By Gail Tverberg: China: Is peak coal part of its problem?

Gail widens her lens in this essay to consider coal.

https://ourfiniteworld.com/2016/06/20/china-is-peak-coal-part-of-its-problem/

As a bonus Gail provides a nice historical summary of energy prices and debt…

In “normal” times, a small increase in demand will increase production of fossil fuels by several percentage points–generally enough to handle the rising demand. Prices can then fall back again and there is no long-term rise in prices. This situation occurred for quite a long time prior to about 1970.

After about 1970, we found that it became more difficult to raise production levels of energy products, without permanently raising prices. US oil production began to decline in 1970. This started an energy crisis that has been simmering beneath the surface for 45 years. Various workarounds for our energy shortage problem were tried, such as adding nuclear, drilling for oil in new areas such as the North Sea, and building more energy efficient cars. Another approach used was reducing interest rates, to make high-priced homes, cars and factories more affordable.

By the late 1990s, even these workarounds were no longer providing the benefit needed. Another idea was tried: encourage more international trade. This would allow the world access to untapped energy sources, including coal, in the less developed parts of the world, such as China and India.

This, too, worked for a while, but resource depletion tended to continue to raise the cost of energy extraction. Also, the competition with low-cost labor in India, China, and other countries tended to hold down the wages of the less-educated workers in the developed countries. Higher prices at the same time that wages for some of the workers were depressed is, of course, a bad mismatch.

One way of “fixing” the problem was with cheaper debt, and more debt, so that consumers could buy homes and cars with lower incomes.  This fix of more debt stopped working in 2008, as repayment on “subprime” debt faltered, and all fossil fuel prices collapsed.

To “re-inflate” the world economy, world leaders began to try to add even more debt. They did this by fixing interest rates even lower, starting in late 2008, using a program called Quantitative Easing (QE). This program was successful in raising commodity prices again, although its effect seemed to diminish with time. China’s huge growth in debt during this period helped as well.

Energy prices turned downward again in mid-2014, when the United States discontinued its QE program, and China (under new leadership) decided not to continue increasing debt as quickly as before. The result was a second sharp drop in commodity prices, without a corresponding drop in the cost of producing these fossil fuels. This shift was devastating from the point of view of energy supply producers.

Gail concludes by making the case that Seneca will trump Hubbert and provides some insight into why most analysts are in denial.

Future coal production is clearly a function of both the amount of resources available and future prices. If there are no resources available, it is pretty clear that no resources can be extracted.

What most researchers have not understood is that future prices are important as well. We can’t expect that prices will rise indefinitely, because low-paid workers, especially, find themselves in a squeeze. They find homes and cars increasingly unaffordable, unless the government can somehow manipulate interest rates down to never heard of levels. Because of this lack of understanding of the role of prices, most of today’s models don’t consider the possibility that price levels may cut back production, at what seems to be an early date relative to the amount of resources in the ground.

Part of the confusion comes from the view economists have regarding prices, innovation, and substitution. Economists seem to be firmly convinced that prices will always rise to fix the problem of future shortages, but their models do not seem to take into account the major role that energy plays in the economy, and the lack of available substitutes. Certainly, the history of energy prices does not support this claim.

If I am correct in saying that prices cannot rise indefinitely, then all three of the fossil fuels are likely to peak, more or less simultaneously, when prices can no longer stay high enough to enable extraction. The downslope after the peak will be based on financial outcomes, such as the bankruptcies of coal operators, not on the exhaustion of reserves or resources in the ground. This dynamic can be expected to produce a much sharper downturn than modeled by the Hubbert Curve.

If analysts consider the possibility that prices will never again rise very high for very long, they realize such a low-price scenario would be a catastrophe. That is why we hear very little about this possibility.

Conclusion

It appears likely that China’s coal production has “peaked” and has begun to decline. This is especially likely if energy prices stay low, or never rise very high for very long.

If I am correct about energy prices not rising high enough in the future, all fossil fuels may reach peak production more or less simultaneously in the not too distant future. Widespread debt defaults seem likely if this happens.

If we are, in fact, reaching peak coal, even before peak oil, this is disconcerting for those who believe that the Hubbert Model is the only way of viewing the world. Maybe we are expecting too much from the model; maybe we need a model that considers prices, and how prices depend on wages and rising debt. Falling energy prices are especially bad for the system; they seem to lead to debt defaults.

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