Flaming nuclear reactors + choking coal = natural gas boom

For some months, we've cast doubt on widely accepted forecasts of a humongous rise in the global consumption of coal. Instead, we've foreseen a massive global shift to far-cleaner natural gas-fired electricity. In doing so, we have relied on a basic assumption: That governments aren't ordinarily suicidal. Based on that rule of thumb, it's been straight-forward to see China's Communist Party -- wishing to remain in power -- not following the steep trajectory of coal consumption growth built into the energy and economic models of our leading institutions (see charts below), but instead a far-less aggressive growth pattern. Why? Because the increasingly aspirational Chinese population has made clear in recent years that it won't tolerate choking and deadly pollution. If China adheres to the existing growth models, China's cities will become those choking, blind, airless -- and socially turbulent -- population centers, and potentially jeopardize the Communist Party's authority. Hence, we've suggested discarding the coal models sitting in your queues.

But now a report from Bernstein Research suggests a mistake in these presumptions. Bernstein foresees the same shift to natural gas as we do, but ties it to the black-swan event we are witnessing before our eyes -- the nuclear power disaster in Japan. "It could be that the Honshu earthquake is the catalyst which fundamentally reshapes our approach to global energy," Bernstein says in a note to clients.

In short, Bernstein forecasts a shift from planned nuclear reactor rollouts to a gas boom (details below). If Bernstein is right -- other analysts predict an interregnum while safety concerns are addressed, and then a revived nuclear buildout -- it isn't coal alone that will drive an anti-suicidal shift to natural gas, but nuclear power as well, specifically the specter of explosions and fires at nuclear reactors. This is the calculus you arrive at when you twin the above set of observations with the super-glut of natural gas around the world -- shale gas from the United States, plus liquefied natural gas from Qatar, Australia, and elsewhere. You get a supply-driven demand response. China is already projected to use much more gas in coming years -- depending on the forecast, from six to ten times its current consumption -- but these unaccounted-for realities on the ground mean it will lap up the gas at an even higher rate.

"China and India will lead in the global construction of more than 80 gigawatts [of nuclear power] over the next decade," Bernstein said. "As a minimum, we expect this incident will slow expansion plans while lessons are learnt. In a more extreme scenario, there could be a public backlash against nuclear power which could substantially reduce the planned build out." In the big picture, Bernstein said:

The fate of the nuclear industry will depend on what [China and India] do. Experience from the high speed rail projects in China has shown that construction and financial risks can occur on large scale infrastructure projects, which is not reassuring. In India, planning permission from local communities will be more difficult as a result of this event. As such, we believe that the planned global expansion of nuclear power is now under threat.

Instead it seems that the world will tilt back towards natural gas. Although we foresee LNG demand doubling over the next decade from 200 million tons per annum to 400 million tons per annum, there could be an additional 25-50 million tons per annum of incremental LNG demand as a result of this incident as nuclear power is plans are revised.

Look at the chart below, from the U.S. Energy Information Administration. Look specifically at the relative rise of coal consumption going forward as compared with gas and nuclear.

Now look at this second chart, also from EIA -- China is responsible for some 78 percent of the above increase in coal consumption.

This trajectory seems nonsensical to say the least when you consider the politics on the ground. So what if China's trajectory does not follow this path? What if that coal and nuclear increase is a bit -- or a lot -- less steep?

The implications are serious for geopolitics -- countries endowed with much natural gas, such as Qatar, Australia and the United States, will see shifts in their relative influence. Another big shift will be in climate presumptions -- gas emits just one-third of the CO2 as coal, and half that of oil. Of course, nuclear power emits no CO2. To the degree it is embraced, it would have an even greater impact on projected future CO2 emissions. Still, as natural gas replaces nuclear power and coal, there would still be a significant reduction in CO2 growth.

The market is on to the short-term shift as traders are on a four-day buying binge in natural gas futures, Bloomberg reports. Shell has already shifted LNG cargoes destined for other markets to Japan, the Financial Times reports.

Park Ji-Hwan AFP/Getty Images

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