Monday, November 05, 2007

Supply constrained = peak?

This Bloomberg article is about coal, but what I find interesting is the comparisons between coal and oil use and prices dating back to 1998 and 2002.

Both coal and oil are energy sources, but they are not perfect substitutes for one another; coal is used mostly for generating electricity, while oil is mostly used for transportation. However, a growing world economy would (and has) demanded more of both.

Economics tells us: With demand up, prices or supply should rise. If prices get too high, demand will likely fall.

While apparently coal use (demand) has grown 27% since 2002, or three times faster than crude, oil prices have risen much more than coal; according to this article, from roughly parity in 1998 to where oil is now 5 times as expensive as coal.

So coal supply is growing in response to the price rise.

With oil on the other hand, we are seeing a much larger price response (rise). This suggests supply is a problem (i.e. supply has not risen in response to much higher prices), and demand is, so far, not backing off much.

Those pundits who believe the oil price rise is unjustified/temporary suggest that the oil price rise is due to (pick any 3):

- speculators
- terrorist/war premium
- oil companies manipulation
- oil companies refusing to invest

We can't rule those out, and they all probably add a little something to the mix, but these facts suggest that supply is the constraint, just as it would be as we get closer to a global peak in oil production.

Bloomberg: Gore Nightmare Wins as Europe Pays to Ship U.S. Coal.


Now that the price of coal is at a historic low relative to oil, there's no stopping consumers and producers alike from embracing Al Gore's nightmare.

A ton of U.S. coal is so cheap at about $47 that European utilities will pay $50 to ship it across the Atlantic, according to Galbraith's Ltd., a 263-year-old London shipbroker. While oil and coal cost the same as recently as 1998, West Texas Intermediate crude is five times more expensive after climbing to a record $96.24 on Nov. 1.

Peabody Energy Corp., Consol Energy Inc. and Arch Coal Inc., the three biggest U.S. coal companies, forecast the largest increase in exports in 20 years, degrading the call for a moratorium on coal plants by former U.S. Vice President and this year's Nobel Peace Prize winner Al Gore. Coal use worldwide has grown 27 percent since 2002, three times faster than crude, said BP Plc. U.S. East Coast coal has risen 71 percent, while oil tripled on the New York Mercantile Exchange.

``Coal is by far the cheapest fuel because there's no price on how much damage it causes,'' said John Holdren, a Harvard University professor of environmental science and director of the Woods Hole Research Center in Falmouth, Massachusetts. ``Unless you get policies to put a price on carbon dioxide and other emissions, no other plants can compete.''

U.S. coal prices are equal to $1.98 for each million British thermal units of energy, compared with $12.51 for fuel oil and $6.91 for natural gas, data compiled by Bloomberg show. A million British thermal units is the equivalent of eight gallons of gasoline.