by Addison Wiggin
The Daily Reckoning
May 3rd, 2005

The story of energy is the story of survival...

First came fire. Then oxen pulling plows. Sun converted crops to food energy. Water and wind energy churned mills. Milled grain fed more oxen and horses. The horses pulled more plows.

The story of energy is the story of civilization...

First it was just wood, dried dung and straw that put heat in our homes. Then we had coal and furnaces. Coal made steam - steam powered factories, trains and boats. It turned turbines, which gave us electricity.

The story of energy is the story of wealth and power...

Coal energy also turned iron into steel. Steel gave us skyscrapers. We turned on the lights and then cooled them with air conditioners. Overtime at the office became possible. Power lines built suburbs. Electricity cooled delivery trucks, warehouses and supermarkets. It kept the ice cream cold in our freezers.

Without energy, England never would have had its Industrial Revolution. America wouldn't be breadbasket to the world. And there would be no tech revolution. No Internet. And no television.

Texas oil barons, industrial tycoons and Arab sheiks all made their fortunes on the back of the world's power resources. So did carmakers and military contractors, the phone companies and computer companies, Bill Gates and Microsoft. Even Warren Buffett, who does his math with a paper and pencil, makes his money investing in companies that need ready access to power to survive.

Some experts even say that if you cut the average energy consumption per person to 1,600 kilowatts per year, life expectancy is cut in half - to 36.5 years.

With the world population adding 250,000 new people every day...or 1 million new people every four days...even the minimum amount of electricity needed to sustain an exploding population is a heck of a lot of juice. No energy crisis is more critical to a society than one in which the lights go out.

Over 95% of the demand for coal over the next three decades will come from the electricity market. And China and India will be responsible for 70% of that new demand.

That's great news for the United States. And for China, Australia and Canada, where you'll find most of the world's untapped coal reserves. There's enough coal just in the known reserves to burn - at current rates - for another 300 years.

And all of it is miles away from the volatile Middle East.

In North America alone, we've got 254 billion tons of proven coal reserves - more than 25% of the world total (compare that to Saudi Arabia, with 24% of the world's oil).

But there are a few problems with coal.

One problem is that it doesn't burn clean. When England was the center of the Industrial Revolution, coal fueled the steam engines. The sky was black with soot. A layer of smog blanketed the streets.

In China, coal fires the power plants. China gets 70% of its electricity from coal-fueled power plants. Since China has lots of coal, it only makes sense.

But having coal isn't the problem. Burning it is.

With three-quarters of China's 400,000 megawatts of installed electrical power capacity coming from coal, China's skies are also turning black with coal smoke. Seven of the world's ten most polluted cities are in China. Acid rain is a serious problem.

But this isn't just a problem for the tree-huggers. China needs to keep a steady flow of foreign investment money pouring in. With the pollution problem, it risks losing a lot of that money.

So Chinese and U.S. companies are both making huge leaps with clean-coal technology. It's coal, but reprocessed in different ways to burn clean. With so much coal in the ground...every breakthrough in clean-coal technology could be worth billions to energy investors.

One of the ways to burn coal cleanly that's getting a lot of attention is called coal liquefaction, or liquid coal. The coal gets crushed into tiny particles, mixed with hydrogen and certain liquids and comes out as synthetic oil that burns much cleaner than regular coal.

Almost any coal-burning power plant can also burn oil. But liquid coal is also getting a lot of attention for another reason...

Dry coal is hard to transport. You can move it in trucks. You can move it on trains and barges. You can even do it by conveyor belt. But one thing you cannot do is move it through a pipeline.

Most of China's huge stash of raw coal is in the North. But most of China's big factories and economic centers are in the South, where there is no coal. And the train system in China can only move a little less than half of all the coal that needs to be shipped!

Even though there's plenty of coal in the North to burn, the South has to actually import coal from other countries. But once coal can be liquefied cheaply and fed through pipelines that will change.

Right now, the cost of getting a barrel of coal or coal oil ranges between $22 and $28 dollars. That may be a lot more than the Saudis pay to get their oil out of the ground. But with regular oil selling above $50 a barrel - suddenly, liquid coal looks like a bargain!

The Chinese plan to replace 10% of their oil imports with liquid coal by 2013. And it will also have huge advantages for running power plants that Chinese trains and trucks can't get to as easily or regularly.

Liquid coal has huge appeal outside China, too. Over the last 12 months, energy companies in the United States announced plans to build over $100 billion worth of new coal-fired power plants. And U.S. coal production is about to hit a record 1.2 billion tons...with Peabody Energy Corp., America's biggest coal producer, promising to double its production by 2010.

Regards,

Addison Wiggin
for The Daily Reckoning

Editor's Note: Addison Wiggin is the editorial director and publisher of The Daily Reckoning. Mr. Wiggin is also the author, with Bill Bonner, of the international bestseller Financial Reckoning Day and a frequent guest on national radio and television programs. Look for the sequel to Financial Reckoning Day - Empire of Debt - in October 2005.

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