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Dec 19, 2012 | 07:01 GMT

4 mins read

The Continued Growth of Global Coal Consumption

It can be difficult to separate the important from unimportant on any given day. Reflections mean to do exactly that — by thinking about what happened today, we can consider what might happen tomorrow.

Coal use is declining in the United States, but it is alive and well in the rest of the world, according to the International Energy Agency's medium-term coal market report released Tuesday. Indeed, an agency executive said that coal would compete with oil as the dominant energy source within the decade. The statement could be a bit misleading, since oil is the primary source for transport fuel for much of the world while coal is primarily used to generate electricity. Regardless, the growth in consumption of coal is unlikely to abate in the near future.

What is a Geopolitical Diary? George Friedman explains.

Simply put, as populations grow and economic activity increases, demand for energy rises. While low natural gas prices and government regulations have led to a decrease in coal consumption in the United States, the commodity remains the cheapest source of energy for much of the rest of the world, providing power and fueling growth in developing nations.

China is the world's largest consumer of coal, and India could overtake the United States as the second largest consumer by 2017. While China has the third-largest known reserves of coal in the world and produces a significant amount domestically, both China and India import large amounts of the commodity and will likely continue to do so for the foreseeable future, serving as centers of strong demand for global coal exporters. Moreover, competition between Russia and the United States in the European coal market has increased as U.S. exports to Europe have grown, and Russia is planning to increase coal exports to China in 2013.

The coal market is currently oversupplied, resulting in lower prices. If this dynamic persists, higher-cost producers such as Australia could continue to suffer until low prices incentivize an increase in coal consumption in developing countries. But the players of the past might not be the only players in the future. With proper infrastructure, resource-rich but cash-poor countries could attempt to utilize domestic coal reserves to achieve economic growth. Such growth would come not only from profits from the resource but also from domestic investment — especially in infrastructure — though export-oriented development does not necessarily trickle down to broader economic development.

For example, Colombia, while already one of the top five global coal exporters, could see billions of dollars of investment in its coal operations. This could spur economic growth and even stabilize the government, which has in recent years made strides toward managing the country's security situation. Meanwhile, Mongolia, a country rich in mineral reserves, benefits from close ties with and proximity to China, a demand center right next door. However, Mongolia's landlocked status — and its political and economic reliance on its neighbors — limits its access to global markets beyond China and reduces the political utility of leveraging its status as a supplier of a critical global commodity. In Africa, Mozambique is seeking to develop large coal reserves for export, requiring significant investment in port and rail infrastructure.

As a result of environmental concerns in Europe and the United States, the most significant market growth for coal will be in developing countries. For a country like India, where major electricity infrastructure failures have made power generation a strategic national priority, coal is a cheap solution. With investors seeking cheap labor and functional infrastructure around the world, more and more countries will see their electricity needs increase, and many will see coal as the best option.

This does not mean that oil is replaceable. Until major advances in battery technology are accomplished, the interface between petroleum-powered transportation and electricity-powered machinery will remain a distant reality. Growing global energy demand simply means that rising secondary powers will have to be involved with and invested in countries such as Indonesia and Colombia, which have the ability to significantly increase their contribution to the global electricity generation mix.

The Continued Growth of Global Coal Consumption
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