Gateway Pacific Terminal: An Unexpected Twist

We've talked a lot about globalization in the last week: whether it's good or bad, should it be limited, how should it be harnessed, etc.

There's an unexpected consequence of a globalized coal market, described in this NPR podcast. Opening trade routes to China could actually precipitate a switch to cleaner fuels in the US. Here's how it works:

Montana and Wyoming, prevented by their landlocked location from shipping the desired quantities of coal overseas, are currently unable to tap into markets where coal captures a 400% premium over domestic sales. Alter this scenario by constructing two major export terminals, and it makes sense for these US states to ship all their coal overseas. Domestic users of coal-fired energy must then either reduce their consumption by switching to natural gas, or pay the higher price (illustrated below).

Image Credit: Jason Welker, welkerswikinomics.com

Considering that US coal exports would satisfy only 3% of China's demand, yet might lead to precipitous drops in domestic consumption, it's difficult to say whether the effects will balance out. Since coal is already losing its edge to cheaper, cleaner-burning natural gas, it could be that higher prices once and for all end an era of US coal consumption. It could also be that the coal-based Chinese economy we help usher in more than cancels any gains from foregoing a fuel that was about to be phased out anyways. It depends how you look at the situation.

As Jason Welker points out, it looks pretty well if you think only locally. It's when you examine the global repercussions we've seen, that things become more complicated.

(An interesting facet of globalization: it assumes that the free flow of goods across international boundaries achieves the highest state of efficiency by allowing each country to specialize where it is most productive. It also assumes, however, negligible losses in the transit of these goods. The costs of a coal-export terminal, of shipping, and environmental pollution do not factor into the equation.)

I hesitate to throw up my hands on the presumption that the situation is beyond my comprehension, but I don't hesitate for long. I've already encountered the difficulty of predicting whether exporting coal now would cause reserves to run out sooner, or merely facilitate the tapping of costlier reserves. This unexpected twist is just one more loop in the system that makes the true environmental outcome so hard to foresee.

Norm Becker features this article in his latest post, which posits that economic theory is sadly lagging behind economic reality. It acknowledges that through most of human history, connections between local economies "were tenuous and intermittent." It further argues that today's society calls for a much more reality-based, empirical approach. I completely agree. I also think it unfortunate that this call comes at a time when empirical approaches are the hardest to execute. How do you experiment with something like a coal port? How do you draw conclusions when large systems don't always mimic small systems, when unforeseen factors are constantly creeping in?

Speaking of the hard-to-foresee: the NPR podcast also points out that if Mongolia were to simply upgrade its rail lines to supply coal to China, the US export terminals could be rendered completely unprofitable, never to ship "a single lump of coal". While I normally think of large corporations as having the system on their side, it's strange to imagine they may be banking so much on flimsy barriers to entry. Now do I chuckle to myself and say, "Let SSA Marine take the hit" - or do I flag this as one more reason Bellingham should refuse to have this coal port built?

I wish it were that simple.