How Mexico Affects European Coal

I was on BNN’s “Commodities” this week. Talking with host Andrew Bell about new sources of gas demand in North America. (You can view the re-play here, as well as the original piece I wrote with Keith Schaefer of Oil and Gas Investments Bulletin here.)

It’s emerging that Mexico may soon become a significant importer of U.S. natgas. Perhaps to the tune of 10% of overall American production. There’s already evidence this is starting to move prices.

This is obviously good for U.S. (and probably Canadian) gas producers. And it has some wider implications worth thinking about.

The Institute of Energy Economics, Japan recently published some interesting conclusions about U.S. gas. For several reasons, the authors believe U.S. gas prices must rise. Significantly.

Interestingly, the study focused on the effects such a price increase would have on the global coal market.

Indeed, the U.S. is still one of the world’s largest coal producers. But with gas becoming cheap the last few years, much of American power generation has switched to gas-fired technology. Gas power has increased to 31% of the energy mix, up from 21% in 2008. At the same time, oil generation has fallen to 36%, down from 48%.

The IEEJ analysis shows however, that increasing gas prices would cause switching of U.S. power generation back to coal-fired plants. Having a big effect on the global thermal coal market.

With U.S. coal consumption dropping, America has turned to exporting more thermal. U.S. exports to the European Union are up 150% since 2010.

But rising natgas prices could put a lot of that coal back into the North American generation sector. Squeezing exports.

This is especially critical as “swing suppliers” to Europe, such as South Africa, are sending more of their coal to energy-hungry Asia. Without the U.S. as a go-to exporter, the global thermal coal market could get tight very fast.

It’s not happening right this moment. But it might come quicker than many observers expect. A good reason to be ready for all the potential effects of the rapidly re-organizing world energy mix.

Here’s to power around the globe,

Dave Forest / @piercepoints / Facebook

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