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FAT-FREE ECONOMICS: Coal, climate and government

Courtesy of gasprices-usa.com

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Coal is a cheap energy source for developing economies like the Philippines. We cannot develop fast enough, create more jobs fast enough, if we are groping in the dark with frequent power outages like what we experienced in the early 1990s. Or if a big portion of household and company expenditures are spent on high power rates.

During a Platts forum last week, one of the speakers, Ismael Ocampo of the Department of Energy, presented the following data:

Sources of power generation in the Philippines, percent of total.

Source: Ocampo, Ismael, “Overview of the Philippine Coal Mining Industry”, July 11, 2012.

Total power generation in 2009 was 61,943 gigawatt-hours and in 2010, 67,743 GWh, for a 9.4 percent growth. Notice the big jump in the share of coal from 2009 to 2010, and the decline in natural gas, geothermal and hydro.  

This shift is also shown in the increase in local oil consumption, by a million metric tons per year on average. Both local production and importation were also rising.

Coal supply and demand in the Philippines, 2007 to 2011, in million MT

Source: Ocampo, Ismael

What drives this rather fast shift to coal? A second speaker, Cecilia Quiambao who is associate editor of Platts for coal, provided some answers. She showed these charts:

Global coal prices, December 2009 to May 2012.

Source: Ocampo, Ismael

Prices were increasing in 2010 with peak points at around $130 per ton in January 2011 for the Richards Bay (S. Africa), then mild decent for the rest of 2011, going down to around $98 per ton by May 2012.

Now is the time to further industrialize and modernize with declining global coal and other energy prices.  This trend is supported by other developments, as Quiambao illustrated:

- US coal export capacity could reach 270 million MT in 2016, according to UBS. US coal producers can flood the international market once pricing becomes attractive to 270 million MT from the current 158 million MT, increasing the disruptive nature of US suppliers on the seaborne market.

- Bain & Co. said cheap shale gas is set to dethrone coal as the preferred source of power generation in the US in the long term as it is widely available and cost effective. The availability of cheap shale gas in the US and its wide use for power generation has led coal producers to export more to Europe and Asia at cheaper prices.

- Korea South East Power received offers for at least 1.3 million MT of coal in its two recent spot tenders for a combined 260,000 MT.

Thus, supply is five times the amount demanded in the case of Kosep. It is a buyer’s market, thanks largely to the further development of shale gas in the US and other rich economies.

Coal is not an “evil” energy source that is said to contribute to “man-made warming” as portrayed by the UN, Al Gore and some environmental groups like Greenpeace and World Wildlife Fund. Climate change is mainly natural, warming-cooling-warming-cooling in multi-decadal cycles, regardless of how many billions or trillions of tons of coal is burned worldwide each year. So while global warming was true, global cooling was also true, and is happening now.

See below the trend in global air temperature (UAH and RSS satellite data), average for northern hemisphere, tropics, southern hemisphere, and carbon dioxide (CO2) concentration in the atmosphere:

Air temperature vs. CO2 concentration, 1979 to May 2012

Source: Friends of Science, http://friendsofscience.org/

From January 2002 to May 2012, as CO2 kept rising to nearly 400 parts per million, global temperature was declining or cooling by 0.04 degrees centrigrade per decade. “Causality” between more CO2 and “more global warming” is not seen or happening. What we normally experience here in the Philippines and other countries in the tropics is more rain and more flooding, not less, little or no drought, not more. And these are indicators of cooling, not warming.

Recently, certain groups like the National Renewable Energy Board - a new bureaucracy created by the Renewable Energy Act of 2008 (Republic Act 9513) - are proposing to impose a carbon tax on non-renewable energy sources, like $1 per ton of imported coal. This is a rent-seeking move by the NREB and other lobbyists to demonize and make an affordable energy become more expensive. Renewables, like wind and solar power, will become “less costly” as they distort upward the prices of the non-renewables and impose an indirect tax to subsidize the renewables.

This indirect tax is called the feed in tariff scheme. Energy consumers - you and me - will pay FIT for the mandatory use of those expensive power sources. This will make our already high electricity bills more expensive. We have the highest electricity cost for industrial users in Asia: $0.18 per kilowatt-hour in 2010 as against $0.15 in Japan and Singapore, down to only $0.06 in Indonesia and Korea. Check out International Energy Agency, IMD World Competitiveness Online as well as Welfare Economics, Philippine Institutional Issues.

The role of government is to allow enterprises to seek cheaper and reliable power sources, and not play cronyism by taxing some power sources while subsidizing others. For now, coal will become cheaper as many industrialized economies shift to shale gas, and coal producers from those countries will sell lower to developing countries like the Philippines.

This is good news and will jibe with the high growth scenario of the government. Climate alarmism and renewable energy cronyism should not be allowed to distort this new development.

 

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