​Bankruptcy of Peabody Energy Highlights a Hard Truth About Fracking

Joel Anderson  |

One major piece of news broke on Wednesday that will likely fly under the radar for most of America, but it’s one that tells a pretty huge story. Peabody Energy (BTU), the world’s leading coal producer, has filed for Chapter 11 bankruptcy.

The story of Peabody’s arrival to this point is long and multi-faceted, with explanations including everything from a failure to restructure debt, declining energy and metal demands due to slowing growth in China, and a leveraged buyout of Macarthur Coal in 2005 at precisely the time coal prices were peaking. However, there’s one other major factor that helped drive the 99.73% decline in Peabody’s share price over the last 10 years: fracking.

For all of the very reasonable, well-meaning concern voiced by a wide range of environmentalists about fracking, the fact remains that hydraulic fracturing and the cheap supply of natural gas it produces has resulted in a significant reduction in demand for coal, struck a severe blow to the economic viability of coal producers, and reduced carbon emissions in the United States by substantial levels.

Ten Years of Fracking Have Produced Some Significant Environmental Good

To suggest that fracking isn’t environmentally responsible is frequently viewed as a point of fact. And that’s not at all off base as it can place groundwater supplies at risk and has clearly been connected to a disturbing trend towards small-scale earthquakes. Risks are especially high when drillers cut corners, something they have frequently done. However, losing sight of the macro trends would be a huge mistake. Looking over the last 10 years, a period that captures all of the rise of the fracking, a few things really stand out.

We’re Using a Lot Less Coal

For starters, 10 years of rapid expansion of fracking has resulted in a huge decline in how much coal we burn here in the United States.

As the above chart from the U.S. Energy Information Administration website indicates, coal has seen a 25% reduction in the amount of electricity generated from its peak around 2005-2008, a figure that’s positively astonishing in its own right but even more amazing when you consider that it represented a reversal of an upward trend for coal use in the United States that lasted for the entire history of commercial generation of electricity.

Pair that with significant growth in natural gas use and, for the first time in living memory, coal is no longer the largest source of electrical power in America. The percentage of electricity generated by coal has plunged from a little over 50% in 2002 to just about a third in 2015. Meanwhile, natural gas has spiked from about 18% of our electricity in 2002 to about a third of total share in 2015. In fact, last year, coal only accounted for 20 terrawatt hours more than natural gas. Drill deeper (pun intended) into the data, and you’ll see that the shift already happened, with natural gas eclipsing coal starting in July of last year.

It’s hard to understate the significance of that trend.

Carbon Emissions are Dropping

Of course, if you’re looking for a way to highlight the significance of that trend, maybe look no further than our all-important carbon emissions. Those just keeping going up and up and up, right? Wrong. Carbon emissions are actually in decline, dropping well below where they were 20 years ago.

How is this possible? A lot of reasons, really. Certainly, the Great Recession played a huge role in that as the above graph should make clear. So has the pretty rapid rise in the use of renewable energy sources, though those still remain a pretty marginal source of energy in the United States. Not to mention, a big drop in petroleum use that comes from improved efficiency in industry and cars alike.

However, the precipitous decline of coal has also played a pretty big role in all this. Given the enormity of the threat posed by climate change, it’s hard to ignore this significant a shift in our prospects for tackling the greatest crisis or our era. For all of the considerations that must be given to the various sources of this shift, the sort of generational change in coal consumption that appears to be happening almost overnight has played a big role in the process.

The Last Decade Has Been Really, Really, Really Bad for Coal Companies

Much of the opposition to fracking feels, at times, to be rooted in a knee-jerk opposition to oil companies that many environmentalists have developed over the years. It’s an understandable reaction, to be sure, but let’s not forget that, historically speaking, coal companies may qualify as the all-time worst villains in the history of corporate America. Whether it be union busting, or blowing the tops off of mountains, or ignoring safety concerns in mines that would eventually collapse and claim dozens of lives, or the consequences to the local environment, or even the disastrous health problems visited upon generations of miners and then the abandonment of the responsibility for them at the first possible chance by the corporations responsible, coal companies are bad, bad news before you even start talking about global warming.

