Uncertainty lies ahead for the coal industry
Three months ago, I gave a talk at the Institute of Municipal Finance and Governance (IMFG) about the Local Governance and Public Finance Challenges of the Fracking Boom: Lessons for the US and Canada. One of the nuggets of information that got the largest crowd response was pointing out that, because of the speed and lower cost of fracking, the Canadian Oil Sands simply cannot compete at $50 a barrel. There is no new investment into the oil sands now and once the equipment is depreciated and the current capital runs the course its natural life, that’s it. There is no new investment already as major players are pulling out. Five – maybe 10 years from now – speaking of the oil sands will be an anachronism. America is looking at the same story when it comes their coal production. Good for the climate. Even better for the local air. Bad for jobs in current mining communities.
US Energy Production by Source Type (Data Source: EIA 2016). Note the downturn in coal production at the same time as the increase in natural gas starting around 2007. Also “Other Renewables” – consisting of wind, solar, etc. - make up less than 2 percent of production. They still have a long way to go.
When looking at economic production costs and global prices, there is one factor that I did not consider: the uncertainty of geopolitical events. Qatar could be embargoed by OPEC. The Venezuelan state could collapse. Militants could take over the Niger Delta. As modern industrial societies need fossil fuels to function, any one of these incidents could be game-changers for global energy markets. There is no imminent, suitable alternative to power our homes, cars, and factories. As such, it’s a price inelastic good and therefore small changes in supply and demand can lead to large price fluctuations. Even if one or two percent of global supply is instantly cutoff, the price of oil could quickly shoot back up to north of $100 a barrel. At such prices, fracking will skyrocket past its 2012 peak, but it will also make coal and the oil sands financially viable once more.
In order to protect both the climate and the local air we breathe, there are two strategies that are usually mentioned: (1) an international carbon tax, and (2) investments into renewable energy research and implementation - particularly wind and solar but also nuclear. We should do these, but I would add a third that is counterintuitive: (3) maintaining world peace and trade networks that keep oil and natural gas prices low. The normal thinking goes that cheaper fossil fuels are, more we’ll use of them and this will slow our transition to alternative energy. This - in general - is true. The laws of supply and demand.
But here is where the rub lies: not all fossil fuels are created equal. Some do significantly more damage to the environment and human health than others. Coal and the oil sands are by far the worst in this regard. Allowing cheaper fuel from fracking – natural gas for powerplants, cleaner oil for transportation – to displace these sources is something that should be commended.
Cesur et. al (2016) found that :
“… natural gas networks has indeed led to a significant improvement in air quality. Furthermore, we show that the mortality gains for both the adult and the elderly populations are primarily driven by reductions in cardio-respiratory deaths, which are more likely to be due to conditions caused or exacerbated by air pollution.”
Lueken et. al (2017) publicized their findings in Scientific American:
“Tens of thousands of Americans die every year from old-fashioned air pollution, generated by electric power plants that burn fossil fuels… if all coal-fired power plants in the United States switched to natural gas—an extension of a trend that is already underway… We found that such a shift would have tremendous positive effects on human health in America. We estimate that low natural gas prices and state policies that move utilities away from coal are savings tens of thousands of lives and tens of billions of dollars each year.”
Both of these studies discuss particulate matter as the main culprit. A type of pollution that is unique to the dirtiest forms of energy. This has flown beneath the radar, but cannot be understated: MOVING AWAY FROM COAL AND THE OIL SANDS IS THE GREATEST UNHERALDED ENVIRONMENTAL ACCOMPLISHMENT OF OUR GENERATION.
Coal kills more people each year (52,000) than the number of jobs it employs (51,000) in the United States. No wonder natural gas has been dubbed a “bridge fuel” between yesterday’s dirty coal and tomorrow’s green energy revolution. A full transition to renewable energy will be the greatest accomplishment of the next generation, and possibly in all of human history. A goal we should strive for, but one that is still a few decades away. In mean time, a continuation of low oil and natural gas prices brought about by world stability will continue this quiet revolution of natural gas. The policy implications of this may seem abstract, but in neighborhoods throughout the country people will breath cleaner air and live longer for it.
What will this mean for your community? Post below!