The Cost of Coal

Many commodities prices have risen considerably in the last couple of years. These include oil, concrete, steel, natural gas, corn, soybeans, wheat, wood, fish, beef, and coal. The principal reason is rapidly increased demand. This demand has grown faster than the supply of these products. The increased wealth of many people throughout the world which has been brought on by a large increase in international trade and improvements in economic freedom in China, India, Brazil, and Eastern Europe has given billions of more people much more money to bid for the supply of these products. The United States exports many of them and is making a great deal of money and providing many jobs as a result.

Let us examine the case of coal. The U.S. has an abundance of coal. Presently, 600 power plants burning coal generate 49% of the nation's electricity. This is up from 43% of the electricity in 2000. However, more than 60 coal power plant proposals were terminated in 2007 due to concerns about greenhouse gases and environmental issues in 24 states. Some of the terminations were brought about by state governments and some by utilities concerned about future carbon footprint legislation. Dozens of the original 151 proposals for new coal power plants in early 2007 are being challenged in the courts.

Meanwhile coal production was cut in China this winter by heavy snowstorms and heavy rains flooded coal mines in Australia, the world's biggest coal exporter. Yes, that is Australia, not the U.S. But U.S. coal exports increased 19.2% last year and the Energy Department is expecting a further 15% increase this year. Power plants widely use Central Appalachian coal, a grade of coal with a very high energy output. This coal sold for $40 per ton in early 2007 and is now selling at almost $90 per ton. Powder River Basin coal in Wyoming and Montana has about 0.75 times the energy per ton and was selling at $10/ton in early 2007 and is now selling for $15/ton. The lower cost is not proportional to the energy content, due to longer shipping distances to most power plants and because the shipping costs are related to the weight and volume, not to the energy content. When a substantial part of the cost is determined by the world market bidding its value up, the cost of shipping relative to the energy output is even more important. The fact that the Central Appalachian coal more than doubled in cost since early 2007, while the Powder River Basin coal went up only 50% is a sure sign that the international market is playing a major role in determining the cost of the coal.

It is interesting to note that while new coal-fired power plants in the U.S. are largely being axed due to environmental concerns, Western European nations are rapidly increasing the number of their coal power plants. See the NY Times article "Europe Turns Back to Coal, Raising Climate Fears." Italy plans to produce 33% of its electricity from coal in five years, which is up from 14% now. More plants are being built in Germany and the Czech Republic. About 50 coal power plants are expected to be opened in the next 5 years in Europe. As I have pointed out before, the Europeans love to criticize the U.S. for its CO2 emissions, but our emissions are growing less rapidly than are theirs. Coal produces about two times as much CO2 per unit of electricity as does natural gas. Meanwhile, India and China are opening about 1 new coal power plant a week between them.

Both natural gas and oil are alternatives to coal for electrical power generation. Both have had larger price increases even than coal, however. Coal in 2006 cost only $1.69 per BTU, while natural gas cost $6.87/BTU. Thus, the heat output per dollar for coal was 4.1 times greater than that of natural gas. For most of us, this means that our electric bills will be going up considerably. The more we switch from coal to natural gas and oil, the more our electric bill will go up. The cost of reducing carbon dioxide emissions will be very high.

On the other hand, if we emulate the Europeans and use more coal, crops and other plants will luxuriate in CO2 fertilizer and our cool planet will perhaps become slightly warmer than it might otherwise be. Of course, over most of the last 400,000 years the planet has been colder than now. We call these colder periods Ice Ages. We are about due to begin another Ice Age, if the pattern holds up. Let us hope that producing a wee bit more CO2 will have a significant warming effect, despite the weak evidence that it might have done so to date. And if it were to cause a temperature increase, would it be cause man's emissions were significant compared to the much greater emissions from the oceans and from decaying plant matter, not to mention all of the animals breathing?

The Convenience of Not Thinking in Politics

Thomas Sowell, in Applied Economics, points out that people generally think only about the immediate intended result of any political issue they think about. When thinking that it would be nice if there were less violence, it seems so easy to wish that the elimination of gun ownership will eliminate violence. The fact that criminals will still acquire guns, while law-abiding citizens will be the ones disarmed, does not come to mind unless one takes the thought process a step further. Certainly thinking about the studies that show that there is more violence and that more homes are robbed when occupied when gun ownership is limited to the criminals, is still another step down the road of thought that is not followed.