If anything, it’s distinctly possible that environmentalists are letting the relative novelty of the practice of fracking drive them to stand in ardent opposition to the practice while completely forgetting just how bad coal mining is and has always been for the environment on the micro and macro level. If anything, we’ve been accepting far worse consequences than anything fracking can muster in the pursuit of affordable electricity for over a long, long time. The fact that fracking seems relatively new can’t allow it to eclipse just how disastrous a century and a half of dependence on coal has been to our environment and to coal communities.

And guess what? Coal companies have gotten absolutely hammered in the last decade and fracking has been a huge part of their downfall. As mentioned above, the last 10 years have seen Peabody shrink from a company worth over $20 billion to one worth less than $40 million. And that’s PRIOR to its bankruptcy filing. But things were worse for Arch Coal (ACIIQ), which filed for Chapter 11 in January, and has seen shares plummet some 99.99% and currently trades on the pink sheets. Alpha Natural Resources (ANRZQ)? Down 99.92% over 10 years and declared bankruptcy last year. And Cloud Peak Energy (CLD), the only one of the four largest American coal companies that HASN’T declared bankruptcy? It’s ONLY down just over 85% over that same time period.

Any time you can point to a company that’s currently worth 1/10,000th of what it was a decade ago and three of the four largest coal companies in the country declare bankruptcy in the same 12 months, there’s pretty clearly something pretty big going on.

Embracing Pragmatic Solutions Essential to Addressing Climate Change

This is all to say that, with many environmentalists rallying behind Bernie Sanders and other politicians when they call for a complete ban on fracking, many members of the green movement need to take a long, hard look in the mirror.

This is not to say that there aren’t some serious issues with fracking. On the whole, there needs to be a lot more regulation, a lot more research, and a lot more input from local communities. These are serious concerns that are dramatically affecting the lives of people living in places where shale reserves are getting tapped into. But coal mining is far, far worse. And it always has been. If anything, the worst case scenario we face if fracking runs completely wild over the next decade pales in comparison to what’s already been going on in coal country for over 100 years.

For those that would insist that we should simply ban fracking and fill the gap with renewable energy, I would ask that you take another look at that first graph and realize the enormity of what you’re proposing. The unfortunate fact is that it is, at this juncture, entirely impossible to simply build out our renewable energy infrastructure fast enough to match the growth in natural gas.

Solar installations are already growing at a rapid rate, the idea that they might be able to jump by millions of terawatt hours almost overnight is entirely unrealistic. The scale of growth you’re talking about is beyond ridiculous. Not to mention, we would still need a way to generate power at night or when it’s overcast, necessitating an alternate source that isn’t dependent on the time of day or the weather. Solar power is undoubtedly our future, but that doesn’t mean we can simply wave a magic wand and make it happen overnight, or that it will ever be our only source of electricity.

If Bernie Sanders gets his way and bans fracking in addition to no longer renewing licenses for nuclear plants, he’s essentially talking about trying to phase out half of our current sources for generating electricity. Half. If we could guarantee that the resulting gap between supply and demand would be filled with renewable energy, this wouldn’t be an issue, but we absolutely, 100% cannot. It would almost certainly be filled with coal. It would revitalize the worst industry in our nation’s history and put our carbon emissions right back on the disastrous upward trend they were on prior to 2005.

Any environmentalist serious about fighting climate change should be cheering news that Peabody Energy finds itself in such dire straits, and should also be ready to face some of the hard truths about fracking contained within that.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer.

Companies

Symbol Name Price Change % Volume
CLD CLDP Cloud Peak Energy Inc n/a n/a n/a n/a
BTU Peabody Energy Corporation 9.51 -0.14 -1.45 1,401,446 Trade
ACI Arch Coal Inc n/a n/a n/a 0 Trade

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