Summary
Recent discoveries of new natural gas reserves have sent well-head prices to levels not seen since late 2002, and supplies are now estimated to be sufficient for 100 years at current rates of usage. Just last year, supplies were thought to be limited and it looked like the natural gas industry was going to be as reliant on foreign imports of LNG as the gasoline industry was on the import of foreign crude oil. Now price, supply, and LNG imports are no longer obstacles to increasing the use of natural gas to make electricity and to power highway. Since coal has been the reserve fuel for those utilities which thought natural gas supplies were limited, the prospects for the former fuel have declined as those for natural gas have risen.
Analysis
The high price and perceived shortage of natural gas have provided a boost to the coal industry and railroad coal traffic in recent years. Electric utilities designed and built the first new coal fired plants in almost 20 years and railroads were able to greatly increase their freight rates for coal and still keep the delivered prices competitive with natural gas prices. With the change in the supply and price of natural gas however, changes will come to the coal industry even more swiftly than was expected after the election of the anti-coal Administration and Congress in Washington.
Mine prices for coal are in free fall and the percentage of delivered cost due to railroad transportation costs is steadily rising. The railroads will have to lower their freight rates or they will suffer a loss in traffic as utilities burn more natural gas and less costly coal. Even lower freight rates however, will not keep traffic from falling due to the effects of the environmental policies of the Obama Administration. In the long term, these policies will hurt railroad coal traffic more than the competition between natural gas and coal, especially if natural gas is ever used more widely as a substitute for gasoline. In the short term however, it will be the abundance and price of natural gas that will affect coal production and railroad coal traffic.
