The Global Zeitenwende
How to Avoid a New Cold War in a Multipolar Era
Last year this article would have started with a call to double world coal production by the year 2000 as a response to the inevitable leveling off of world oil production. Today, however, experience in 1979 alone has lowered expectations of future OPEC oil production and reinforced the trend to a slowing down of nuclear energy capacity. Hence, it now appears that world coal production must at least triple by the end of this century if we are to have adequate energy supplies to accommodate even moderate levels of economic growth.
Such a level of increased coal use would require the movement in world trade of at least 700 million tons of coal a year-the energy equivalent of about the current level of oil production from Saudi Arabia, 9.5 million barrels of oil per day. It would require an annual coal production increase of five percent. In quantitative terms these are major targets, yet they are modest in terms of the vital objective of assuring the future of the world economy.
We have the tools at hand to achieve such expansion. Coal is widely available; the technology for coal production, transport, use and conversion into synthetics is known and is constantly improving. Why, then, does further growth of this promising fuel of the future seem to be stalled? Why is there a 20 percent overcapacity in the United States today, resulting in 20,000 unemployed miners? Why do potential European and Japanese coal importers suspect that major producers such as the United States and Australia will not in fact export significant quantities of coal in the future? And why do major producers not believe that possible importers will not expand their coal usage to handle increased quantities in their energy systems?
These are difficult questions. To answer them one must inspect each part of the coal system-from production to transport to eventual use, domestically and internationally. The potential is clearly there. The major limitation is our ability to handle the difficult institutional, political and environmental issues. All are solvable; none have easy solutions.
The elements of the world energy balance are now, I believe, generally understood by those who seek seriously to assess the present situation and future prospects. In particular, the International Energy Agency, bringing together 20 nations within the Organization for Economic Cooperation and Development (OECD), has produced a series of progressively more pessimistic appraisals. Alas, while these are apparently accepted by leading governments, their implications do not seem to have sunk in to the requisite degree in the public opinion of central nations, including the United States.
As recently as two years ago, most observers believed that the major oil-exporting countries, grouped in the Organization of Petroleum Exporting Countries (OPEC), could, in the medium to long term, produce approximately 40-45 million barrels per day (mb/d) and that this meant that a significant gap between oil export availabilities and the demand levels of consuming countries might not emerge until at least the late 1980s. Even last year, however, the best estimate by IEA of OPEC oil production had been reduced to 38 mb/d. Today, we foresee that such production may well be held to a level not much above 35 mb/d, with a likely situation of no growth, or next to no growth, in OPEC oil exports henceforth. In essence, this means that if overall energy demand continues to increase, it will have to be met increasingly with our own resources and ingenuity, a harsh reality not readily accepted.
Thus, even on optimistic assumptions about some of the underlying energy supply and demand factors, oil supplies cannot meet projected demand. The "gap" could grow from relatively minor shortfalls in 1985 to 10 mb/d in 1990 and 28 mb/d in 2000, even if between now and the year 2000:
-economic growth is moderate (3.4 percent per year);
-the energy/GNP growth ratio is reduced from historical levels of 1.0 to 0.8, reflecting gains in conservation;
-OPEC production goes up to 38 mb/d with Saudi Arabia contributing up to 15 mb/d;
-coal use and production are doubled;
-natural gas use and production are doubled;
-nuclear energy increases 12-fold.
In the real world, of course, there is no such thing as a gap. Already signs are appearing that oil supply and demand will be balanced in 1985 by a combination of a reduction in economic growth, more improved efficiency of energy use than presumed, and some addition of non-oil fuels. But beyond that date the balance would require far more draconian adjustments.
There are several available means by which the large differences between desired energy demand and expected supply can be reconciled over the longer term. Energy demand can be reduced through market reaction to limited supplies leading to sharply higher energy prices, which would result in either more efficient use of energy or a slowdown of economic activity, or a combination of these. Additionally, energy supplies can be increased beyond those assumed in the scenario.
The key point is that, if effective action is not taken on the demand or supply side, the only outcome will be lower economic growth. A reduction of the economic growth assumption over the period by one percent would "save" the equivalent of 9 mb/d in 1990 and 20 mb/d in 2000. The cost of such an adjustment would be an annual loss of GNP in the OECD of nearly $800 billion (in 1978 dollars) in 1990 and $2 trillion in 2000. In effect, both the industrialized countries and developing countries that lack oil would be faced with a situation of virtual economic standstill, with growth rates far below those of the postwar period, and in the case of the developing countries barely above anticipated population growth rates. But of course averages never begin to tell the story of what would be happening to lower income countries and groups within countries, or to the industrialized countries that are already in difficulty. A world of reduced growth seems to appeal to some who take their present good fortune for granted; to others less fortunate, and indeed to the political stability and security of the world as a whole, the result can only be described as critical and potentially disastrous.
So it is to avoid such a prospect that one must look extremely hard at the potential areas of increased energy supply within this time frame. Given the uncertainties which surround nuclear power development, the limited number of available sites for hydropower, the embryonic state of development of other solar energy technologies (whatever their ultimate potential beyond 2000), and the grave uncertainties about additional oil and natural gas resources, the conclusion is inescapable that a tremendous expansion in the use and production of coal is fundamental.
