Tuesday, August 05, 2008

Is Coal the New Oil?

Something very strange is happening to coal prices in the US. A massive discrepancy has opened between prices east and west of the Mississippi, with the far west flat at around $12 to $15 per ton and the east soaring to nearly $150 ton, triple last year's prices.

Because coal is expensive to ship, and rail and barge transportation is limited, coal is usually three to four times more expensive in the east than in the west. But as you can see from the chart at the bottom, the current trends are extraordinary.

Coal matters because most of our electricity comes from coal. Higher coal prices inevitably mean higher electricity prices, which we all pay. But what could be causing such an odd and dramatic price increase? The usual market forces don't seem to explain things. Demand for coal in the US has been flat, exports haven't increased significantly, and inventories are reasonably high. This leaves market speculation as a real, and likely, possibility.

Speculation in energy markets tends to occur where there's the least regulation and, perhaps even more importantly in the Bush era, the least regulatory attention. After Enron it became very hard to manipulate the electricity market. Too many nosy people keeping an eye on things. As a result, over the past five years or so, speculators moved into oil, but given all the attention they've been getting in that market, perhaps they're starting to put their money elsewhere. Coal would be a logical choice. The coal market is much more geographically fragmented than oil, making it easier to control and manipulate. And, at least in the eastern US, the coal market is also fairly inelastic, again making it easier to manipulate.

Looks like coal could become the new oil. Enormous profits for the few, much higher energy costs for the rest of us. It's the American way.

Click on chart for a larger version. Source: EIA. The Powder River Basin is in Montana and Wyoming, and the Uinta Basin is in Colorado and Utah.

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