Digging for Black Gold
The last time there was good news in the coal mines? Most people probably can't remember that far back.
While Americans have been transfixed by the spectacular rise in oil and natural gas prices and the fat profits of the oil giants, coal has quietly risen to prices not seen for nearly three decades.
For miners who weathered massive layoffs and coal companies that long sat on losses as large as their vast stockpiles of mined coal, this could mean a sustained industry boom. It would be one that the coal industry hasn't seen since the OPEC oil shocks of the mid-1970s brought coal prices up to nearly $100 a ton and turned Appalachia's coal country into a Wild West free-for-all of bootleg miners and golf-course business deals. For everybody else, particularly electricity-hungry consumers, the rise in coal prices could mean even higher energy prices on the horizon. "There haven't been many coal booms, so it's hard to compare," says David Khani, an industry analyst with Friedman Billings Ramsey & Co. "But there has clearly been a spectacular change in the coal space."
The federal National Energy Information Center projects that domestic demand for coal will increase to 1.5 billion tons by 2025, a nearly 38 percent increase from current levels. Most of that demand will come from electric utilities, which buy 92 percent of all the coal sold domestically. (Coal makes up more than half of the fuel bought by electric companies every year, compared with only about 20 percent coming from natural gas.)
Tight supplies at these utilities are among the causes of the rise in coal prices. The price of coal bought from central Appalachian mines for "spot," or immediate use, has doubled since 2002. More important, long-term contract prices are also on the rise. That means big profits for companies such as Peabody Energy Corp., which reported a 141 percent increase in third-quarter earnings last month.
But their costs are also on the rise as they have had to dig farther into veins and grapple with transportation shortfalls. "The easiest, most technologically available, and best-quality coal is gone," says Brenda Pierce, U.S. Geological Survey energy program coordinator.
And with coal companies still fearful of another bust, coal production has barely budged. Consol Energy recently publicized a $500 million expansion in Pennsylvania that promises to increase capacity there by 70 percent, or about 7 million tons a year. But they say the deal hinges on buyers coming to the table first.
Those buyers are probably on their way. Even with the price rise, coal remains far cheaper than natural gas. Several utilities now have coal-fired plants on the drawing board or in the works. And the federal government is doing its share to beat the drum. The Department of Energy has lined up several coal and utility companies to jointly invest with the federal government in a new "zero-emission" $950 million coal-fired power plant. On the drawing board since President Bush announced the initiative two years ago, the plant could be operational by 2012.
This story appears in the December 19, 2005 print edition of U.S. News & World Report.
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