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Study Finds Rising Production Costs, Not Natural Gas, To Blame for Appalachian Coal Mine Closures

For all the blame natural gas has received for driving out coal demand in the United States, a new study has found that rising coal production costs, not natural gas, are behind most of the coal mine closures that occurred between 2002 and 2012.

The study was published this week by the nonpartisan environmental think tank, Resources for the Future. It focuses on the closure decisions among Appalachian coal mines, which accounted for most of the closures during the 10-year period. The study noted that the number of operating Appalachian mines has fallen by two-thirds in the last 40 years.

The study found that while natural gas prices declined by some 69% between 2008 and 2012, the lower gas price environment led to the closure of 125, or 30% of the mines that closed between 2002 and 2012 as a result of declining profits. The study utilized public data from the Mine Safety and Health Administration, U.S. Energy Information Administration (EIA) and information reported by public coal companies in their annual reports to the Securities and Exchange Commission.

Meanwhile, electricity consumption also has taken a hit, with the EIA indicating that consumption increased by an annual rate of 0.6 percent between 2006 and 2012, well below its own projection of a 2% annual growth rate during this period. It’s also a far cry from the period between the mid-1970s and mid-2000s, when the share of coal-fired generation in total electricity generation increased from about 44% to 50%, EIA data show.

But even with lower gas prices and falling electricity consumption, declining productivity was at the heart of most coal mine closures, the study said. Between 2002 and 2012, real per-ton extraction costs in Appalachia nearly doubled, with declining worker productivity explaining most of the cost increase. Declining productivity caused 274 mine closures between 2002 and 2012, or 67% of the total closures in the sample caused by declining profitability.

Regulation of sulfur dioxide emissions from the electricity sector, health and safety regulations, and changes in permitting of new mines also contributed to declining profitability, the study found. Competition with coal from the Powder River Basin (PRB) in Wyoming, which has lower production costs and also lower sulfur content, also lessened the profitability for Appalachian coal.

“During the sample period, declining productivity reduced annual operating profits three times as much as did lower natural gas prices or electricity consumption,” authors said, noting that expected profits strongly predict closure rates.

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