Favorable Coal Conditions Now Moving In

May.21.09 | About: VanEck Vectors (KOL)

Recently I had occasion to watch an online debate between a clean-coal advocate and a robust, articulate green-energy blogger. The debate followed predictable contours. In one corner, the clean-coal advocate repeated a series of rather inflated achievements, supposedly gained over the past 30 years in coal-fired power generation. In the other corner, the green-energy blogger appropriately deflated these claims, but then went on to paint pictures of shiny happy people living in a peaceful and clean world. A world portrayed, it should be added, as easily attainable. I patiently read through to the final jousts, and then sat back in my chair to watch oil make its climb above 60.00.

mike-brodie-aka-the-polaroid-kidd-trainThe dialectic of the environmental debate, over coal, has now formed a well-worn path. It’s largely political at this stage and the core thrust of the conversation, just as in oil, is that everything could be solved if only the opposition would get out of the way. While it’s not the focus of today’s post I’ll briefly remark that the type of fast transition to a clean power Grid, often talked about by famous advocates like Al Gore, is simply not possible. Not in a 10 year time frame. Not even close. Equally, I would note that coal remains a serious environmental problem even after 35 years of regulatory improvements. And, I see that the coal industry repeatedly takes total aggregate gains in air quality nationally over the past 35 years and then claims those entirely for itself. C’mon. Also, marking those gains starting from the worst levels in 1970 obviously makes for a dramatic comparison. The Clean Air Act did the heavy lifting here.

The bigger problem with this debate, especially as it occurs in the United States, is that it constantly pivots off the notion that we have lots of freedom and discretion to decide how both we–and especially the rest of the world–will use coal. Sure, we’ve got some choices here. But as I have written previously coal is a nemesis precisely because it’s a cheap source of BTU that continually prices just below other fossil fuels. And sometimes, it prices well below other fossil fuels. Such a pricing is forming now, as oil climbs back above 60.00, while Central Appalachian Coal (CAPP) still lingers in the mid 40’s per ton. The 5.8 million BTU in a barrel of oil will set you back 60 bucks. Yes it’s liquid. And yes, it’s a very useful form of energy. But the fact remains that the world’s poor, a full quarter of humanity, is still in the process of migration to liquid fuels. And coal, with its versatility in both heating and industry, is still the fossil fuel of choice for the developing world. For 45 bucks, you can get yourself as much as 25 million BTU in a ton of coal. That’s a 25% price discount to oil, for more than 4 times the BTU. That is some serious BTU bang for your buck.

mike-brodie-aka-the-polaroid-kiddUnless the US-based VOIP-Web-Cam Political-Journal Blogging-Heads type debate wishes to move on now, to whether US coal reserves should be locked into the ground and neither used by us, nor exported, then the bulk of this conversation is frankly rather academic, and leisurely. Furthermore, oil above 40 as early as 2004–let alone oil above 60 today–was more than enough of an energy price-shift to kick global coal demand into a much higher gear. And not solely in the developing world either. The data clearly shows the total global call on Coal this decade, as a kind of panicked flight from expensive oil, was enormous. For these reasons, favorable coal conditions are now moving in because oil is lifting in part from dollar weakness and reflationary policy at a time when industrialism remains weak. These are exactly the kind of difficult, almost fetid, economic conditions in which coal thrives. Coal likes a swampy, stagflationary landscape. One where growth has trouble getting off the floor, but where the world’s 6.7 billion people still need heating and basic power generation. Not exactly a happy story, is it?

Photographs: Mike Brodie aka The Polaroid Kidd