Thursday, April 17, 2014

Increasing Coal Production in Response to Natural Gas Price Hikes

According to the EIA, the U.S. Energy Information Agency, natural gas prices have been nearly double or triple in the last few months over their recent year's average. Since January of 2012 until January of 2014, natural gas prices have averaged between $2 and $4.50/MMBtu, but in the first three months of 2014, natural gas prices have risen drastically to between $4.50 and $8/MMBtu. The report says that due to the very cold winter that the entire U.S. experienced, the demand for natural gas heat went up, and thus the prices for natural gas rose.
This article reports on the happenings at Spring Creek Mine in Montana, which is owned by Cloud Peak Energy. The CEO of Cloud peak discusses that in recent years, production at the mine has been below the overall average from the life of the mine, but this winter, the mine was called upon to produce more coal in order to keep up with the demands of power plants in order to supply the energy for increased heating due to the polar vortex. But coal isn’t slated to lose it’s drive now that winter is coming to a close, coal prices are predicted to be around $2.36/MMBtu yearly average, while natural gas is predicted to be around $4.44/MMBtu, and people are interested in the “cleaner” low sulfur coal that is mined from the Spring Creek Mine. Foreign demand for American coal is also on the rebound now that economies around the world are starting to make a comeback from the global economic downturn, but currently, America is not prepared to export the predicted demands of coal due to lack of viable shipping ports.
I found it very interesting to see how natural gas and coal were substitute goods when demand for energy increased. It makes sense in concept, but to actually see the changes in demands graphically was useful. One of the major thoughts that I had when I finished reading the CNBC article and after comparing it to the EIA report, was the externalities of coal and natural gas, but mostly coal. While coal is predicted to trade around $2.36/MMBtu, around $2 cheaper than natural gas, will the negative externalities actually outweigh the upfront price paid? And while the demand for coal on the foreign market is gaining traction, is it worth expanding the coal shipping industry or would expanding other export industries have a lessened environmental impact on both a local and a global scale? I personally think that calling lower sulfur coal “cleaner” does a disservice to the public on a level around that which calling cigarettes “light” creates the belief that they are healthier. 
--Tom Scalley

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