit Oil.”

“But with gasoline back to more than $3 per gallon and the winter heating season approaching, will consumers finally flinch?” In addition to putting the squeeze on consumers, high oil prices are raising fuel costs for airlines, according to Standard & Poor’s credit analyst Philip Baggaley.

“High oil prices hit airlines harder than other transportation providers because fuel costs represent a larger proportion—about one-quarter—of operating expenses and because airlines do not have fuel surcharge provisions built into contracts with their customers,” Mr. Baggaley said.

Nonetheless, other, more favorable industry conditions have helped airlines continue to see good profits. Unless conditions worsen significantly, Standard & Poor’s doesn’t expect any near-term rating changes for airlines. (See “Airlines Offset Higher Fuel Costs With Increased Fares . . . So Far.”) Chemical companies are also doing well at managing higher costs because of the recent upturn in the business cycle. (See “Why Haven’t Substantially Higher Crude Oil Prices Depressed Credit Quality For Chemical Companies?”.)

“Strong operating profits demonstrate that even the most energy-intensive commodity chemical companies can prosper in the face of escalating costs if chemical cycle supply and demand continues to be strong,” said Standard & Poor’s credit analyst Kyle Loughlin.

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