“This island is made mainly of coal and surrounded by fish. Only an organizing genius could produce a shortage of coal and fish at the same time.” – Aneurin Bevan
On March 12, 1943, the H.M.S. Queen Elizabeth set sail across the Atlantic with some special passengers. On board was a team of 42 oilfield workers from Oklahoma recruited to participate in a highly secretive project. Their mission – borne of desperation and codenamed The English Project – was to radically improve Britain’s domestic oil production. With German U-boats crimping imports, and production on the home front struggling, the British were staring at the ugly face of defeat. The crown needed an energy miracle.
Salvation arrived in the form of this most unrefined crew. Over the course of the next year, the so-called “Roughnecks of Sherwood Forest” brought their technological know-how, experienced swagger, and get-it-done ethos to the British countryside, bringing online nearly 100 producing oil wells. The resulting ten-fold jump in domestic oil production played a small but critical role in holding off the German onslaught. Today, two identical seven-foot-tall statues stand in honor of these unsung heroes who helped transform Britain into an “unsinkable tanker” – one in Sherwood Forest, and the other in Ardmore, Oklahoma.
The criticality of The English Project lays bare a rather self-evident truism: oil is inherently more valuable than coal. While Britain was awash in coal, it couldn’t power its airplanes with the stuff. Nor tanks, ships, or trucks. Coal has important but limited uses, whereas oil can be refined into gasoline, diesel, asphalt, greases, and all manner of useful petrochemicals. As the Roughnecks so ably demonstrated, the distinction can be the difference between victory and defeat.
The passage of time may have altered many things, but it has not disturbed that truism of inherent value. And yet, we observe today a most unusual development in relative prices across the energy markets.
This anomaly is not readily apparent, and we must first deal with the pesky challenge of comparing prices for primary energy fuels on a like-for-like basis. As we have noted in prior work, energy raw materials are often quoted in different units of trade and currencies. They also have varying inherent energy content. Such distinctions make quick comparisons difficult for industry analysts and nearly impossible for casual market participants.
Our preferred method to correct for these obfuscations of convention is to express all primary fuels in US dollars per unit of inherent energy. With the price of natural gas already quoted in US dollars per million British Thermal Units (BTUs), it serves as a useful calibration anchor for such an exercise. Harmonizing the price of oil into this view, we note that a barrel of WTI oil contains 5.8 million BTUs of energy, and when we divide the quoted price of oil in barrels by 5.8 we get a price we can easily compare to that of natural gas. Finally, a metric ton of Newcastle thermal coal contains 24 million BTUs. Dividing its price by 24 completes the transformation needed for across-the-board analysis. Here is a useful visual for all three fuels based on prices quoted yesterday:
The eye is initially drawn to the massive geographic energy arbitrage that exists in the natural gas market, a topic we have written about repeatedly (and long before it became front-page news). Look yet again and another observation – one with potentially greater implications – emerges: the energy price of coal is now higher than that of oil!
You can almost hear the sound of 42 Roughnecks scoffing in disbelief.
A 10-year weekly chart comparing the price of oil normalized for energy content drives home the unprecedented nature of this market glitch:
What to make of this extraordinary price action? More than you might think. Let’s dig in.