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Energy

Coal May Come Back, But Only a Little

Trump's promises will run up against weak demand for steel and cheap natural gas.

It has been a great few weeks for the stock of coal-mining giant Peabody Energy. First, it was boosted by a late-October rebound in coal prices. Then, last week, the man who pledged this year to "bring the coal industry back" was elected president of the U.S.

A Coal Company's Rebound

Peabody Energy stock price

Source: Bloomberg

Still, I wouldn't get too excited. As noted in the chart above, Peabody filed for Chapter 11 bankruptcy protection in April. There's a good chance that existing shareholders will be wiped out in the reorganization. Also, if you extend the chart's time frame by a few years, the rebound of the past few weeks dwindles to almost nothing.

Oh, Never Mind

Peabody Energy stock price

Source: Bloomberg

Reports of Peabody's comeback have been exaggerated, then. But Donald Trump's pledge to bring back the coal industry is not entirely empty. The Barack Obama administration really has been waging a "war on coal" to combat climate change, airborne toxins and the despoliation of federal lands, and the Trump administration is almost certain to cease hostilities. The first thing to go will probably be the moratorium on new coal leases on federal lands announced by the Interior Department in January.

Still, environmental regulations were only one factor in coal mining's precipitous decline. Weak demand for steel around the world translated into weak demand for the metallurgical coal used in making it, while fracking and other new drilling techniques unleashed a boom in natural gas production that enabled gas to displace coal as the nation's No. 1 source of electrical power.

Gas Overtakes Coal

U.S. electricity net generation by source, trailing 12 months

Source: Energy Information Administration

The steel industry will surely have its ups and downs in the future, but it uses only about 7 percent of U.S. coal. So it's power generation that matters, and in power generation natural gas has been pushing coal aside (so have wind and solar, but to a lesser extent). That's partly because natural gas burns cleaner than coal, and has thus been helped by environmental regulation during the Obama years. But it's mainly because U.S. natural gas production has increased by more than 50 percent since 2005, and the price of gas has fallen 65 percent from its 2008 peak.

Oil and natural gas extraction has just gone through a technological revolution that unlocked abundant new supplies; coal mining hasn't. And while Democratic politicians have been ambivalent about and sometimes outright opposed to fracking and to the pipelines needed to transport oil and gas, Trump has said that he wants to "lift the restrictions on American energy." He's also said some other, less fracking-friendly things, but on balance I don't think anyone has reason to expect a crackdown on natural gas drilling from the Trump administration.

There is good reason to expect decreased White House interest in subsidizing wind and solar power, but there too technological progress has brought prices down sharply. Some executives in the renewables industry predict that they can keep gaining market share even without federal help.

For now, though, it's natural gas that is coal's main competition. For coal to make a serious comeback, then, natural gas will have to get a lot more expensive, and stay that way. In the energy industry, one should never say never: Natural gas prices do have a volatile history. Also, the past few years have been so terrible for miners that even a pause in coal's decline may feel like a comeback. Still, there's little reason to think that the election of Donald Trump has suddenly changed the dynamics that have been pushing coal to the side and gas to the forefront.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    Justin Fox at justinfox@bloomberg.net

    To contact the editor responsible for this story:
    Stacey Shick at sshick@bloomberg.net

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