Here in Maryland, the electric utilities have not been allowed to charge residential home owners enough for their power that the electric utilities could properly maintain and modernize their power distribution systems. In the BG&E area, residential owners were paying one-third less for power than were commercial users. In effect, commercial users were subsidizing the residential power users, since their additional payments were providing a disproportionate share of the power system maintenance costs and for the upgrades to the system. These commercial users were getting only a portion of the benefits in reliable power that they should have been getting. There is a very unreliable transformer near my laboratory which has long needed to be replaced and it has not been. This is likely a direct result of the residential home power subsidy. In addition to the many power failures experienced at my lab, we have nightly brown-outs, which I suspect are due to BG&E intentionally reducing the line voltage in the middle of the night in a desperate attempt to reduce their operational costs a bit. This may not affect many residential users of power, but my laboratory often runs experiments through the night. These brown-outs only rarely kill the computers, but they add to uncertainty about the quality of some of the data acquired by our spectrometers. Of course, those businesses which place a premium value on reliable power do not have as many concerned voters on their side as does the side which wishes for lower home power costs. It is simply assumed that we commercial users will be able to continue to provide jobs whether we have reliable power or not. It is not rocket science to understand what the effects of state power commission interference in rational power rates will be, but most of the voters will not allow themselves to think past the idea that it would be nice if the state government arranged for their power costs to be lower.

I talked to my mother tonight and she remarked that many of her elderly friends refuse to think about the effects of social programs such as Medicare, Social Security, and further proposed socialized medicine schemes. My Mom points out that medical care will suffer and that the costs of Medicare are too high because it is in no one's immediate interest to control costs. My Mom has often questioned why she or my Dad were charged so much for a procedure, a doctor walking through and asking "How are you?", or the cost of a medical product. The reply is usually, "Why do you care? You are not paying for it." Commonly, this response is an angry one. She asks her elderly friends why they do not care that the programs they want come at the expense of higher taxes on their children and grandchildren. They respond that that is depressing to think about, so why think about it? It seems to me that this is a clear case of parental and grandparental abuse of children and grandchildren, but it is apparently widely accepted practice. The AARP institutionalizes it and works mightily to lobby for this abuse. For this reason, I immediately throw away their invitations to join their organization. I love my three daughters and my nieces and nephews. I do not want to smother their life options in oppressive taxes. I will not join AARP in their crusade of intergenerational warfare. But most elderly people apparently do. They are only too happy to hurt their children. It is good not to think about this painful consequence of thinking only about their immediate convenience.

In the Maryland suburbs of Washington, DC such as Montgomery County and Howard County, about half of each county has been set aside to remain farmland or to be developed in 3 acre lots. The cost of land is so great in these counties that hardly anyone can afford to buy 3 acres and put a home on them. These land-use restrictions are intended to provide plenty of open green areas. This is the wished for result and it works. This is the claimed sole intent. However, a great many of the voters have an ulterior motive. Their monetary stake in their homes is great, so they do think a bit further down the road on this issue. They are generally very aware that they are choosing a course of action here which will drive up the cost of housing in their area and increase the value of their home in particular. On this kind of political issue they have an incentive to think about the consequences of their green area restrictions and they like the result. Yes, given a money incentive, people will think about what they are doing politically, at least a bit further down the road. But, do they admit that this is the real reason they are so green? No, never. They are very happy to pull the mantle of being an environmentally friendly good guy over their shoulders. But, that is not their primary reason for wanting land-use restrictions. The primary reason is to make housing more expensive. There is little remorse that this hurts others.

So, what do the politicians think of these usually unthinking voters? That it is very easy to present ideas for legislation which have wished for intentions. This legislation always gives the politicians more power. It improves their chances of re-election. By the time the problems come home to roost, they will be in a higher office or already retired from politics. If they serve in the US House of Representatives or the Senate, they will be enjoying a retirement with more than $1,000,000 a year income from a Fedeal government pension and further income for lobbying. Far from wishing to provide leadership in the quest for good government, our politicians see only gravy in the micro-thoughts of their electors. They are intelligent enough to manipulate the voters into giving them power, but never intelligent enough to think about the consequences of their actions on future generations of Americans. You see, they do their own wishing. They wish for power and a conscience free of concern for the ill they have done the country. In my correspondence with Maryland Senators and Representatives, I have found them all to be simple-minded in their espoused thinking, but very nimble in manipulating the voters. They are clearly practiced at selective thinking. They specialize in only that thought directed at being re-elected and increasing their own power over others.