Throughout the election campaign, you may have heard a lot about Obama’s ‘War on Coal’. Well it turns out that instead of complaining about burdensome regulations, the coal industry and its supporters should have been complaining about the competitive free markets. Costs have been rising for coal mining and transportation, while competitive natural gas has seen its prices plummet. In April 2012, thermal coal accounted for about 32% of U.S. electricity generation, down from an average of 50% between 2003 and 2007. Last spring marked the first time in history that U.S. utilities produced as much power from natural gas as they did from coal.
Outside of the Romney campaign, the largest voice against the Obama Administration came from Murray Energy CEO Robert Murray. Murray went so far as even forcing his employees to attend a Romney campaign event (unpaid of course). After the election, Murray Energy announced that it had been “forced” to make the layoffs in response to the bleak prospects for the coal industry during Obama’s second term. In a prayer circulated by the company, Murray said Americans had voted “in favor of redistribution, national weakness and reduced standard of living and lower and lower levels of personal freedom.”
Murray cited pending regulations from the EPA and the possibility of a carbon tax as factors that could lead to the “total destruction of the coal industry by as early as 2030.” One hundred and two layoffs are planned for Murray operations in Utah, with 54 from Illinois and seven from West Virginia. In August, Murray shuttered an operation in Ohio, again blaming the Obama Administration and its alleged “war on coal.”
However, it is not regulations that are causing headaches for the coal industry. It is the market itself. For much of the past two decades, coal has been the least expensive thermal fuel in the US. The much publicized shale boom has led to rising production from the nation’s prolific shale oil and gas plays and has ensured that natural-gas prices have declined steadily since early 2010. This upsurge in output, coupled with reduced demand from the recession and a warm 2011-12 winter, sent the fuel spiraling to a 10-year low of $1.90 per mmBtu in late April 2012. In this challenging price environment, utilities with the flexibility to adjust their generation mix opted to burn more natural gas and reduce coal consumption.
In addition to competition from natural gas, coal, especially Appalachian coal, is becoming much more expensive to mine and transport. The easiest-to-reach coal has already been mined, which means coal companies have to dig deeper and go after thinner seams and smaller deposits in West Virginia, Ohio, Kentucky and other neighboring states. Marie Shmaruk, a director at Standard & Poor’s who analyzes metals and mining companies, states, “We have been relatively negative on central Appalachia for quite some time because it’s an expensive area to mine. It’s been mined out and has thinning coal seams. We’ve been mining there forever.” Shmaruk said that “central Appalachia is being squeezed the most. At natural gas prices today, the coal in a lot of those mines is not really competitive. And you’re seeing a lot of the utilities in that area have moved to natural gas.”
In addition to rising mining costs, the average cost of shipping coal by railroad to power plants increased almost 50% from 2001 to 2010, with rail transport accounting for more than 70% of U.S. coal destined to the electric power sector, said a new report from the U.S. Energy Information Administration (EIA). Rates grew slowly in the beginning of the decade before increasing almost 11% in 2005, and then continued to grow at a relatively robust pace until the recession. The impact of the recession on transportation rates was short-lived as rates grew more than 9% in 2010.
Going back to Obama’s ‘War on Coal’, the coal industry faces a rule going into effect in 2015 that tightens the amount of mercury coal plants can emit, as well as regulations on mountain-top mining. Both will add to the current trend of making coal production and coal-fired power plants more expensive. The rules themselves are not Obama’s doing, although the EPA has decided to implement them fairly quickly. Most stem from the Clean Air Act, which was signed by Richard Nixon and strengthened during the first Bush presidency.
Many U.S. coal companies are now banking on the hope that international demand can help save the industry. According to the World Resources Institute, Some 1,200 new coal-fired power plants are being planned across the globe. Two-thirds of them would operate in China and India, it says. Having China and India bidding on coal from the US could potentially push the price up and improve profit margins. A Sierra Club report goes into detail on the current regional and international market dangers facing coal investments. One of the trends it highlights is the rising price of internationally traded coal, mainly due to the rise in the price of oil. Coal has to be transported to export terminals, shipped overseas, and transported to coal plants which are dependent upon the price of oil, mainly in the form of diesel fuel. The more expensive U.S. coal ends up being when it reaches Chinese shores, the less they’ll buy. Not a great outlook for the industry no matter who you try and blame.