Profit from the Peaks

Written By Brian Hicks

Posted November 22, 2010

According to the Wall Street Journal:

“State-run media reported that Beijing is considering capping domestic coal output in the 2011-2015 period, partly because officials worry miners are running down reserves too quickly to meet the needs of a rapidly expanding economy.”

“Imposing a cap would be significant as China’s mining sector is already finding it hard to keep up with domestic coal demand, which has grown around 10% annually over the past decade.”

“China can’t keep growing coal output much beyond another decade, analysts say. The mining sector is constrained by chronic infrastructure bottlenecks, especially road and rail, and those coal deposits that are easiest to mine have already been tapped.”

“Experts are starting to predict when China’s coal reserves will run out—a nightmare scenario in a country where 70% of its energy is derived from coal.”

That’s peak coal.

And, says Business Insider, “Like everything else in China, coal production statistics are simply immense. China now consumes and produces close to 50% of all the coal in the world. Thus, changes in Chinese consumption and / or production may have a dramatic impact upon the global coal market.”

But this shouldn’t come as a shock. As we’ve said in Energy and Capital:

Conventional thinking was that we’d never hit peak oil — that we’d have enough easy-to-reach sweet crude for centuries to come.

Thus, peak theories have been mired in controversy and disbelief. But the fact is we’re already approaching the last of the high grade, easily accessible oil deposits.

The same holds true for other resources, such as coal.

Conventional thinking is that we have 250 years of remaining coal reserves, that there is no need to worry about supply — at least, not during our lifetimes…

But, as we’ve been writing about in these pages for some time now, the “peak”-ing of a resource involves the supply of easy-to-get-to, high quality stuff. And while I hate to be the bearer of bad news, the reality is that oil isn’t the only fuel source with a peak theory…

Reader feedback

Now I realize that those who aren’t keen to the idea of peak oil aren’t about to embrace the notion of peak coal with open arms…

After the peak oil garbage, you want us to believe in peak coal, Ian? What gives?

According to USGS studies, we have 250 years of it left. Peak coal is a fallacy. We’re not running out of coal. Stop the fear mongering. — James T.

That 250-year supply report from the USGS was compiled in the 1970s. And, as I’m sure even James can attest to, a lot has changed since then…

Updated USGS studies find that we may only have 100 years of coal left — a startling drop from 250 years. Plus, what James doesn’t understand is that the easiest and most profitable coal reserves are mined first. New technology can help, but sooner or later, you reach the point when the energy needed to extract coal is so great that it’s no longer profitable.

And at the rate that we’re burning through coal, it’s not surprising that we’re approaching that point. About half of the electricity in the United States is generated by burning coal.

So exactly how much do we have left?

Back in 1907, the USGS first said we had three trillion tons, or enough for 5,000 years. By the 1950s, we had 500 billion tons. By 2007, we have 250 years remaining.

Nowadays, experts argue there’s far less. David Rutledge from the California Institute of Technology said in 2009 that he believes we have half that amount, which would work out to 120 years’ worth.

And more than likely, the actual amount is less than Rutledge’s best guess.

Peak coal by 2011?

Yep, there are new studies that existing coal mines will reach peak production as early as 2011, with peak production levels cut in half shortly thereafter.

But 2020 is more likely in my opinion, based on reserve to production ratios.

Tadeuaz W. Patzek and Gregory D. Croft, authors of a recent coal study published in the scientific journal Energy, find that coal production will decline after 2011. They believe mines won’t be able to reverse that trend.

“It’s unlikely that future mines will reverse the trend predicted in this scenario,” according to the authors. “The most important conclusion of this paper is that peak of global coal production from existing coalfields is imminent…”

That runs counter to current reserve estimates, which those researchers call overblown and based on data that’s dated or unreliable, including recent studies from the World Coal Institute and the U.S. Energy Information Administration.

The World Coal Institute finds that the use of coal will rise 60% over the next 20 years, and that coal will last us 119 years. The U.S. Energy Information Administration finds that coal consumption will grow 50% by 2035.

But Patzek doesn’t believe it. He maintains the world will finish off the easy-to-reach coal of higher quality, and what remains will often be lower quality stuff that’s much harder to dig up and deliver.

(Sound familiar?)

Global peak coal findings

South Africa may have already reached peak production, according to research.

The chairman of the Association for the Study of Peak Oil (ASPO), Jeremy Wakeford:

It is commonly believed that South Africa has abundant coal reserves which will last 200 years or more. But recent research [from] three scientific journals suggests that usable reserves are much smaller than previously thought, and that annual production could reach a peak and begin to decline within a decade — or might even have peaked already.

Along those lines, the findings of a geological study will soon be published in the SA Journal of Science. One geologist estimates South Africa will reach peak coal production in 2020, when ~285 million tonnes will be produced; 242 million tonnes were produced last year, with over half being used by Eskom, and the export market and Sasol sharing the rest. 

But that’s not the only problem…

Richard Heinberg, author of Blackout, explains in his book that coal figures out of the United States are misleading because the quality of the coal is uneven.

If production continues to increase in volume, the coal will decrease in energy value.

Worse, researchers are already finding exhaustion of high quality coal in Pennsylvania… and they expect for production in West Virginia to soon fall off.

In China, reserves were estimated to contain 200 billion tons in 1930. That has since been cut to 114.5 billion tons by 1992. According to Heinberg, the problem is that China suffers from weak productivity, thanks to disastrous working conditions.

Russia produces about 350 million tons of coal a year — an amount that doesn’t satisfy its needs and forces it to import from elsewhere.

As for India, the nation has been hit by shortages of coal due to infrastructure problems. It’s already lead to drastic reductions in electricity usage.

The bottom line here is we are nearing peak coal, and must find other sources of energy to replace it. And one of the best ways to profit from coal’s future is by buying the Market Vectors Coal ETF (KOL:NYSE) on pullbacks.

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