Synthetic Fuels Policy

EMD-79-99: Published: Jul 27, 1979. Publicly Released: Jul 27, 1979.

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A review was made of various proposals to accelerate synthetic fuel development. The United States will never be able to produce conventional oil in anything like the quantities needed to substantially insulate ourselves from the world oil market which is dominated by the Organization of Petroleum Exporting Countries. For that reason, it is important that the United States move to develop alternatives to imported oil. A significant effort should be made to develop synthetic fuels and a separate organization to encourage that development would be appropriate.

Since the establishment of an off-budget corporation would deprive Congress of appropriate control and oversight, a middle ground is considered preferable through the use of on-budget multi-year funding which would eliminate the uncertainty of annual appropriations, but require periodic Congressional review. The more expensive synthetic fuels would be in direct competition with oil and gas, and would need subsidies, perhaps indefinitely. On the other hand, oil prices may increase to reach synthetic fuel levels, eliminating the need for subsidies. If Government is the prospective purchaser of the fuel, it can create competition by soliciting bids for synfuel contracts. If coal-based synfuels are to become a prominent part of future energy supply, closer attention should be paid to oil company involvement in coal reserve ownership and production. Energy production from biomass such as municipal solid waste and alcohol production from surplus crops are the most practical, but conservation as well as renewable initiatives are needed for a balanced program. Among financing mechanisms, loan guarantees are popular because the program would be costless in the absence of default. However, these may not induce private firms to produce synfuels since imported oil will most likely remain less costly for the near future. A more certain way to assure synfuel production is to provide a price guarantee coupled with a purchase guarantee, although this could be very costly since the production costs are not yet known.

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