In the study Steam Coal Prospects to 2000, published in late 1978 by the International Energy Agency, the potential for future coal production, use and trade was explored. Several different scenarios for future coal activity were examined. The "reference" case, which assumes present policy and a 50 percent real oil price rise over 1978 levels by 2000, showed a doubling of OECD coal demand by the year 2000-from current levels of 1,000 million metric tons of coal equivalent to 2,100 mtce.1 World trade of coal in this case would amount to 504 mtce by the year 2000. If, however, coal development policies are accelerated, coal demand in the OECD would reach 2,600 mtce by 2000. Compared to the reference case, such an enlarged coal case would result in a reduction of the world energy gap in the year 2000, referred to earlier, by some 500 mtce or about seven million barrels a day of oil equivalent. World coal trade in this "accelerated coal use" case would be on the order of 700 mtce (of which 195 mtce would be trade in metallurgical coal).
The coming renaissance of coal will have to be strikingly different from the past record. Coal will be part of a more diverse energy demand and supply structure where new processing, conversion and energy transformation technologies will meet social and environmental requirements. The development of coal will be driven by international needs as well as domestic requirements. Coal will be a major factor in encouraging increased economic interdependence among potential coal consuming and producing nations, with reverberating consequences for their political and even strategic relations.
There are numerous reasons why coal can become the most significant substitute fuel for oil. First, reserves are abundant and widely dispersed. It is estimated that the world has recoverable reserves of 640 billion tons-enough for 250 years of consumption at present levels.
Second, coal is in wide use today. In 1978 coal provided about 30 percent of the world's energy, but this percentage varied from region to region. The Soviet Union and China consume coal for 50 percent of their energy, whereas the percentage drops to 20 percent for the OECD countries. In South Africa, almost three-quarters of energy demand is supplied by coal.
The fact that coal starts from such a broad base has both advantages and disadvantages. On the one hand, technology is known throughout the coal chain, from the mine ultimately to the consumer. Constraints are relatively easy to identify; strategies can be developed to overcome them. Coal is a known commodity to the consumer; its expanded use does not stir emotions like some other proposed alternatives to oil.
On the other hand, expanded coal use is frequently regarded as a return to the past. It raises important environmental and safety issues, and in some quarters it has the reputation of being a fuel limited by the ways it can be used.
Yet coal is, in many respects, much more adaptable than other alternatives. The major initial possibility for increased use of coal as an energy source (apart from metallurgical use by the iron and steel industry) is in the electricity-generation and industrial sectors. Already it provides 40 percent of OECD electricity, and its use in industrial processes is increasing again. Apart from feedstock requirements and processes requiring extremely clean fuels or precise temperature control, coal could potentially supply a large portion of the industrial sector's direct heat and process steam requirements currently supplied by oil and gas. For example, the process steam or heat requirements of the chemical, petroleum refining, paper, building materials, and food processing industries appear to be good candidates for coal substitution in the long run. Large coal-fired boilers will be needed for new industrial parks, district heating and combined heat/power facilities.
Over the longer term, new combustion technologies as well as coal conversion into synthetic gas or liquid fuels will promote greater penetration of coal into other markets. The National Coal Board in the U.K. is even experimenting with new ways in which it can be used directly for residential and commercial settings. The uses of coal are limited only by our imagination as to how to transform this abundant resource into practical use.
Third, even before the recent escalation of oil prices, coal was economically competitive with oil. Even at pre-Iran oil prices, a coal plant with full desulphurization facilities could produce baseload electricity at an average total cost during the first 20 years of operation 30 percent less in the United States and 15 percent less in coal-importing regions than the electricity produced in an oil-fired plant over the same period.
Whether these cost comparisons would continue into the future is of course debatable. The relatively large untapped resource base of coal would suggest that costs might be held reasonably constant. Yet some observers believe that coal prices are primarily a function of world oil prices, that coal production and transportation costs will rise more rapidly as output increases or that the increased market power of those participating in the coal supply chain will allow a wider margin between coal costs and coal prices in the future.
All of these factors may indeed operate to increase the price of coal in the future. Rising oil prices can affect the price of coal both directly (through increasing production and transportation costs) and indirectly (by increasing demand). But oil prices are unlikely to be the main determinant of coal prices as some believe-and of course the widespread shift to lower cost coal, where it can substitute for oil, will tend to limit the rate of oil price increases in the future. Rather, the major determinant of future coal prices is likely to be the extent of effective competition among coal suppliers and coal transporting systems, and in some countries the competition between coal and nuclear power in the electricity sector. And it is at least hopeful that competitive forces in the international coal markets are today strong. The resource base is widespread and abundant, and there is a lack of corporate concentration and few institutional restraints to entry and competition. Furthermore, the promised development of new coal burning, cleaning and blending technologies will allow greater use of a wider variety of coal types leading to increased competition among coal suppliers.
The competitive position of coal-fired electricity generation vis-à-vis nuclear power in the OECD is less definitive than the choice between coal and oil. The important conclusion to be drawn here is that both coal and nuclear power are likely to produce electricity at a lower cost than oil-fired plants in future years. In some respects, to the extent that there are obvious advantages associated with diversifying the sources of electric power, coal and nuclear power may be more complementary than competitive.
