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NEW YORK (Reuters Breakingviews) - Peabody Energy's collapse heralds the future of oil. The largest U.S. coal producer on Wednesday filed for bankruptcy protection, felled by pollution concerns and declining costs of rival fuels. Oil companies should pay heed.
Less than a decade ago, Peabody's market value was over $20 billion. Since then, utilities have closed coal-fired plants in favor of cleaner renewable sources and cheaper natural gas. Investors are shunning dirtier energy. The decisions have rippled through the coal industry, causing multiple insolvencies.
It isn't a big leap to the already reeling oil industry. More than 70 percent of crude used in America is for transportation, according to the U.S. Energy Information Administration, and the bulk of that is for cars. There may be relatively few electric vehicles on the road now, but that is changing fast. The number sold worldwide grew about 80 percent last year, according to the Department of Energy.
There also appears to be considerable demand. Over 325,000 people just plunked down $1,000 to order Tesla's new Model 3 sedan, which won't even be in production until the end of 2017. That's equivalent to about 2 percent of all new cars sold in the United States last year.
Governments are subsidizing electric cars, which are traveling longer distances on each charge. The price of the lithium-ion batteries they use also has plummeted by about 90 percent over the past decade. GM said last October it paid $145 per kilowatt-hour for batteries, roughly around the threshold needed to be cost-competitive with internal-combustion engines. Moreover, prices are still falling fast and will keep falling as production scales up.
The short-term problem for petroleum is expectations. If what's in the ground is expected to be worth less tomorrow than it is today, oil-producing countries and companies will pump as fast as they can, curb investment and diversify into areas like natural gas. It's probably no coincidence that Saudi Arabia is unwilling to slow production despite protestations from its OPEC partners as it considers an initial public offering of its national oil company Aramco.
The $10 trillion valuation estimated by some analysts could turn out to be as fleeting as Peabody's. The coal company's bankruptcy and market trends for electric cars are the canaries in the oil fields.
- Peabody Energy, the world's largest privately owned coal producer, sought bankruptcy protection on April 13 in the U.S. Bankruptcy Court for the Eastern District of Missouri.
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.