As most of the fuel complex is getting less expensive than the highs of a few weeks ago, most coal in the US continues to climb to record prices. The weekly EIA report showed Central Appalachian advancing .5% to $140 per short ton, Northern App up 7.9% to $149, Illinois up 1.4% to $71, and Uinta Basin up 10.7% to $62 while Powder River Basin prices eased slightly. Appalachian coal is generally more expensive because of its higher heat content, somewhat lower sulphur content, and proximity to export markets to Europe. Coal in Europe has fallen slightly below $200 per metric ton so it still pressures the US price upward. As the higher fuel costs begin to be reflected in higher electricity prices we may see a slight reduction demand and thus a cooling of prices. The price is finally affecting US oil/gasoline demand, helping to bring pump prices back below $4 per gallon for the time being.
But a key barrier to US oil demand reduction affecting oil’s price is the current subsidization in many key consuming nations. An article in the NY Times described these government mechanisms that prevent global price increases from being felt by consumers. For instance, the Chinese government is forecast to spend $40 billion this year, even after their recent 25% price hike, to keep pump prices lower than the global average. Malaysian and Indonesian governments were forced to reduce subsidies earlier this year due to their crippling effect on federal budgets. The subsidies accounted for 7.5% and 4% of their GDP, respectively. BP reports that 96% of global oil demand increases occurred in these subsidized nations. For many of these countries, there are serious trade-offs between cutting subsidies to preserve budgetary stability and fighting high inflation. For oil exporters like Saudi Arabia, Venezuela, and Iran, the subsidies are easily paid for by skyrocketing oil revenues. Thus, our monopsony power as the largest consumer of global oil is eroded by emerging consumers in countries with both rising incomes and little financial incentive at the pump to reduce demand.
The result: to achieve lower prices we have to reduce demand a larger amount than if they didn’t have subsidies. Whether the subsidies are good or bad for individual countries is debatable. Certainly, us climate activists would rather have subsidies for renewables than for fossil fuels. But the crisis of energy and food inflation is a serious one for the world’s poor, and must be taken into consideration.