Low Oil Prices Help Consumers and Coal Companies, in the Short Term

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Researched by Industrial Info Resources (Sugar Land, Texas)--Crude oil prices have been falling for the last several months. In August, the price of a barrel was more than $100. The December price fell below $60 a barrel. In the short term, this trend is a welcome break at the pump for most consumers, with U.S. average gas prices now below $2.50 per gallon of regular unleaded. This is the lowest that prices have been at the pump since 2009. There are other short-term impacts to consider. One of them is the cost of coal transportation.

One of the main expenses for coal companies is transportation costs. According to the U.S. Energy Information Administration (EIA) Power Plant Operations Report, the transportation portion of the delivered cost of coal was between 31% and 35% between 2008 and 2012. Most of the coal in the U.S is moved by rail. The National Academies Press (NAP) published a study in 2007 showing that rail transportation accounted for about 58% of coal transportation; waterborne transportation 17%; trucks 10%; 12% percent by multiple modes of transportation (primarily rail and barge), and 3% is accounted for by mine mouth plants with conveyor systems.

The drop in fuel costs is great news for the coal business. Producers can get their coal to customers more cheaply This is also good news for the railway companies. According to the Association of American Railroads (AAR), "no single commodity is more important to America's railroads than coal." Coal made up was 43.3% of freight rail tonnage and 24.7% of rail gross revenue in 2011.

The long-term picture is more complicated. The AAR website shows that the movement of oil by rail has increased every year for the last four years, while coal has dropped significantly in the last few years. This reflects two trends: Coal demand in the U.S. has levelled off and U.S. oil production is the highest it has been since 1986.

The rise in oil production between 2011 and 2014 was the fastest the country has ever seen. As with any finite resource, the acceleration in production cannot last forever. The long-term trend shows that oil prices are likely to increase again and that coal demand is not likely to regain the ground it lost. So while coal and oil do not compete directly in the U.S. electricity generation sphere, the price of oil can significantly impact the delivered price of coal.

For more information, see October 29, 2014, article - Coal Industry's Uncertain American Future, Part One: Politics and Environmental Law, November 10, 2014, article - U.S. Coal Industry's Uncertain American Future, Part Two: Natural Gas and International Demand for Coal, December 24, 2014, article - Maintenance of OPEC Production Prompts Speculation of Motives and December 23, 2014, article - Fear Itself Plays Big Part in Crude Oil Price Drop.

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, three offices in North America and 10 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.