Fourth, large-scale expansion of coal consumption, production and trade would have a major and positive impact on overall economic activity. Demand for coal mining, processing, transportation and combustion equipment, and ancillary and spin-off demands could trigger economic regeneration in centers where coal will be produced, processed, shipped and consumed.
There are, however, very great problems to be overcome. To begin with, many utilities, industries and public authorities are locked into energy systems, infrastructures and cost/pricing structures which evolved during the era of rapid oil growth. Decisions to switch from oil to coal will present complications of structural reform.
In the case of power generation-an obvious sector where coal can effectively substitute for oil-outright prohibition of the construction of new oil-fired power plants may not be immediately possible in all countries, although Germany has implemented such a system, requiring that all new power plants be designed to provide their base loads by other fuels. Restructuring of refineries may also prove to be a constraint. In addition, boiler conversion is a difficult and timely task. Space is often a limiting factor to quick coal retrofitting; added handling equipment, coal crushers, and environmental equipment are all required. There must be transport facilities such as railroad or barge facilities to deliver the coal as well.
But in time it should be possible to accomplish the required structural adaptations. Even in cases where oil-fired capacity must remain in operation for economic reasons, efforts should be expended to limit oil-fired generation progressively to middle or peak load requirements, using coal and other appropriate fuels for base load generation.
Industry faces similar problems to those encountered by utilities. It takes a great deal of effort in industry to convert oil-fired boilers to coal; it is (and was) much easier the other way round. Conversion to coal in many cases requires the use of different boilers and heat exchangers, as well as allocation of space for the coal pile, installation of coal handling equipment, provisions for ash collection and disposal, dust control, and other environmental equipment. There are also limits to the existing distribution system's ability to supply smaller scale industrial demands in diverse locations at reasonable costs.
The substitution possibilities and ease of conversion between oil and gas currently provide industry with flexibility and security minus the high capital expenditure required for conversion to coal. The relatively low price of natural gas in some existing long-term contracts and the regulated price of natural gas in certain markets also reduces the incentive for coal substitution in the near term.
Nevertheless, coal is currently a competitive fuel in large-scale industrial boilers for electrical generation and process steam, and in certain heat applications. In the longer term, successful commercialization of fluidized bed combustion technology, and improvements in coal cleaning, blending and distribution systems will help resolve some of the current environmental constraints, space limitations, and other objections to industrial coal substitution. Several other promising developments loom on the horizon. Improved interaction between energy and regional development planners could foster the development of industrial parks where the energy requirements of many smaller firms (which might find conversion to coal impractical on their own) could be supplied by central coal plants, giving them full advantage of the scale economies and higher efficiencies offered by cogeneration.
I have already referred to the highly competitive and fragmented structure of the coal industry as basically healthy. Yet it is also true that an industry that comprises hundreds of companies in the United States is to some extent an obstacle to rapid adaptation. In recent years, the major oil companies have been stepping up their acquisition of coal properties, so that they currently produce about 20 percent of U.S. production, a figure estimated to rise to 50 percent by 1985. This has given rise to some concern and to suggestions for legal prohibitions or restraints. In such a situation, a non-American should speak cautiously, but it is my impression that the prospective degree of concentration shows no signs of threatening the essential competitiveness of the industry, and that in terms of the enormous size of most open-pit mines and the necessary infrastructure development, especially in the western coal region, large entities would be in a position to overcome more rapidly the numerous bottlenecks in coal systems from the mine to the consumer.
Beyond the problems of transition and adjustment, a longer term constraint is how to greatly expand coal production, trade and use in an environmentally acceptable manner. This problem is particularly acute for surface mines, which must be relied upon for a very substantial proportion of increased global coal production, especially in the United States, Canada and Australia. Surface mining imposes considerable demands on the local environment, so that rigid control over material movement, restoration of the topsoil and landscaping of the mine area must be maintained.
An example of successful handling of these problems is the recently developed mine in Wyoming, known as Black Thunder, which at any one time will disrupt only 600 acres for the total mining operation. Its planned annual physical production is over 20 million short tons, or the equivalent of about 200,000 barrels of oil per day. Such high production on relatively little land enables the producers to reinvest heavy sums in land reclamation and to carry out such reclamation rapidly.
All told, it is estimated that an extra 300 million tons per year produced from the western United States would involve a mining surface area of less than 10,000 acres per year requiring movement of about 400 million tons of rock and soil. This surface area would be divided for production purposes among individual mines widely separated in different states. The large resource base would provide a wide choice of possible sites, allowing enhanced opportunity to select areas which will be less harmful to the environment and community.
The problem in these areas is of course the preservation of agricultural land. Even more complex problems may arise where the coal is located in proximity to highly populated areas. But here too there are outstanding examples of successful handling.
Perhaps the world's most impressive coal development with regard to community and environmental concerns exists in the Rhine area of Germany. During the last three decades, more than 50 communities west of Cologne containing more than 24,000 inhabitants have been relocated to make room for mines. The major coal developer in this region is the Rheinische Braunkohlenwerke, or Rheinbraun. Under the Brown Coal Act of 1950, Rheinbraun is required to perform extensive land reclamation efforts subject to proper safeguards. That law enables Rheinbraun, which owns almost all of West Germany's 56 billion tons of brown coal reserves, to exploit veins over a 2,500-square kilometer area irrespective of the use being made of the ground above the coal.
