Get ready to work your asses off in the reopened mines if I am elected

Market forces and the decline of coal

Hans van Cleef - 1 December 2020

Rewind to May 2016. Donald Trump is campaigning in West-Virginia. “Get ready to work your asses off in the reopened mines if I am elected,” Trump tells the coal miners. His promise is greeted with cheers.

About the author

Mr Hans van Cleef
Hans van Cleef is Senior Energy Economist with ABN AMRO. In this role he covers for the bank the energy market in its broadest sense and gives regular updates (especially oil and gas related, but also wind, solar and the carbon market).
After Trump became president, he immediately signed a decree ending a regulation intended to protect waterways against coal mining waste and, indirectly, make coal production more difficult. But has Trump’s election led to a revival of the US coal sector?

Well, not really, and that is just as well. Coal consumption and production peaked in the US in 2007 and has been in free fall ever since. Consumption has plummeted by 60 per cent, output by some 20 per cent. The promised extra jobs never materialized. In fact, due to COVID-19 unemployment is now at its highest level since WWII.

The most important driver behind the dramatic drop in consumption was neither Obama’s climate policy nor Trump’s attempt to breathe new life into the coal industry. The decline was mainly pricedriven. In recent years, gas has been cheaper than coal and, as a result, has been steadily supplanting coal as the preferred fuel for power generation. 

Moreover, the relentless rise of renewable energy is putting extra pressure on coal consumption. Regardless of the political rhetoric, it is more important to look at what is happening in the market.

Not only has the share of coal in the energy mix decreased remarkably quickly in the past years, but the production of oil and gas in the US is also under intense pressure. The low oil price has forced many shale oil producers to shut down their operations, in some cases permanently. And although the share of natural gas in the energy mix has increased, the production of this fuel is also under threat from low price levels. The low prices for both oil and gas can be traced back to declining demand (a direct consequence of COVID-19) and large inventories. These are partly related to COVID-19, partly to OPEC policy and partly to the fact that the rise of LNG has turned gas from a local into a global market. Clearly, external, non-political, market factors can cause significant shifts in the energy mix, leading to substantial increases or reductions in carbon emissions.

Given the required energy transition to counter climate change, this is an important lesson for politicians at home and abroad. Governments do not build wind farms, sell electric cars or insulate houses. These are the tasks of energy, automotive and construction companies. But governments can offer subsidies to tempt these companies to invest in sustainability. Likewise, it can encourage consumers to think and act green, for instance, by discouraging polluting technologies through carbon emission pricing.

But above all, governments have the responsibility, or rather the duty, to set and pursue long-term climate objectives. And it must do so in a clear, consistent and focused manner. That is crucial.

Because unpredictable government policy with a horizon of a mere four years makes companies fearful of committing to large investments for the longer term, it also creates uncertainty among consumers who, as a result, decide to put off buying an electric car or greening their home. And it keeps financiers from taking a chance on new technologies that involve more risk.

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