Summary
Several months ago, sweeping changes in the energy sector were forecasted to occur after the passage of a comprehensive energy bill by Congress later this year. Now many of the more controversial features of that legislation, including expensive Cap & Trade provisions for carbon, are not expected to pass and are not being aggressively pushed anymore by environmental lobbyists as the costs of these measures is becoming apparent. Even without these restrictions however, utilities have been installing wind farms at a pace not truly appreciated by even the wonks at the EIA of the DOE, and switching to cheaper and cleaner burning natural gas and away from coal.
Analysis
Railroad coal traffic has been relatively stable for the last few years only because exports were booming enough to offset the decline in the domestic use for electricity. This year, with a decline in exports coupled with a decline in the demand for electricity, coal traffic on the railroads is off a whopping 8.6% for the year, and even more than that during most of the second quarter. Besides the new competition from wind farms, the cost advantage coal enjoyed as prices for natural gas soared on a projected shortage as recently as last year is now gone. New discoveries of domestic natural gas have driven down the price of that fuel to levels not seen in many years. Delivered coal costs however, have only come down only a little. Even though coal companies have cut their prices, the railroads have continued to raise their freight rates, and the cost of transportation can range 30% to 66% of the total delivered costs of coal for utility companies.
So even if a Cap & Trade system for carbon emissions is not legislated this year, coal production and railroad coal traffic will continue to decline as less coal is used to generate electricity. This will have major implications for the railroads since coal traffic provided much of the revenue and profits that were needed to expand their freight capacity of the networks to handle the growth of intermodal and other traffic segments.
