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A Future With Coal?

Zach Fross
November 22, 2006

There has been a lot of speculation as of late regarding what the price of oil is going to do. Is it going up? Is the price going down? What do we plan for and where do we place our wealth? I have been looking for answers to these questions and as of late, coal has been catching my attention.

Coal as a long term, stable investment.

Over the last five years, coal consumption has been growing with continuing momentum. This growth has been fueled by the world’s thirst for energy along with increased demand for such things like steel (due to the higher demand for infrastructure). What this means for a long-term investor is that the companies that are dealing with coal probably aren’t going away anytime soon and will continue to grow.

The Energy Information Administration (EIA) estimates in its World Energy Outlook that 1.6 billion people are still without electricity. In developing countries where electricity is not available, the use of household coal for such purposes as cooking is widespread. According to the EIA, these developing countries are expected to increase their share of the world’s energy consumption from about 30% in 2000 to around 43% by 2030. Because a lot of these countries are restricted by which type of energy that can be converted into electricity (i.e. natural gas due to lack of resources, and nuclear because of political pressure) the most feasible option is coal. Not only is there an existing infrastructure in these developing countries, but also the price of coal is stable and coal is relatively abundant.

What about coal as a speculative investment?

When looking at the fact that the world’s energy demand is increasing every year and is not expected to slow anytime soon, we can see that there are many problems that are arising. Just taking a look at the United States’ coal power situation, much of the country’s electricity is produced from 50-60 year old power plants. These facilities will soon have to be replaced and the country is taking a hard look in coal’s direction.

Global warming and health concerns are also issues of the U.S. government which are causing clean coal technologies to become a realistic opportunity. The National Energy Act of 2005 describes the government giving money and tax breaks to the tune of $2 Billion over the next 10 years. $284 million of which will be spent during 2007 and $54 million has already been earmarked for the U.S.’ sponsored project FutureGen, the world’s first facility that will combine Integrated Gasification Combined Cycle (IGCC) electricity production and the capture of CO2 for geological sequestration (now that’s a mouth full).

Let’s not forget about SynFuel and the Fischer-Tropsch process. The U.S. is also awarding $1.3 Billion towards the research and production of alternative fuels; the most promising of which are the synthetic fuels made from coal and natural gas. This tells me that the world is still highly interested in coal as well as emerging coal technologies.

So what does all this mean?

If you are sitting there thinking that the price of oil will keep going down - “just look at what the prices have done recently; the price has gone over $70 and now it's back down in the $50's” - then think again. Global oil demand is still on the rise and production is struggling to keep up. The current decrease in price is simply a price adjustment period that will quickly subside. This along with coal’s long-term stability, continual growth, and speculative aspect, makes investing in coal even more seductive.

Zach Fross
November 22, 2006

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