Peak Coal and Jeremy Grantham’s Clarion Call on Natural Resources

Andy Lees writes today:

We have seen this before but Coal India has also scaled down its annual production target to 452 m tonnes from 460 million tonnes, and whilst this could be made up with imports that means blending even more of India’s coal and therefore sacrificing thermal efficiency. Al 27 of the power plants are categorised as “major” producing around 500MW per day. The plants seem to be spread around the country including Dadri and Rajghat which supply power to the capital. The shortages are “due to less receipt of coal from CIL”. An NTPC official said irregular and short supplies have forced power stations to operate below installed capacity.

“We are running our plants at 75% load factor as running the plants at optimum capacity could lead to our coal stocks depleting faster”. Shortages of coal has already meant India has missed its power output target by 2.4% – (811.13 billion units compared to the target of 830.76 billion units) according to the Ministry of Statistics and Programme Implementation. The coal minister has already warned that the coal shortage could rise over the next 5 years from 125m tonnes to between 250m & 300m tonnes, undoubtedly part of the reason why JSW Energy announced on Friday it would shelve a planned 3.2GW power plant expansion at  the Ratnagiri plant. (Chinese coal prices edged back to a 40.86% premium to Australian coal prices on an energy for energy basis).

Inflation is a problem in places like India and China where these kinds of coal problems are increasing the cost of production. As they expand the economy, these countries face energy constraints more generally, not just for coal or oil. China has increased interest rates in tandem with its other efforts to tamp down on speculative investment. However, China is also raising rates to counteract the inflationary impact that these shortages are having. India is moving in that direction as well. Today the central bank unexpectedly raised interest rates 50 basis points.

Noting these headwinds is a good way to segue into a piece from noted money manager Jeremy Grantham. Like me, Grantham believes that peak resources is a phenomenon which will pose problems for the global economy in the future (see April’s Grantham: ‘Days of Abundant Resources and Falling Prices Are Over Forever’).

As the commodities bubble in 2008 burst, I called this a world in which commodity prices would see greater volatility, higher lows and higher highs.

So, what happens when demand destruction sets in? Economics would tell you that the price collapses again but to a new higher equilibrium level. And then the whole pattern reasserts itself again. That means higher lows and higher highs for the price of oil as we go through each business cycle. Obviously, this is a recipe for global economic instability and that leads to war, famine, revolution and some other pretty nasty stuff.

And indeed, we have already seen the wars and the revolution in the past year. Others are thinking along the same lines, predicting China’s assertiveness could lead to armed conflict in Asia. Willem Buiter thinks water will be bigger than oil.

For his part, Grantham has written a second consecutive quarterly note on peak resources that this time concentrates on the human suffering, writing:

This quarter, I would like to focus on the most dangerous parts of the coming shortages.  I will try to separate those that, for us rich countries, are merely going to slow down the growth rate of our wealth through rising prices, and those that will do not only that, but will actually be a threat to the long-term viability of our species when we reach a population level of 10 billion.  In all cases, poorer countries will be the most threatened.  Situations that will irritate some of us with higher prices will cause others to starve.  Situations that will cause some of us to go hungry will be for others a real disaster, and I believe this, unfortunately, will not be in the dim and distant future.

It is a cogent analysis which is not a message of despair but a clarion call for change. I suggest you read it at the link provided below.

*Note: registration is required for access to the GMO site’s research

Source: Resource Limitations 2: Separating the Dangerous from the Merely Serious

  1. Oz says

    I think we’re trying to think a bit too far ahead here. While I don’t disagree with the long-term natural resources shortages theme, a lot will happen to influence resources prices before true shortages really do.

    As a Aussie pro funds manager, based in a city which is one of the world’s biggest coal export ports, a coal shortage won’t be a problem for a long time – the region has hundreds of years worth of coal. The only constraint is getting it out of the port – capacity has doubled in the last couple of years and will double again in the next few.

  2. David Lazarus says

    I do think that Peak Oil is upon us already. The Saudis have been lying about their reserves for years.

    As for Peak Coal I doubt that yet. There is plenty of it around maybe a few centuries worth but the biggest problem is that it creates carbon dioxide when used. That will only exacerbate the climate crisis, and in the smog and heath impacts then we need to cut coal consumption anyway.

    1. Edward Harrison says

      Oil output from conventional sources peaked in 2005

      1. David Lazarus says

        Exactly but peak coal is many decades away. Still does not mean we need to raise efficiency standards. Oil will only go up from now on unless efficiency cuts long term demand.

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