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Rising Oil Prices Seen Pushing Costs Higher For Coal Miners

Record high oil prices may dim the prospects for U.S. coal miners looking to rebound from a year of higher costs and stagnant coal prices.

Coal miners consume millions of gallons of diesel annually to run their mining equipment. If the price of oil and petroleum products rises significantly, companies will face millions of dollars in added costs.
“The guys that aren’t hedged are going to be squeezed,” said Dick Price, a coal analyst at Westminster Securities and former executive at Peabody Energy Corp. (BTU), the largest U.S. coal miner.

Analysts say that miners in Wyoming’s Powder River Basin use the most diesel and therefore will see the biggest cost increases, though these companies are also the industry’s largest and have the ability to hedge against price increases. These companies use enormous, fuel-guzzling trucks to bring coal from the mine to the railroads for shipment to power plants across the country.

Some analysts argue that higher oil prices translate to higher coal prices, because higher oil prices tend to push up natural gas prices, which in turn drive coal prices.

This may be true in the long term. Eventually coal prices must adjust upward to reflect the cost of mining, including diesel costs, analysts say. But in the short term, natural gas and coal prices are correlated because of demand for electricity. Oil, however, isn’t used much for power generation in the U.S., so there are relatively few power generators that can switch to natural gas when oil is expensive.


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