The New Black Gold Is Coal

As the global warming battle continues, look for coal-to-fuel projects to gain momentum.

By Jim Ostroff, Associate Editor, The Kiplinger Letter

January 6, 2009

Coal is likely to be a big winner in the new Obama administration. Over the next two years or so, look for Congress to provide several billion dollars for investments in research and development to commercialize processes that transform coal into motor fuels for autos, trucks and jets.

The federal funding initiative will be part of a concerted plan that earmarks incentives to boost alternative energy, including solar, wind and geothermal power. The effort will help the U.S. reduce carbon dioxide emissions and oil dependence. But the Obama plan also recognizes that it will take decades for alternative energy sources to replace fossil fuels.

In the meantime, coal will be touted as one homegrown solution to ease U.S. reliance on oil imports, which now account for nearly two-thirds of daily usage. Within 20 years or so, look for coal plants to make up to 3 million barrels a day of gasoline and diesel fuel. Rocket science won't be required. The technology to convert coal to motor fuel was developed by Germany during the 1930s and has been used for years by South Africa's Sasol.

Part of the push behind coal-to-fuel projects is fear of oil supply disruptions or cutoffs in the U.S., China and elsewhere. Oilbound economies aren't convinced that the recent collapse in oil prices to $40 a barrel and less should distract them from funding coal-derived fuels. Policymakers in those countries know that the break-even benchmark of $50 a barrel for oil will be reached and exceeded in coming years, once the economic morass ebbs.

The fight against global warming continues, especially a coming era of heightened initiatives to reduce carbon dioxide emissions. But that won't knock coal out of the box. To reduce harmful emissions, some carbon content of coal-derived fuels will be removed at the processing plant and stored permanently underground. Plus, the fuel will be blended with alcohols made from biomass to yield a mixture that emits lower levels of greenhouse gases than today's motor fuels, says James Bartis, a senior policy researcher at Rand, a public policy think tank.

Ersatz fuel will help temper world oil prices by slowing the growth in demand. Meanwhile, the new coal fuel plants likely will be built in other coal-rich countries, including Australia, China, Germany, Russia and Slovakia. Coal-to-fuel processing plants will spur the creation of a new industrial sector, too. Within approximately 20 years, look for the coal fuel industry to generate more than $50 billion in sales.

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