Peak coal? Or just a temporary coal glut?

My e-mail pen pal Bill Harvey sent me a link to an article reporting that Peabody Energy, the nation’s largest coal company, is losing money, and some smaller U.S. coal companies have already gone bankrupt.

Does this mean we’ve reached peak coal?  Have American companies already mined all the coal that can be extracted profitably?  Profitably, even taking into consideration all the costs in human health, environmental destruction and climate change that they offload onto the public?  Maybe.

There’s another trend at work, and that is a glut in the world supply of coal, which is driving the price down.  This is part of a normal economic cycle.  A glut causes a drop in prices, which causes business failures, which causes scarcity, which causes a rise in prices, which causes another boom, which causes another glut, and so on.

But as we use up all the easy-to-get coal, easy-to-get oil and easy-to-get natural gas, and the remaining gas becomes more expensive to extract, the cycles of boom and bust will be shallower and shorter.

The question is how much buyers of coal should count on a good supply at a reasonable price in the long run.

Electric utilities typically make take-or-pay contracts, which obligate them to buy certain amounts of energy from certain suppliers at a certain price over a long period of time.

I don’t think there’s anything improper about take-or-pay contracts in and of themselves.  A supplier isn’t going to make a long-term investment unless there’s assurance of a market.  But the buyer needs to do a lot of hard thinking about the future.

I think that, as a matter of national policy, coal companies and other energy companies should be made to absorb the costs of the harm they do to human health and the human environment.  If that increases the cost of energy—well, the cost was always being paid, just not by them.

As a matter of national policy, it is best to leave as much coal and other fossil fuels in the ground as possible.  Ideally we the people will find good substitutes.  But if there comes a time when they are desperately needed, these resources will be there for us.

True, that requires energy companies to absorb sunk costs which, left to their own devices, they would try to get back.   There is an economic incentive to keep producing in order to generate some revenue, even if the revenue is not enough to offset what’s already been invested.

Public policy should not be concerned with this.  Public policy should be concerned with what’s best for the public at large.

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uscoalexports

coalproductionforecastAs this chart shows, the price of coal is not set by American companies.  It is set by the top importers, which are China, Japan and India, and the top exporters, which are Indonesia, Australia and Russia.  Net U.S. coal exports are declining.   But U.S. coal production is forecast to hold up pretty well no matter what.

LINKS

King Coal’s reign may be ending by Emily Schwartz Greco for Other Worlds.  [Hat tip to Bill Harvey]

Global Coal Market Seen in ‘Bad Shape’ As Supply Glut Expands by Mario Parker for Bloomberg News.

Is coal’s decline permanent? by Mike Corones for Reuters.

Will America’s shale boomtowns bust?  A report from the heart of North Dakota’s fracking country by Jennifer Reingold for Fortune.  Other energy markets besides coal are glutted.  (Hat tip to naked capitalism)

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