"Supply is struggling to meet demand."

At first, I had a flashback to a peak oil argument from the weekend.

How could you blame me? Every time I hear an "expert" talk about how the world is almost out of oil because of the peak oil theory, it's hard not to throw something at the television. I apologize for sounding like a broken record, but how long will it take for these "experts" to realize that peak oil has nothing to do with how much total oil is left? Perhaps one day they'll take the time to understand it's all about how much of that oil we can pull out.

This simple phone conversation, however, had nothing to do with peak oil. The topic was on another fossil fuel-coal. Trust me, coal has been around for a long time. The Chinese have been mining it for fuel roughly 10,000 years ago.

To say that coal prices have been on the move in 2008 would be a gross understatement. If you remember from last week's Energy and Capital, my colleague Chris Nelder showed you how coal prices in the U.S. were exploding. Prices have even doubled in some cases.

There's several reasons for us to get into coal before the end of the year. For me, all it took was the shortfall in global coal production to grab my attention.

Supply versus demand, haven't we heard this story before?

I know, the thought of supply falling short of demand does remind me of peak oil. That may be true for you too, but one thing the oil markets have taught us is that the right moves can become extremely profitable. I'll get to the investment side of coal in just a moment, though.

For now, let's focus on that supply question.

Coal Production

First let's take a look at demand on a global scale. It appears that supply falls short of meeting global demand this year by 25 to 35 million tons. Several officials have also estimated that amount would double to 70 million tons during 2009.

In the U.S., demand is expected to surpass supply by 15 million short tons. Again, we have to think back to last week.

Considering that the chances of a significant production boost are slim, we can expect the coal markets to tighten over the next two years.

With approximately 270 million short tons of recoverable coal reserves (I'm referring to both bituminous and sub-bituminous coal), the U.S. has plenty in the ground. But as you already know, there's a huge difference between having it in the ground and pulling it out.

U.S. production, however, won't be enough to make up the difference. In fact, one of the headlines I read this morning pointed to the struggle that coal producers will have. Nearly 40 million short tons of coal won't be produced due to the stringent environmental regulations and lengthy permit process. Add that to the millions of tons of coal production stopped because of Midwest flooding.

Even though we may see a slight correction in coal prices as new production comes online, I believe we can still remain bullish on coal prices over the next two or three years.

Now, I understand that you're probably not reading my column for your health. Like myself, most of my readers are always asking how they can invest in these tight markets. Even if U.S. production won't be able to make up the demand shortfall, higher coal prices will ensure a decent return on your investment.

Investing in U.S. Coal Production

Although I feel reluctant to give away some of my favorite coal stocks, you can't go wrong with the major players. But as always, remember to never throw your hard earned money away without checking everything out for yourself.

Take a look at some of the big plays, for example. Alpha Natural Resources (NYSE: ANR) focuses their operations in Northern and Central Appalachia. Nearly 90% of their coal reserves have a high Btu content (more than 12,500 Btu per pound of coal). If you had jumped into these guys at the beginning of 2008, you would have made a hefty 188% today.

Another coal player I've seen touted around the block is Consol Energy Inc. (NYSE: CNX). Although coal isn't the only energy source they deal with, Consol is the largest producer of high-Btu bituminous coal in the U.S. and certainly worth your time and effort.

These two plays certainly aren't the only ones worth looking into. In fact, I've had a hard time finding a company that hasn't performed well for investors. Just make sure to do your own due diligence when looking to add a company to your portfolio.

Until next time,

Keith Kohl

Energy and Capital

P.S. Hopefully all of my readers have a firm grasp of what peak oil will mean to the world's energy situation. But many of you have been asking me nonstop about whether they can safely invest in peak oil. The answer, undoubtedly, is yes. I would recommend checking out how peak oil might be our generation's greatest investment opportunity.

"Energy stocks... The only way a human is going to make any money."

-- Matt Simmons, Peak Oil's first and most vocal proponent,
and founder of the country's last pure play energy investment banking firm.

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I suggest anyone interested in the concept of "peak oil" take a look the slides of a presentation given by Matt Simmons.

The U.S. Geological Survey estimates the Bakken Formation contains 3 to 4.3 billion barrells of "undiscovered, technically recoverable oil." At the current rates of crude comsumption in the U.S., this is enough oil to make the U.S. "energy independent" for less than 200 days.

Apparently you are completely ignoring climate change and the serious role coal plays.

Money money money - I hope your money keeps you warm when low-lying countries are going under, and when the Midwest gears up for perhaps another 500-year flood in the span of 15 years.

You must be very sick. I am sorry for your children, who will have to live with what you've created.

SCIENCE says "WE" have done this to ourselves? Only GORES science says this kinda crap - condemning the world - jeez!! Contributors to climate change? Perhaps, and only then MAYBE. Still not conclusive at best!
Furthermore, the whole premise of this investing program is investing where the money is, not where we hope to one day have it...
The nation would stop dead without fuel (fuel keeps us warm and also cooks our meat) Yep, Tasty grilled cows and other nummy animals! Coal lights or streets and makes our ceiling fan turn.
Until our nation and other nations have a better way to warm back sides and power without coal,(coal and gas-of all types)is where the money is! Please take note of the title- Energy and Capital.

The scientific evidence for man-made climate change is overwhelming. Fossil fuels are the number one cause. Don't you think it's irresponsible to promote buying coal and oil? I know you promote renewables as well, but if you promote coal and oil, you are contributing to the problem that will condemn the world to catastrophe. We are all morally responsible for what we do in this life.