A sophisticated system to protect communities and individuals has been established; before mining begins, extensive planning and consultations occur over months or years between company executives, government officials and representatives of the local population. But once a plan for a new coal mine is approved, residents and property owners must negotiate with Rheinbraun and come to terms with the firm on compensation and relocation. The company has never had a major open-pit coal mine project rejected and generally has had an extraordinarily successful record in relocating populations to their satisfaction. (In one instance, after procedures had been closed and planning of mining was to be changed, some people who were ready to be relocated under previous plans protested when they learned they had to stay under the new plan.)
In short, experience does suggest that if the need for increased production is accepted, and a procedure for consultation with the local population developed, it is now politically as well as technologically possible to deal with the environmental problems associated with surface mining.
In the case of deep mining, which will still have to provide substantial amounts at least in the United States, the problem of safety is a major one; in Britain today, it is estimated that deep coal mining entails a loss of life at the rate of one person for every two million tons of coal mined, while U.S. experience is roughly comparable. Plainly, every effort must be made to reduce these figures.
Deep coal mining also has its own environmental problems. The disposal problem for solid waste is severe. The amount of spoil per ton of coal produced varies greatly from mine to mine, but the quantity might be 30 percent of the coal produced. Only some of this is likely to be marketable as land fill, and ultimately the material has to be spread as a surface tip or the expense of transporting it back into the mine will have to be incurred. Acid mine drainage and the residue from any local cleaning are additional problems requiring control. Existing techniques and new technology under development, including the use of new fluidized combustion technology to burn waste at the mine mouth to produce useful power, can make these problems manageable.
Next, there is the problem of solid wastes at the combustion site, which may be quite unfamiliar to industries replacing oil with coal. A 1,000-megawatt (electric) power plant may have to dispose of 320,000 tons per year of ash, and on a national basis the United States and Canada would have an ash production of over 100 million tons per year by 2000 on foreseen levels of coal use.
But such a level does not pose serious obstacles. Fly ash can be used to make cement, and is also used in road construction. Another solution which has been adopted in Japan, and which could find application elsewhere, is to use the ash for creating new industrial sites in shallow water offshore.
More serious is the problem of pollution, especially from sulphur oxides. One might suppose that this problem, already substantial, would grow proportionately with much greater coal use. However, this is not necessarily so. The likely areas of major increase in OECD coal production (western United States, Canada and Australia) contain much lower sulphur-content coals than eastern North American or most European coalfields. Though OECD coal production might increase in the "accelerated coal" case from 950 million metric tons of coal equivalent to over 2,400 mtce over the next 25 years, it is expected that low-sulphur coal production will grow from about 160 mtce to 1,200 mtce and that the proportions of high- and medium-sulphur coal will sharply decline.2
The technology for keeping sulphur oxide emissions to environmentally acceptable levels is available and in use today. The problem is primarily one of cost-at the estimated target levels of U.S. coal production and use, the installation of regenerable flue gas desulphurization capacity would involve an estimated cost of about $35 billion (in 1978 dollars), or 20 percent of the estimated power station construction bill. But with such installation, sulphur oxide emission quantities in the United States could actually be lower in 2000 than in 1976.
A major difficulty is that capital expenditures in the United States for such equipment are currently more difficult to recover from the state utility commissions in rate increases than outlays for other costlier fuels, which can be quickly passed on to consumers. Such institutional constraints will have to be remedied.
Finally, there are a number of environmental concerns surrounding the expansion of synfuel plants for producing liquid fuels from coal. The water requirements for such plants are very large, and in many parts of the United States the adequacy of water supplies for other uses is already marginal. But there should be enough areas where the problem is manageable to make a start, and over time it should be possible to develop technologies that minimize water usage.
A possible longer term and more profound objection to increased reliance on energy from fossil fuel combustion (not just coal combustion) is doubt about the inherent ability of the earth's environment to absorb and recycle the carbon dioxide produced, and about the consequent effect on the earth's climate.
The amount of carbon dioxide in the atmosphere has steadily increased from about 313 ppmv (particles per million by volume) in 1958 to 334 ppmv in 1978. Continuing increase might cause a "greenhouse effect" by altering the radiation balance of the atmosphere. A global temperature increase and major climatic changes might result.
At present concentrations of carbon dioxide, no global temperature rise has been detected above the "noise level" of natural variations. Some computer models, based on necessarily very uncertain assumptions, predict that, if the CO2 level in the atmosphere were to double in the next century, the temperature would rise by 2ºC in the tropics and 10ºC at the poles and there would be a seven percent increase in average precipitation and evaporation.3
The mechanism of CO2 transfer in the atmosphere and its return to the oceans and earth is very complicated. Knowledge of the whole carbon cycle, involving plant and animal growth and decay is not yet sufficient even to be sure how much of the observed seven percent increase over 20 years is due to fossil fuel combustion. Deforestation and other land modifications are also known to have a major effect, but their magnitude is so uncertain as to be thought by some to be half as large and by others to be twice as large, as the effect of fossil fuel combustion.
