For example, one of the most extensive and valuable mineral resources in the U.S. is called the Pittsburgh Coal Seam. The Pittsburgh Coal Seam shows up in outcrops all over town, if you know where to look and what you are seeing. But there is a lot more to this hunk of rock.

The Pittsburgh Seam extends underground all over western Pennsylvania. The Pittsburgh Seam is high-grade coal and can be as much as 6-8 feet thick. That’s a lot of energy stored up in one place.

A century or more ago, coal from the Pittsburgh Seam was abundant and cheap. People heated their houses with coal, cooked with coal, powered simple engines with coal. And all over western Pennsylvania, people like Henry Frick and Andrew Carnegie pulled a heck of a lot of money out of that Pittsburgh Seam.

They built mines, powered mills and created immense industries based on burning coal. More fundamentally — if not philosophically — they profited from harnessing and releasing the stored-up energy from ancient sunshine.

Let’s think about that for a moment. It was not that capital was cheap back in the last century. Gold was gold. Money was money. When they borrowed funds, Frick and Carnegie paid the same interest rates as anyone else anywhere else. But they succeeded, and did so in great fashion. What was their advantage?

Well, it gets back to that Pittsburgh Coal Seam. In the last century, western Pennsylvania had rich seams of coal located near the surface. Pittsburgh had proximity to some of the best energy reserves in North America. So coal became the foundation of industry. Energy powered industry, and industry created wealth.

The rivers of western Pennsylvania made it easy to transport that coal. That is, using barges to float things down the rivers required relatively less energy per ton-mile to move the coal to Pittsburgh’s mills. And using the rivers meant that it required less energy per ton-mile to move the value-added products out to the interior of the country, and to the world. (For example, the steel locks on the Panama Canal were built at Pittsburgh and floated down the Ohio and Mississippi rivers, across the Gulf of Mexico and to Panama.) Yes, it took capital to gain access to the energy sources. But the energy sources also leveraged the capital.

In its own way, energy is a form of capital, isn’t it? And it is a major competitive advantage to control a source of low-cost energy.

In fact, control over reliable sources of low-cost energy may be even better than access to cheap capital, especially in years to come. There are so many dollars in this world that almost any darn fool can borrow them, or how else to explain what has been happening on Wall Street lately? But ample and low-cost energy can certainly multiply the effectiveness of capital. Ask Frick or Carnegie.

Have you seen the price of coal lately? In 2008, thermal coal prices are set to double, from about $55 to $125 per ton. That’s based on a recent agreement between Japan’s Chubu Electric Power and the giant mining firm Xstrata, and it should become the benchmark for 2000-09 contract prices worldwide.

Spot prices for thermal coal have tripled in the past 12 months. And spot prices for coking coal (used to make steel) have quadrupled in the last 12 months. Just in the last two months, those prices have doubled. Do you notice any patterns?

Let’s boil it down to a few key points. The cost of the world’s “traditional” energy source — coal — is skyrocketing. And about 40% of the world’s electricity is currently generated using coal. Many other industries use even more coal, from steel makers to cement kilns.

So if coal prices are going up, what will that mean for electricity prices, or steel, or cement or whatever? They are headed up, as well. I would say grab your oxygen mask. But that’s a bad joke, because of the carbon dioxide (CO2) issues that people blame on coal.

And look at the current U.S. presidential race. All three potential nominees (Obama, Clinton and McCain) are discussing issues related to CO2 and associated climate change. All three candidates discuss the need for the U.S. to utilize what is called “clean-coal technology.” And I live just a few miles from a major U.S. Department of Energy “clean coal” research center. So I know that there is some great “clean coal technology” out there, and more coming down the pipeline.

But at its root, “clean coal” really means taking expensive coal and making it more expensive in order to use it. So face it. In the U.S., the days of burning raw coal and living with belching smokestacks are gone with the wind.

You can believe in the climate change argument or not. But your personal view on climate change does not matter for these purposes. The next president of the U.S. (and much of the next Congress, as well) will not be “friendly” toward old-fashioned coal-fired electricity. That is already baked into the political cake.

So can we predict the future? Well, nobody can. But we can connect the dots and make some intelligent forecasts. The dynamics of electricity are changing.

Whether you like it or not, people all over the world are burning coal. The black rock is getting scarce, and prices are going up. Those contracts are already signed.

Here in the U.S., as well, much of the nation’s electrical capacity is based on burning coal. So electricity costs in the U.S. will rise with the prices for coal. That is just “Public Utility Regulation 101.”

And to add to the problem, U.S. national policy is headed toward less energy generated from coal. This is due to CO2 concerns. Read the Web sites of the presidential candidates.

So where can we in North America get significant amounts of “clean” electricity with minimal CO2 emissions? Not from coal. How about windmills? Yes, when the wind blows. How about solar? Yes, when the sun shines.

Until we meet again…

Byron King
April 21, 2008

P.S.: As always, if you have any questions or concerns about my article or anything else, e-mail us at jim@pennysleuth.com.

The Past and Future Source of Cheap Energy was originally featured in the Penny Sleuth.