Coal transportation bottleneck

While on the road this week, I ran across an article in USA Today – many of our finest hotels provide a free copy of the paper edition – that illustrates the fact that recent, rather dramatic energy price increases are not limited to the visible changes at the gasoline pump.

The article can be found on-line at A mountain of coal awaits a ride – http://www.usatoday.com/money/industries/manufacturing/2005-08-24-coal-usat_x.htm

As Mr. Eliot Blair Smith describes, there is an abundant store of coal in the Powder River basin in Southeastern Wyoming. The problem is that this coal is not in the world’s most convenient location – most of the customers that burn the coal are located hundreds to thousands of miles away. The link between mine and customer is the world’s busiest freight railroad as measured by the gross tonnage carried. Since the middle of May, 2005, this railroad has been operating at a reduced capacity because of necessary track maintenance. A combination of heavy rainfall, snowmelt, and an accumulation of coal dust destabilised a large portion of the track leaving the Powder River Basin.

There are more details and a history of the repair progress at UP: Notice Of Disruption On The Southern Powder River Basin Joint Line http://www.uprr.com/customers/energy/sprb/updates.shtml. These regular updates paint an interesting picture, especially if you read between the lines to understand some of the corporate fingerpointing.

For example, the Union Pacific Railroad’s updates clearly state that they do not have a contractural responsibility for maintaining the track – that is done by the Burlington Northern & Santa Fe railroad. In the most recent updates, the UP even posts graphs showing that some of the missed train loadings are due to problems at the mines themselves and are not the railroad’s fault.

The bottom line for all of this is that there has been less coal shipped out of the Powder River Basin – which is the source of about 40% of the US coal production – this year than was planned, even though the Energy Information Agency predicted a 2.5% growth in coal consumption.

The implications of this unplanned situation are not good for American consumers and electric utilities.

• The price of Powder River Basin coal is up by almost 70% over last year.
• The price of competitive coal is also up.
• Competitive coal is often higher in sulfur, the price of emissions credits is also up.
• Some utilities are running low on coal and deciding to cycle plants that normally operate at baseload.
• Cycling baseload plants adds to the maintenance costs – steam plants love steady state and dislike starting and stopping.
• Natural gas prices – already high – are under increased pressure to make up the difference.

Peabody Energy and Arch Coal, however, are making record profits.

For long term energy planning, it is also important to understand that total resource numbers are not the only important figures when it comes to deciding whether or not we have an energy supply problem. This rail disruption did not change the amount of coal stored in the hills in Wyoming, it simply affected the rate at which that coal can be moved into the market. Production rate limitations are just as important as resources in determining the price at which supply and demand will be balanced.