CO2 production from greatly increased coal consumption may turn out to be a long-term problem if coal use were likely to continue indefinitely at high rates. So far, the evidence seems too weak to prevent coal from playing a major part in the energy supply over the next 50 years, but there is a continual need for careful study of the level of carbon dioxide and for the acquisition of knowledge of the mechanism involved in CO2 transfer.
Closely related to the environmental issue is that of coal transport. Efficient, economic and environmentally acceptable coal transportation systems must be developed that can service expanded trade and use. This will be particularly challenging in the United States where both unit trains and slurry pipelines must be used to move the West's vast coal reserves to market.
Major problems must be resolved. Railways are restricted by the topography of the route and there may be environmental objections to greatly increased traffic from residents along the route. Slurry pipelines need a ton of water for each ton of coal and so are restricted to regions with adequate water supply at the origin; and there are considerable environmental problems in disposing of the dirty water at the destination. Slurry pipelines also face legal constraints due to problems of obtaining right of way.
All of these problems are solvable if sensible economic, environmental and political planning is done today. The current dispute between railroads and slurry pipelines should be resolved to allow a role for both. Each system is needed to move the vast western coal reserves to market. Slurry pipelines cannot do the job alone, because severe water constraints would be encountered, and railroads could not move all the western coal because this would involve too much heavy traffic through communities by unit trains.
However, a combined effort between the two forms of transportation should eliminate any insurmountable constraints. Rail is most suitable for local movements and for low to moderate quantities, or where maximum flexibility is required, and slurry pipelines are most economical for high-volume consistent demands. And competition between the two systems could help assure against steep tariff increases.
In addition to moving coal within the country, strategies for major export of coal from the United States will have to include plans for broadening the country's export capacity. Although the United States is today the world's leading coal exporter, port facilities are generally deficient. Further, the United States has very limited capabilities to accommodate larger vessels being built throughout the world. The majority of East and Gulf Coast ports can only accept vessels with 35- to 45-foot drafts. Massive efforts will have to be made to develop and expand deep-water port facilities for loading, receiving and transshipment to handle increased trade volumes and large carriers.
In sum, the expansion of coal production and use does entail serious environmental problems, and acceptable solutions to these (and to the problem of adequate transportation) will entail very great expenditures as well as some additional technological innovation. The impact will inevitably be particularly great in areas of greatly increased production.
The essential political problem is to minimize these destructive effects. The capacity to do this through intelligent planning and investment clearly exists. The problem is to persuade people in affected regions to take a national (and indeed a global) view which recognizes that failure to make the coal available would have equally, if not more, severe impact on other local communities. And if such communities lack the energy needed to manufacture the clothes, machinery and automobiles, and to produce and process food, those local communities in potential coal-producing regions would suffer just as much as others.
This fundamental interrelationship between producers and consumers of energy is in many respects at the heart of the energy problem both within individual nations and among the nations that might produce and consume coal through international trade. Let us turn our attention to the international arrangements and adjustments that will be needed.
Table I, below, shows the present shape of world coal trade, and the way in which such trade might expand if one assumed simply a continuation of present national policies, a moderate rate of expansion of overall energy demand, and reasonable estimates in the evolution of particular energy sources. (In particular, the table makes a "low nuclear" assumption, which, however, still assumes that nuclear energy would be expanded roughly tenfold in the time frame 1976-2000.) On this basis, in terms of millions of metric tons of coal equivalent, with the plus signs indicating oil imports and the minus signs indicating oil exports, world coal trade might appear as follows:
PROJECTED WORLD COAL TRADE
(assuming present policies)
1976 1985 1990 2000
Canada +3 -6 -9 -14
United States -54 -68 -79 -129
OECD/Europe +55 +94 +153 +311
Japan +60 +96 +123 +181
Australia/New Zealand -31 -57 -90 -195
TOTAL OECD +33 +59 +98 +154
Centrally planned economies -38 -43 -49 -66
Developing countries +7 +11 +2 -10
South Africa -6 -34 -60 -90
Other +4 +7 +9 +12
TOTAL WORLD COAL MOVEMENT4 128 208 287 504
The table shows a present volume of world coal trade of approximately 130 mtce. If present policies were to continue, such trade might expand by the year 2000 to approximately 500 mtce. The table makes clear that, on any assumption, the United States, Australia, and the "centrally planned economies" (principally the Soviet Union and the East European countries) are and will remain the major exporters of coal, and that Japan and the West European members of the OECD are and will remain the principal consumers.
If one then looks at the possible future shape of world coal trade, assuming "accelerated coal" policies, the picture does not alter in its fundamentals, but the changes in magnitude are, of course, very great indeed. Table II, below, is a projection, using the same units and indicators as Table I, of what world coal trade might become if individual nations adopted clear-cut "pro-coal" policies, and if the nations of the world were able to cooperate on the necessary trade arrangements.
