Coal: What Happens if It Isn't Cheap and Plentiful?

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". . .some analysts are arguing that official coal reserve figures around the world are greatly overstated."

The 2009 National Geographic special issue on energy spends a lot of time discussing coal. For good reason. In terms of electric generation, coal is king. In the U.S., coal-fired power is nearly half of the total generation mix. Globally, it's nearly a third. And in China, it's almost 70% of primary energy consumption. For decades, coal has been the primary baseload power source for many regions, because of its low cost and ready availability.

The U.S., according to reports from the Department of Energy and elsewhere, is very well-positioned to continue this pattern for many years to come; for example, the issue cites DOE coal reserves data suggesting that the U.S. has over 200 years' worth of coal at current rates of consumption. According to the Energy Information Administration, the U.S. has 27% of global coal reserves, followed by Russia at 17%, China at 13% and Australia at 9%.

But for a while now, there have been signs that the era of cheap and plentiful coal might be closer to ending than many people think. Coal reserves have been written down, significantly so, in many regions. China is using up their reserves at a prodigious pace. And now some analysts are arguing that official coal reserve figures around the world are greatly overstated.

At CalTech, David Rutledge has done an analysis of coal field productivity to derive an estimated total world coal reserve of 666 billion tons, vs. 3,400 billion tons as one other estimate (the IPCC's maximum extractable estimate) relying upon official reserve tallies had shown. The Energy Watch Group put out a report back in 2007, which estimated peak coal may happen by 2025, with demand growth starting to outstrip supply as early as 2020. The USGS has now scaled back their estimates of the U.S.'s economically recoverable coal.

According to the Energy Watch Group report, in terms of energy content (vs. volume) U.S. coal production already peaked earlier this decade. So within a couple of decades, if not sooner, we may start to experience much higher coal prices, if all of these analyses are an indication. And if so, that would mean coal-fired generation would become a lot more expensive.

It will be interesting to watch the coal supply forecast debate—and its implications for both investment theses and public policy.

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