Coal and Nuclear Power Can’t Substitute for Pricey Oil

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(Corrects status of Japan’s nuclear program in the 27th paragraph. This is the second of four excerpts from “The Big Flatline: Oil and the No-Growth Economy.”)

About 40 percent of the world’s electric power is generated from burning coal, which is second only to oil in contributing to global energy use.

And affordable coal may soon be running out just as fast as affordable oil is.

No resource can withstand the pressure of an exponential growth in demand. China burned 3.7 billion tons of coal in 2010, according to the U.S. Energy Information Administration, compared with 1.2 billion tons in 2000. Today, China uses almost twice as much coal as the U.S. while possessing only half of its reserves.

Coal is behind China’s world-leading economic growth, accounting for more than three-quarters of the country’s power. An ever-increasing supply is needed to keep factories humming, lights on and, most of all, its gross domestic product growing.

Just as oil prices hit unprecedented highs a few years ago, so, too, did the price of its hydrocarbon cousin. At the peak of the boom in global commodity demand in 2008, coal prices rose to almost $200 a metric ton, a price matching the $147-per-barrel for oil at the time.

Oil prices tumbled 70 percent when the recession hit. Although coal didn’t fall as dramatically, its price still dropped by more than half. And, like oil, coal prices perked up again along with the global recovery.

China’s Needs

In today’s economy, to expand their GDP, countries need to burn more hydrocarbons. That’s why China is digging up its coal reserves at an unprecedented pace. The official growth plan calls for burning as much as 5 billion tons per year, a third more than recent consumption. The country already accounts for almost half of global coal production, yet it holds less than 15 percent of the world’s coal reserves. China now uses more coal each year than the U.S. and Europe combined, forcing it to be a net importer.

India’s fuel demands are also surging. World coal consumption, according to the Intergovernmental Panel on Climate Change, is forecast to double over the next two decades. Where will all this coal come from?

China is already struggling this year to meet current needs, and its companies are scouring the world looking for new reserves. State-run Chinese enterprises spent more than $32 billion to acquire foreign mining companies from 2005 to 2010.

Industry experts will tell you that enough coal exists to fuel the generation of electricity for the next 200 years. In one sense, they are probably right. The world will never geologically run out of coal, just as it will never run out of oil. But just as we are rapidly running out of affordable oil, the same constraint is being felt in the world coal market.

As it turns out, our supply of economically viable coal is a lot smaller than we think, at least when it comes to the high- grade variety. Not all coal is created equal. The highest grades, such as anthracite and bituminous coal, can have as much as five times the energy content of other “brown” varieties, such as sub-bituminous and lignite. If you have to ship five times as much low-grade coal to match the energy content of high-grade coal, it makes little sense to transport it to faraway power plants.

Unfortunately, the so-called brown coals are the most abundant. The type with the highest energy density, anthracite, has been depleted far more rapidly.

Coal Quality

Physical tonnage can offer a misleading picture of supply. For example, coal production in the U.S., which has the world’s largest reserves, has never been greater. But from the standpoint of how much energy is produced, coal peaked in 1998, and the substitution of lower-grade coal for higher grades has resulted in a reduction in actual energy content. The U.S.’s annual production of high-grade anthracite is now less than a quarter of its 1950 level. Production of the next-highest grade of coal, bituminous, peaked in 1990 and has since been declining, as well. But despite a drop-off in high-quality production, the total coal output -- mostly brown varieties -- from U.S. mines has increased by about 20 million tons per year.

Less energy for more tons mined: This is just another example of the concept of diminishing returns that is now common in our energy landscape.

Nuclear has been hailed as a potential alternative to oil and coal. But every time it seems poised to take off, we get an unpleasant reminder of its dangers.

The meltdown of three reactors in Japan in early 2011 was the latest setback to nuclear energy’s chances of becoming the fuel of tomorrow. Before the accident at Fukushima, concerns about carbon emissions had translated into a new receptiveness toward the nuclear industry. That completely changed in the hours after the tsunami struck. Investors quickly sold off everything that had anything to do with generating nuclear power, and governments bailed out.