PROJECTED WORLD COAL TRADE
(assuming pro-coal policies)
1976 1985 1990 2000
Canada +3 -6 -12 -29
United States -54 -68 -81 -214
OECD/Europe +55 +116 +179 +468
Japan +60 +101 +142 +231
Australia/New Zealand -31 -82 -136 -259
TOTAL OECD +33 +61 +92 +197
Centrally planned economies -38 -43 -44 -66
Developing countries +7 +10 +2 -56
South Africa -6 -34 -58 -90
Other +3 +6 +8 +9
TOTAL WORLD COAL MOVEMENT 128 233 331 708
How, then, might the world move from the kind of projection in Table I to that in Table II? (Indeed, even the attainment of the coal trade levels indicated in Table I cannot be assumed.) Obviously, major adjustments would be involved, both in consuming and producing countries.
Energy-deficient countries which have not traditionally used significant quantities of coal must face the prospect that oil imports will simply not be available in sufficient quantities and at reasonable prices to balance energy demand. They will then be forced to rely on coal imports to meet a proportion of their energy needs. Coal-rich countries will need to arrange for rapid expansion of their export supply, and must encourage installation of the necessary infrastructures. National coal policy measures can complement and reinforce each other through international planning, thus inducing substantial economies of scale and increasing the magnitude of coal's contribution to overall energy supply.
The concept of an international free-trading market in coal analogous to other major commodity markets must be present throughout the planning process. Such a market could ultimately develop in a fashion similar to today's international oil market-that is, it might be characterized by multinational energy enterprises active in various stages of coal production, transportation, processing and trade. Significant volumes would be traded in spot and cargo markets as well as under long-term contracts. A large degree of cross-investment could be expected, with coal-consuming enterprises such as utilities and industrial consumers securing a long-term interest for a sizable proportion of their supply sources.
To these ends, ministers from the twenty IEA countries, in May 1979, agreed on a set of Principles for IEA Action on Coal which are designed to stimulate expansion of world coal trade by providing a governmental umbrella for commercial negotiations between consuming and producing countries.5 In an accompanying communiqué on coal, all IEA governments agreed that coal production, use and trade must be expanded to make up in part for inadequate future supplies of oil. Perhaps most important, detailed political commitments were made which seek to create a balance between the interests of consumers and producers.
On the one hand, potential coal-importing countries agreed to adopt strong coal utilization strategies, to impose no new restrictions on imports inconsistent with the Principles, to implement measures to support domestic production by measures which do not limit growth in coal consumption, and to encourage the development of the required infrastructure. On the other hand, the agreement encourages potential coal exporters to produce coal for export, to establish an investment climate conducive to coal development, to encourage development of the required infrastructure, to impose no new restrictions on coal exports inconsistent with the Principles, to implement existing coal export control systems so as not to limit the growth in overall coal consumption, and refrain from interference in long-term contracts.
Since such government decisions cannot be carried out without full industry cooperation, the IEA Governing Board has also established a Coal Industry Advisory Board, composed of high-standing individuals from coal production, transport and industry, to advise governments on existing bottlenecks to expanded world use of coal.
These are important steps. They represent the first coherent framing of agreed multilateral policies to promote the expansion of world coal trade, as well as its production and use within individual OECD countries. But of course there remain major problems in achieving the necessary balance of interests, which in turn can create mutual confidence. Such confidence is particularly important in the initial stages, when sizable investments must be committed that will make an expanded coal system a reality. Already, two specific key problems can be identified.
The first of these is the protection of domestic coal industries. For example, Germany and Britain as traditional coal-producing countries face the prospect that a liberal world coal-trading regime would allow cheaper coal imports to undercut domestic supplies which are of high quality but much more difficult and costly to mine. In some cases, such higher cost domestic production benefits from substantial state subsidies for reasons of national security or maintaining employment. It will be necessary in such cases to ensure that governmental protection given to such production over the short term does not inhibit imports of coal in the longer term. Perhaps the best way out of the dilemma is to link such protected production to specific uses and to permit imported coal to meet any demand in excess of such uses. Thus, specific short-term needs can be met without jeopardizing the overall thrust of an international effort to expand coal's role in the energy economy.
Second, a stable climate for international coal investment is vital. The major proportion of investment capital in key areas will of necessity have to come from private sources, and investors' decisions are bound to be influenced by their perception of and confidence in a reasonable economic and regulatory climate during the life of the investment. Governments and public authorities should attempt to avoid excessive revisions in legal, administrative or environmental regulations and procedures which would disproportionately increase costs and reduce confidence. What is especially needed are long-term policies that will stimulate adequate capital investment at an early stage and thus substantially minimize lead times.
But the most basic problem is the development of confidence between major coal-consuming countries and major coal-producing countries. For the United States and Australia, the potentially largest coal exporters among the industrial nations, secure access to coal markets in Western Europe and Japan is a vital first step to obtaining sufficient capital for the building of coal export infrastructures. Similarly, European and Japanese utilities will tend to be nervous about building up reliance on coal exporters from these areas without adequate assurance that such exports, particularly those negotiated under long-term contracts, will not be subject to arbitrary controls and that, even in energy supply emergencies, export consumers will be treated no less favorably than domestic consumers.
What is needed most of all, at this stage, is a major U.S. commitment to the export of steam coal. A similar commitment by Australia is also essential, and this will require careful negotiation, especially between Australia and Japan, which is likely to be the major consumer of increased Australian coal exports. But it is the United States that must be the real bellwether of an expanded world coal system, for the simple reason that 65 percent of the recoverable coal reserves of the OECD countries are located in the United States.
