What Are the Prospects and Policy Issues of Producing Liquid Fuels from Coal?
The United States leads the world in recoverable coal reserves, the technology for converting coal to liquid fuels already exists, and production costs appear competitive at world oil prices well below the recent peak. Yet despite its promise, private investment in coal-to-liquids (CTL) technology is being impeded by three uncertainties: where oil prices are heading, what it actually costs to produce coal-derived fuels, and how greenhouse-gas emissions will be regulated. A RAND Corporation study examined these issues.
A domestic CTL industry could produce as much as three million barrels per day of transportation fuels by 2030, an amount equivalent to 15 percent of current U.S. oil demand. Such an industry could yield important energy security benefits. Most notably, it would put downward pressure on world market oil prices, benefiting the United States by an additional $6 billion to $25 billion per year, depending on how OPEC responds to reduced demand; such an industry would also lead to a decrease in expenditures for crude oil to the detriment of all petroleum producers.
Capturing greenhouse-gas emissions, principally carbon dioxide (CO2), at a CTL production plant is easier than at a conventional coal-fired power plant. If plant-site greenhouse-gas emissions can be captured and stored, then the CO2 generated by motor vehicle fuel produced from coal would be on par with that generated by conventional petroleum. But while research results on geologic sequestration of CO2 are promising, the commercial viability of large-scale geological sequestration will remain uncertain until successfully demonstrated in the United States.
Weighing both benefits and costs, the study recommended pursuing an insurance or hedge strategy that entails federal incentives to reduce uncertainties through early commercial production experience with a limited number of first-of-a-kind CTL or combined coal/biomass-to-liquids (CBTL) plants. Key to implementing this approach would be a government commitment to advance CBTL technology and to expand its ongoing carbon sequestration technology development program to include larger-scale and longer-duration demonstrations.
Pursuing Policies to Address Imported Oil and National Security Linkages: Forthcoming Research
An Interview with Keith Crane
Keith Crane is Director of the RAND Corporation's Environment, Energy, and Economic Development Program. In addition to working on issues within this program, he is also engaged in issues pertaining to Iraq, Iran, the Middle East, the transition economies of Eastern Europe and the Commonwealth of Independent States, China, and post-conflict nation building. He was a member of the Afghan Study Group in 2007 and in 2006 served on the Economy and Reconstruction Working Group for the Baker-Hamilton Iraq Study Group. In the fall of 2003, Dr. Crane served as an economic policy advisor to the Coalition Provisional Authority in Baghdad. Dr. Crane writes extensively on transition issues in policy and academic journals and briefs high level decision makers.
Dr. Crane received his Ph.D. in economics from Indiana University in 1983. He was an Adjunct Professor in the Department of Economics at Georgetown University in 2001-2002 and in the George Mason University public policy program between 1998 and 2000. He has served as a faculty member of the RAND-UCLA Center for the Study of Soviet International Behavior and as a Fulbright Professor at the Central School of Planning and Statistics in Warsaw, Poland.
What are the linkages between imported oil and national security?
As a nation, we consume about 25 percent of all the oil produced, yet we produce only about 10 percent of the world’s oil. That gap means that, as a nation, we rely on imported oil, which, in turn, has economic, political, and military consequences for national security.
What are some of these consequences?
As examples, economically, a surge in world oil prices can push the U.S. economy into recession; politically, some oil exporters use export revenues to influence other countries in ways inimical to U.S. interests; and militarily, the need to field forces to protect the supply and transit of oil from the Persian Gulf adds costs to the U.S. defense budget.
How do we determine which policies make the most sense in reducing these impacts?
The U.S. government should pursue policies to increase supply and reduce demand, but such policies need to be assessed in terms of both their costs and their benefits.
Based on your assessment of costs and benefits, what supply- and demand-side options make the most economic sense?
On the supply-side, U.S. policy should continue to support well-functioning oil markets and refrain from imposing price controls or rationing during times of severe disruptions in supply. It also makes sense to publicly articulate when and how the nation’s strategic petroleum reserve will be tapped if global oil supplies are disrupted and to change the current law to remove the need to declare a national emergency to use it. Finally, it also makes sense to ensure that licensing and permitting procedures for drilling and producing oil and building facilities to manufacture synthetic and renewable fuels are clear, efficient, balanced in addressing costs and benefits, consistent with national environmental objectives, and transparent.
What about on the demand side?
On the demand side, we find that a strong price signal would be most effective. For example, imposing an excise tax on the order of $17 to $31 per barrel of oil would increase fuel economy and soften growth in demand for oil. We estimate that this would reduce U.S. oil consumption by as much as 10 percent, causing U.S. expenditures on oil to fall by between $72 billion and $91 billion per year by 2025. Another demand-side option is to provide more U.S. government funding for research on improving the efficiency with which the U.S. economy uses oil and competing forms of energy.
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