Global warming may pose far greater dangers than a meltdown, but nothing scares people more than radiation. No matter how exaggerated the fear, Japan’s nuclear accident became the world’s nuclear accident.

If you look at Japan’s fuel imports, it is easy to see why nuclear plays such a big role. Japan burns about 4.5 million barrels of oil every day, ranking it third in the world behind the U.S. and China. Japan produces less than 150,000 barrels a day. Now, its hydrocarbon fuel bill will be significantly higher.

For years, the Japanese nuclear industry had been selling a reputation for world-leading earthquake-resistant construction standards at home and abroad. The Fukushima disaster exposed an industry in which decades of safety breaches and cover-ups pointed to a major accident just waiting to happen.

Higher Costs

The policy fallout reaches well beyond Japan. After each nuclear disaster, the bar is set higher for safety. Reactors built between the disasters at Three Mile Island in 1979 and Chernobyl in 1986 cost 95 percent more than those built before 1979. Compared with existing nuclear facilities, the power generated in plants built after Three Mile Island was 40 percent more expensive. After Chernobyl, additional safety and containment measures sent construction costs up more than 85 percent, while prices for nuclear-generated power increased by an additional 40 percent.

Germany was one of the first nations to react. The government reversed a decision to extend the lives of its aging fleet of 17 nuclear-power plants until 2036. Chancellor Angela Merkel, a strong proponent of nuclear power, decided to close seven of the oldest reactors, pending a safety review. Two have been permanently boarded up. Germany then announced that it would close all of its nuclear-power plants by 2022.

Germany now must replace the lost power. Almost 30 percent of its electricity comes from nuclear, roughly the same proportion as in Japan. While Germany leads the world in solar and wind energy, that won’t be enough to fill the gap. The more likely substitute is natural gas. But that means greater energy dependence on Russia, which already provides almost a third of Germany’s supply.

Other countries are also reconsidering nuclear power. Switzerland is looking to phase it out altogether. In the U.S., which has the most reactors, a nuclear renaissance had been under way with 14 states considering proposals for new plants. Now, public anxiety will make building facilities almost impossible. A recent Gallup poll found that seven out of 10 Americans were fearful of a nuclear accident. A CBS poll found support for nuclear power had slipped to 43 percent, lower even than in the aftermath of Three Mile Island.

The effects of Fukushima are being felt almost everywhere except in China and India. That is where power needs are the greatest, and both countries are holding the line on ambitious nuclear plans.

New Reactors

China has 25 reactors under construction. They will be added to the 14 already in service, providing a fivefold increase in nuclear-power generation capacity by 2020.

India will proceed with plans to order as many as 21 nuclear reactors. More than half of its 1.2 billion people still need to be connected to an electrical grid. The country’s oil consumption is already about three times its domestic production, and demand spurred by record auto sales is driving it higher.

In Japan, however, all of the 50 remaining operational nuclear reactors have been shut down after scheduled maintenance checks, and just two have restarted. That means that over about a year, it will go from a country drawing almost a third of its power from reactors to one that is close to nuclear-free. On Sept. 14, the government announced that it would phase out nuclear power over the next three decades.

It will have to tap other sources, adding to the demand for global resources. At the same time, oil and coal prices are telling us that those resources have never been scarcer.

Fukushima and incidents such as the spill from the Deepwater Horizon rig in the Gulf of Mexico are both products of an insatiable demand for energy that compels us to harness ever more costly and tricky sources of supply. The more our economies grow, the more energy and power they need, prompting the development of even riskier resources.

Will the high price of extracting these new sources of supply end up killing the world’s appetite for it? In some places, that has already happened.

(Jeff Rubin, a former chief economist and chief strategist at CIBC World Markets Inc., is the author of “Why Your World Is About to Get a Whole Lot Smaller.” This is the second of four excerpts from his new book, “The Big Flatline: Oil and the No- Growth Economy,” which will be published Oct. 16 by Palgrave Macmillan. The opinions expressed are his own. Read Part 1 and Part 3.)

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To contact the writer of this article: Jeff Rubin at jeffrubin@sympatico.ca

To contact the editor responsible for this article: Max Berley at mberley@bloomberg.net

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