Specifically, Table I, which projects a level of U.S. coal exports of 129 million metric tons of coal equivalent by the year 2000, means that coal production in the United States would need to increase from 550 mtce today to 1,180 mtce by 2000. In the "accelerated coal" policies case (Table II) U.S. coal exports are projected to increase to 214 mtce by the year 2000, which means that total U.S. production would have to reach a level of 1,500 mtce annually by that date. In terms of physical volume, the amounts of coal required are actually greater than these figures by approximately 35 percent, since the bulk of increased U.S. coal production for export would have to come from the western United States, where the BTU content of coal reserves is somewhat below the standard employed for the "coal equivalent" unit.6
Will the United States make such a commitment? The stakes, I believe, are enormous in its doing so, not only for the sake of American interests but for the sake of the entire structure of cooperation among the industrialized nations, and ultimately for the future health of the world economy as a whole.
Looking at the matter initially from the standpoint of U.S. interests alone, it is evident that a major expansion in U.S. coal production-both for domestic use and for export-would have a very favorable impact on the U.S. balance of payments. In terms of 1978 dollars, an export volume of 214 mtce (roughly 250 million tons in terms of physical volume because of the below-average BTU content of western U.S. coal reserves) would mean $6 billion in foreign exchange earnings even at current coal prices. And the roughly 1,300 mtce retained for domestic consumption would substitute, in substantial part, for what would otherwise be a need for oil imports costing additional tens of billions of dollars even at current prices.
Apart from its financial implications, a major expansion in U.S. coal production would at least limit, if not eliminate, the present critical dependence of the United States on imports of oil from unstable areas of the world and from countries that in some instances may have political differences with U.S. policy. President Carter has now announced a ceiling on U.S. oil imports at 1977 levels (8.5 million barrels per day), not permitting that level to be exceeded in the future and indeed looking toward a reduction in the oil import level. It seems inconceivable that such targets, adopted in the national interest of the United States itself, can be achieved without the kind of expansion of coal use envisaged here.
If this is a fair assessment of the stakes from the U.S. point of view, it must be accompanied by recognition of the massive scale of the effort required, and of its evident difficulties and problems. One careful estimate of the scale of effort (by experts at the Massachusetts Institute of Technology) calculates that an increase in U.S. coal production capacity from 500 million metric tons in 1975 (in physical volume) to 2,000 million metric tons by 2000-roughly the physical volume required to meet the "coal equivalent" targets stated-would require:
-a 13-fold increase in western coal production;
-a doubling of eastern underground mining:
-a combination of nine new slurry pipelines and expanded rail facilities involving 1,400 new coal unit trains and 3,200 new conventional trains;
-500 new coal barges and 9,400 new coal trucks;
-a major expansion in port facilities to handle large coal-carrying ships.
All told, the estimated capital requirements for both mining and transportation in this study were $118 billion in 1975 dollars-a figure which is almost certainly on the conservative side.7
Obviously, the problems in mounting an effort of this scale are in themselves formidable. But the root difficulties may be less economic and financial than political. As we have noted in Section III of this article, the technological means exist to make expanded coal use acceptable from an environmental standpoint; the question is whether the American public and its officials at all levels of government are prepared to accept the importance of the task and hence to make the necessary adjustments on a coherent basis that will permit the industry to move ahead.
In addition to the problems already noted, one may perhaps call attention to others specific to the United States. One of these is the fact that much of the incremental coal will have to come from the western coal reserves, where it is estimated that 80 percent of the recoverable reserves are owned by the federal government. Currently a moratorium is holding up leasing and therefore development. Efforts must be made to open up federal lands at the earliest possible time.
Realization of the coal export potential of the United States as well as the domestic coal conversion program will require not only an improved and expanded U.S. transportation network but a competitive one in terms of transport costs. I have suggested that a combination of slurry pipelines and expanded rail facilities will surely be needed. Each entails the granting for the necessary rights of way and other facilities, at the political level and as promptly as possible.
And there are certain concerns that may arise connected to the prospect that a significant part of expanded production will be destined for export. European utility managers, as well as a few American coal and utility officials, are worried that some American communities will resist expansion of coal mining operations, especially surface mining in the West, when done under contract to export markets, or even more so, if done by partially foreign-owned companies. However, these concerns usually rest on intuition or casually formed impressions. The experience of communities with either export-oriented or foreign-owned companies has often shown that any early resistance ebbs with the creation of new jobs and tax revenues by these companies. Often the most vocal opposition comes not from the producing community, but from potential domestic consumers who fear an advance in price or temporary shortage of the commodity because exporters are outbidding domestic buyers. But the supply of western U.S. coal is abundant and export demand is not likely to bring about higher prices or shortages. Expansion for export might even bring about better economies of scale, allowing lower prices for all concerned.
The nature of the transition to production for export could be an important psychological element in improving public opinion on export. The public should be brought along step by step. Initially, local communities would probably be more receptive to surface mining, especially in the West, by American-based companies producing coal for domestic markets. As the community began to accept mining and was convinced of its positive contribution to the community and satisfied with the program for restoration of the environment, expansion for export, even by partially foreign-owned mining companies, would probably be easier. This does illustrate, however, that unless the United States settles its own domestic coal problems in the first place, there will be little chance of significant coal export.
