Coal Demand to Rise for Decades

Jim Brown
 
Printer Friendly Version

That was the message from the Peabody Energy CEO last week. The demand curve is rising because a large percentage of the world still has no electricity.

CEO Gregory Boyce pointed out that the world's population rises by 200,000 people per day. We will rise from our current 7.225 billion today to 9.6 billion before 2050. The last two billion increase took roughly 12 years for each billion. The rate of gain is slowing as the boomer generation begins to die off but the total population is still growing.

According to Boyce 3.5 billion people have little or no access to electricity. About half the children in the developing world attend schools that don't have electricity. Over 1 billion people receive healthcare in offices without electricity.

Coal is the only fuel that can remedy this situation in the short term and that is why coal demand continues to rise. Coal plants are relatively simple and inexpensive to build and power. Coal is available all around the world and the technology to make plants cleaner is improving daily. Coal is the only choice for low income areas.

Coal's market share for electricity generation in the U.S. has increased by one-third over the past two years and now has twice the market share of natural gas. That is probably a shocking statement to many readers that hear in the news we are oversupplied by natural gas and everyone is switching to it because of the cost.

That is an incorrect assumption. When natural gas prices rise over $3 per Mcf it is normally cheaper to burn coal. In some areas that drops to $2.75 and some areas it is closer to $3.50 but the raw facts are that coal is cheaper.

Peabody Energy is boosting thermal coal production because of higher demand from electrical generation companies.

Nuclear energy may be cheaper in the long run to produce electricity but it takes 10-15 years to design, permit and build a nuclear plant. China is building 10 new coal fired plants a month. China has 19 operating reactors with 6 more to begin operation by the end of 2014 an another 28 will come online before 2020 with dozens more in the planning stages. China can't afford to have its citizens wait 10-20 years to get nuclear energy so they are building coal fired generation plants as fast as possible.

India has the same problems as China but they are much farther behind on the nuclear energy curve.

In the map below the highest density population centers are in black. The black areas have more than 1,000 people per square kilometer. In China and India there are more people that that in a single apartment building. The population density is so thick that smog is already unbearable but electricity is still a luxury. This is why coal has a future, a very long future.


The Baker Hughes rig count showed another drop in active gas rigs to 316 and a 19 year low. Oil rigs rose +11 to a 25 year high. E&P companies are fleeing the dry gas areas and racing to get prime acreage in the hottest shale plays for oil. Despite that rush to oil production it will not be enough to significantly increase production to the point where we will be "energy independent" or able to export oil to Europe.

New two year low in Cushing inventories.
New 11 year low in gas inventories.
New 19 year low in active gas rigs.
New 25 year high in active oil rigs.


Forbes published an article last week echoing my comments over the last month. It was titled "Oil Exports: The Rhetoric and the Reality." LINK Finally some common sense in the mainstream press. When we import 7.0 mbpd it makes no sense to export oil to Europe. That just creates a bigger deficit for us and puts us at risk in the global oil market.

The details are emerging from the ship collision in the Houston ship channel on March 22nd. The fog was just beginning to lift when the Summer Wind, a 585 foot Liberian-flagged vessel and the Miss Susan, a tug towing a barge of fuel oil saw each other on a collision course.

The Summer Wind was traveling 12 knots and Miss Susan was moving 4 knots. When they saw each other just under a mile apart they knew they were going to collide. The two captains talked to each other on the radio several times over more than five minutes and tried to come up with a strategy to avoid the wreck but you can't stop the inevitable. You can't stop ships weighing hundreds of tons in a hurry.

The impact caused Miss Susan to spill 4,000 barrels of fuel oil that shutdown the channel for nearly a week, restricted fishing in Galveston Bay and threatened bird sanctuaries at the start of the spring nesting season.

This highlights the problems with the Houston ship channel. On an average day in 2013 there were 38 tankers, 22 freighters, one cruise ship, 345 tows, six public vessels, 297 ferries and 25 other transits, with 75 ships in port. All a terrorist would have to do to shutdown a significant portion of our fuel supplies is to sink a ship in the center of the channel and that would be very easy to do. The channel is only five hundred feet wide and 45 feet deep. The Liberian ship involved in this collision was 585 feet long. In just a matter of minutes a terrorist could make a hard turn in the middle of the channel and set off a bomb in the bottom of the ship and it would take months to clear the channel. Gasoline and diesel prices would double and supply would disappear.

Don't think that these kinds of attacks are not going to happen. It is only a matter of time before disaster strikes.

Market

The Nasdaq and Russell 2000 led the decline on Friday and moved to critical support levels. Most analysts believe the decline will continue to some extent this week because of the rising fear levels. We know that quite a few retail traders probably got margin calls over the weekend and they will be forced to sell stock on Monday.

With the "sell in May" cycle not far ahead and Q1 earnings going to be lackluster at best there is not much reason for investors to be heavily invested. I would remain cautious and look for opportunities in the energy sector on any market dip. Energy equities should remain insulated from the broader market as long as oil prices remain elevated.

Jim Brown

Send Jim an email

Archives:200920102011201220132014201520162017