Yeah think (think, think) let your mind go, let yourself be free
You need me (need me) and I need you (don't you know)
Without each other there ain't nothing we can do"
- Aretha Franklin
We are learning that banks are currently backing away from loans to coal producers and that with this decision, the bankruptcy of major coal producers is imminent. Hennie Penny is alive and well in coal country.
According to the New York Times, those noted environmentalists Bank of America (NYSE:BAC), Citigroup (NYSE:C), JP Morgan Chase (NYSE:JPM) and Morgan Stanley (NYSE:MS) have withdrawn from coal-fired electricity generation financing. Peabody Energy (BTU), the largest US coal producer, threatens bankruptcy. Why such negativity? This looks like opportunity for both Peabody and its bankers.
Peabody. Not a screaming buy.
Is coal dead? Of course not. Are some coal producers about to pay the price of their short-sightedness? Perhaps. Is the problem coal, or the management of Peabody and the creativity of its bankers? I suggest the latter.
Coal is in retreat, because it has, with its current extraction technology and current natural gas prices, an unattractive trade-off between the cost of a BTU of energy it produces and the things its production emits into the atmosphere or water. But what may be really dying is Peabody management's notion that the cheapest way to increase coal production is to buy legislators. Although that remains to be seen.
Where is the thought that changing coal production technology might be a good idea, or that coal producers could make more flexible plans based on the likely change over time in costs of alternative sources of energy? Where is the coal producer that does not rely strictly on coal? Where are the bankers that understand the purpose of mergers and acquisitions?
Additionally, it is in the long run interest of society to create electricity generation facilities that are more easily modified to change feedstocks as their relative costs change. Where is the effort to develop this technology?
As a society we are remarkably disinterested in thoughtful management of energy. What we consider least is what matters most: uncertainty. Which mix of the energy feedstocks will produce the best energy/emission tradeoff per dollar in five years? We don't know that and we will not learn it for four years. Modern Portfolio Theory is all about this problem.
There is money to study the benefits of coal-based energy, and money to study the benefits of ethanol-based energy and nuclear energy. But the constituency for "sometimes this is a good idea, sometimes that is a good idea," if it exists, is certainly hard to locate.
Management of the uncertainty surrounding the cost of a unit of energy and the cheapest future sources, considering both the energy and its emissions, is our society's most critical economics-related issue.
We seem to wake up every morning, look at the availability and price of various energy feedstocks, and conclude that energy policy is best managed assuming today's prices and extraction technology will last indefinitely.
As investors we understand the notion that over longer time horizons it is unwise to assume any one investment, say IBM, will be the ideal place to park our money. We might think of Apple, say, as the thing of the moment, but no experienced investor thinks there is any long term single good investment. See the very thoughtful article by Dan Stringer, here.
Why does society feel we must put an end to one source of energy and bless another, because of today's prices and technology? An example of a simple "clean air" solution that has fallen out of favor is ethanol sourced from corn. Corn fields are a better look than strip mines, but hard research that includes the carbon emissions produced in reducing tons of low-carbon corn to a gallon of ethanol fuel and its cost may return another answer.
The simple answer we economists seem to favor is a "carbon tax." Too simple. I'm not sure I understand what "carbon tax" even means. Carbon is the thing we burn to produce energy. The amount of carbon in an energy source is more-or-less directly proportional to the energy it produces. If we were to tax carbon, all sources of energy would pay a tax proportional to the energy produced, leaving us with more government revenues and no way to distinguish between one source of energy and another. A carbon waste tax makes more sense, but surely carbon waste is not the only untaxed cost of any of the energy sources. I doubt that it is even the most dangerous emission.
Common sense and my coal country roots leave me with no doubt that there are some major serious negative effects of coal extraction on the human habitat. However, it is also somewhat clear to me that as a society we must give more thought to how we manage our carbon resources than the simple observation that coal is dirty.
Amber waves of grain.
And there is, I suggest, a way of looking at the production of energy that has not been properly explored. Specifically, the federal government should consider creation of non-profit sources (more than one) of models of the energy/emissions production mix. This research would produce transparent models of the use of energy production resources that does not limit itself to a single source of fuel or emission.
Instead what is needed is the outline of an energy production strategy that changes with changes in the relative prices of different energy feedstocks and the all-in least-cost disposal method for noxious byproducts of each. The cost of tossing out the trash from energy production is important. And society has paid too little attention. But a look at the trash without considering the value society places on energy consumption is a visit to the land of Oz.
Giving coal or corn or whatever a spanking and sending it to its room is not the answer. Nor is it anything but wishful thinking to expect consumers not to react to cheaper fuel by consuming more of it.
We are not going to solve our energy problems soon, no matter how many global pledges our governments make. But it would be quite inexpensive to ask better, more realistic questions about our social alternatives.
Industry studies won't work -- tobacco and food research makes that abundantly clear. Government studies don't work. Look at public school lunches if you doubt that. In defense contracting, there has been more success with non-profits with oversight like Rand. What is plain is that more common sense is needed and less single-interest politics -- and a government that considers real choices and makes real decisions, instead of meeting with other countries and making pledges.
The health of King Coal depends on intelligent management of the risks that coal will be temporarily uncompetitive. That may require diversification and energy companies that rely on multiple energy feedstocks. Peabody may need an acquisition partner, not bankruptcy.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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