In 1994, the People's Republic of China imported oil for the first time.
Until that year, the country's domestic production met its demand... a demand that wasn't all that large because China spent most of the 20th century either in a socialist, anti-business environment or being tortured by the Japanese.
Now... just 16 years later, China is Saudi Arabia's largest oil customer. It's the second-largest oil importer in the world, and the largest car market. This extraordinary shift is one of the reasons oil has climbed from $20 a barrel to $75 in the past eight years.
A similar "China Moment" – a giant shift caused by China's economic growth (as economists call it) – just happened in coal... and similar opportunities to make money on an energy boom are available to investors.
In 2007, China switched from being a net exporter of coal to a net importer of coal. Coal fires over 70% of China's electrical power plants... and its ravenous demand for electricity calls for more coal every year... so much so that this year, industry insiders expect China to pass Japan to become the world's largest importer of coal.
You see, the true measure of a country's wealth is in the penetration and reliability of electrical services. You can't have an iPod or an air conditioner without good electrical service. To meet the demand for electricity, China burns coal... a whole lot of it. The Financial Times notes China's year-to-date imports of the black rock are up 120% over 2009. If that pace continues, China will consume 125 million tons, far more than Japan and South Korea.
Just like it is doing with oil, China's long-term demand is going to drive gains for coal prices and coal stocks over the next few decades. This means a big tailwind for big coal producers like U.S.-based coal giant Peabody Energy (NYSE: BTU, Stock Forum) and China-based Yanzhou Coal (NYSE: YZC, Stock Forum).
This demand also makes me long-term bullish on natural gas. As I told you back in April, natural gas fires power plants as well. We can substitute it for coal in some power plants here in the U.S. According to industry tracker Platts, power plants began to switch from coal to gas in 2009 when gas fell to less than $5.50 per MMBTU (million British thermal units).
As coal prices rise, natural gas prices have no choice but to eventually rise with it. I believe we'll see a price floor develop in natural gas prices up around $4.50-$5 per MMBTU. We've already seen natural gas prices above $5 per MMBTU in late May and early June this year. As China demand overwhelms coal supplies, we should see that price level solidify into a base.
In sum, I'm bullish on coal... but it's a political football from time to time. And many coal stocks have enjoyed huge price rises over the past year or so. On the other hand, natural gas is a clean fuel, and loved by most environmentalists. Stay long those royalty trusts I've been telling you about.