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Economics and coal resource appraisal: strippable coal in the Illinois Basin ( USA)

Southern Economic Journal
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Abstract

Coal-resource appraisals generally describe the location and general characteristics of coal beds. Estimates are made of the average overburden depth (depth of the coal bed below the surface), bed thickness, and perhaps certain chemical properties of the coal [1]. Although such resource compilations represent an important initial step, neither they nor current estimates provide sufficient information to determine the costs of alternative options for National energy policy. Because coal is expected to provide an increasing part of future overall U.S. energy supply, it is crucial for long term planning that coalresource appraisals convey sufficient information regarding the degree of economic resource scarcity (escalation of unit costs for mining remaining deposits as the best deposits in an area are mined out) expected as coal consumption increases. However, assumptions embodied in most large-scale models of coal supply [13; 20] imply that the coal reserves that exist can be commercially produced as needed. As demonstrated by the embargo of 1973-1974 and more recent difficulties in obtaining crude oil, even a slight temporary commodity shortfall will result in significant economic losses when the commodity supplies a large proportion of the total energy used by an economy. For the United States, crude oil resource estimates did not give warning of a decline in domestic petroleum product.

In this paper we argue that coal-resource estimates, as they are now made, will not give warning of future supply difficulties. A method for incorporating an economic dimension into appraisals of strippable coal resources is presented and is applied to a major U.S. coal-producing region, the Illinois part of the Illinois basin. Illinois accounts for nearly 70% of the demonstrated strippable coal reserve base of the Illinois basin [12]. In particular, a long-run incremental cost function (that is unit costs vs. cumulative reserves extracted) is estimated for strippable coal in Illinois. The estimated cost function exhibits an initial range over which costs increase at a constant rate-followed by a range where costs increase very rapidly and the function becomes quite inelastic. This long-run incremental cost function is significant for two reasons. Comparison of the demonstrated reserve base for strippable coal (14.8 billion tons) with cumulative production (since 1920 of 1.1 billion tons) might suggest that future depletion will not be significant when, in fact, the cost function presented here indicates otherwise. Because the only states having more reserves of strippable coal than Illinois are Montana and Wyoming [18], these results have implications for national coal-resource appraisal. Secondly, most models used to study the effects of alternative public policies in coal markets are static in nature [15; 16] and cannot consider the effects of increasing costs. Furthermore, models which are multi-period in nature [11; 13] appear to have little empirical basis for their assumptions regarding the escalation of production costs resulting from depletion.

The plan of the paper is as follows. First a description of the analytical approach for constructing the long-run incremental cost-reserve function is discussed. Following this, the descriptions of the Illinois basin and the basic physical data are presented. In the concluding section, the main results are presented and their implications are explored

Additional publication details

Publication type Article
Publication Subtype Journal Article
Title Economics and coal resource appraisal: strippable coal in the Illinois Basin ( USA)
Series title Southern Economic Journal
Volume 47
Issue 3
Year Published 1981
Language English
Publisher Southern Economic Association
Contributing office(s) Eastern Energy Resources Science Center
Description 11 p.
First page 742
Last page 752
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