Doubtless, these problems are only illustrative of the kind of adjustments and political decisions that will be needed in the near future within the United States. But the national stake in overcoming such obstacles does seem to point to the possibility that an aroused public opinion will be able to overcome them.
The emergence of coal as a key commodity in world trade would have wider consequences beyond the scope of energy considerations, encompassing economic and political factors as well. The fact that specific energy-policy strategies may enhance or hinder a nation's freedom in matters of broader economic policy, or in the conduct of its foreign relations, is well known to all nations. The Western industrial nations, either as regional groups or collectively, have a common interest in ensuring that energy issues do not constrain world economic growth or cause divisive conflict in political or strategic relations.
By satisfying a large proportion of their energy demand from an alternative energy source, industrial countries would also be responding to the expressed desire on the part of OPEC and non-OPEC developing countries to moderate growth in demand for oil imports. In addition, the development of a world coal market would facilitate the efforts of developing countries to include it as a credible energy alternative in their own supply planning and thus further contribute to reduced tension in the world oil market.
In addition to a number of developing countries that are also potential coal producers on a significant scale (India, Colombia, Mozambique, Venezuela), recent developments in China offer the prospect of possible active Chinese participation in the world coal market. Chinese efforts to seek greater interaction with the world economy as part of its modernization drive could well depend to a significant degree on energy exports, including coal. Indeed, there already are indications that China is counting on coal export revenues to help finance foreign currency purchases of equipment, plant and technology imports.
Coal's impact on world trade would be considerable. Even at today's prices, a volume of 700 million tons moving in international trade would represent about $30 billion worth of trade in 1978 dollars. The evolution of a much larger world coal market and infrastructure would stimulate world economic integration. Linking the major industrialized and industrializing areas of the world through substantial trade in a key energy commodity would reduce the present instability due to the unbalanced world oil market. For Europe and Japan in particular, international arrangements that guaranteed access to coal supplies on a reliable long-term basis would reduce uncertainty over the security of energy supplies. This in turn could not fail to contribute to more vigorous economic and political leadership in partnership with the principal suppliers.
Strong coal policy action will have a positive effect on political relations. At first sight it may appear that there is very little connection between the rather technical issue of promoting coal programs and overall political relations among nations. But this is to ignore the alternative of conflict and tension due to energy supply and price difficulties that are certain to arise if coal is not developed at a pace sufficiently fast to provide adequate alternative supply. One has only to imagine the disastrous impact of competitive bidding-up of scarce oil supplies (the famous scramble for oil) to realize that political relations and cohesion among leading industrial nations could not survive unscathed. A vigorous effort to step up coal development on a reliable international basis would not only help remove the threat of energy supply and price difficulties but would also put political links on a stronger footing and enable more effective resistance to external threats.
It is now over five years since the 1973-74 energy crisis transformed our perceptions of the world energy situation. Some progress has been made since 1973, including conservation gains, new oil production emerging from the North Sea and Alaska, and a serious discussion in the United States on energy coupled with some legislative action.
However, recent events in Iran have again forcefully revealed the extent of our vulnerability. We must honestly face the insufficiency of our actions to date; measures adopted have proved to be too leisurely or too weak. It is now time for political leaders in governments and legislatures to halt the promotion of various sectional or regional interests at the expense of others and to wake up to the grave peril to our economic and political system threatened by our present energy situation.
The vast potential of coal makes active coal development a central element in any strategy to resolve the international energy problem. Constraints exist, but they can be overcome. Expanded coal utilization, production and trade is a major challenge. Success will bring benefits not only in terms of increased energy security, but also in the form of concrete and real benefits to our economies and political systems.
1 A metric ton of coal equivalent is a standard unit of heating capacity, based on the average BTU content of hard coal (13,400 BTUS per pound). Goal with a below-average BTU rating needs more physical volume that the tonnage value, while high-grade coal requires less physical volume. In addition, for purposes of conversion to American units, a metric ton is 2,200 pounds.
On this basis, approximately 71.4 million metric tons of coal equivalent per year is the equal in energy value of 50 million tons of oil per year, or one million barrels per day of oil.
2 These are figures for production within the OECD countries and thus differ from the potential demand figures cited earlier in the text. The balance of production and demand between OECD and non-OECD areas is given below in Tables I and II.
4 All the above totals, in Table I and Table II, exclude coal trade movements within the indicated broad areas, for example trade within OECD Europe and between one developing country and another. The amounts involved, however, are relatively minor.
5 The Principles were adopted by the Governing Board of the International Energy Agency meeting at ministerial level in Paris on May 21-22, 1979. The same group also adopted a Decision on Procedures for Review of IEA Countries' Coal Policies.
6 Most western coal has a BTU rating of 9,000 BTUS per pound. A rough estimate is that a volume of 100 million metric tons of western coal per year would equal 71.4 million metric tons of coal equivalent, which as noted earlier would be the equivalent in energy value of one million barrels per day of oil.
7 Workshop on Alternative Energy Strategies, Energy: Global Prospects 1985-2000, New York; McGraw Hill, 1977, Chapter 5.
Why More of the Same Could Be Dooming the Planet