Liquid Coal a Slippery Business

Also look to Syntroleum(SYNM Quote). Syntroleum is an innovative small-cap company that has never turned a profit, but enjoys the greatest exposure to the military among CTL producers and is well-positioned to take advantage of Congressional authorization for the Air Force to sign 25-year CTL jet fuel agreements.

While passage of CTL incentives and construction of the new plants envisioned would only marginally increase domestic coal demand in the near term, the affect on Wall Street's perspective could be greater.

Peabody CEO Gregory Boyce told an industry conference two years ago that if its coal reserves were converted into CTL fuels, their value would increase ten-fold. While that scenario is only illustrative, the combination of pro-CTL policy action in Congress and continuing uncertainty in oil markets could well lead Wall Street to revalue more dearly the coal reserves of producers like Peabody, Arch Coal(ACI Quote), Foundation Coal(FCL Quote) and Consol Energy(CNX Quote).

Near-Term International

China and India's relentless growth in energy consumption, anxiety about energy security and proximity to substantial coal reserves give CTL a rosy near-term future abroad.

China's 2006 imports of approximately 163 million tons of oil are expected to rise to 200 million tons by 2010. In response, the country has begun to move aggressively into CTL with about $25 billion worth of CTL investments in the pipeline. Beyond predicted economic savings, CTL provides China strategically valuable domestic capacity in the event of an import disruption, as could occur if it came to blows with the U.S. over the Taiwan Straits.

South Africa's Sasol(SSL Quote) is the vehicle to capitalize on this opportunity. Sasol developed next-generation CTL technology and industrial-scale production experience during the apartheid embargo. It is moving forcefully into China where it is building two CTL plants in Ningxia and Shaanxi to the tune of over $10 billion. Moreover, its Gas-to-Liquid (GTL) business, with production plants in Nigeria and Qatar, provides a complement to its CTL portfolio.

Long-Term Global

To handicap CTL's long term prospects, follow U.S. leadership on climate change. If the U.S. successfully throws its weight behind worldwide mandatory emissions caps, CTL's future will probably resemble its past -- a last-resort for the politically isolated. If it does not, CTL's future looks bright.

Rising oil demand, flat production capacity and growing concern over political instability in producer states means high oil prices. Add to this the economic and security advantages of domestic energy and the value proposition should prove irresistible to China, India and other developing nations with significant coal reserves.

In the face of these considerations, only mandatory greenhouse gas emissions caps will change the investment equation, either through outright prohibition or the added expense of purchasing carbon credits. However, these developing countries will not impose caps on their own because the benefits of CTL are immediate and local while its environmental costs are diffuse and long term.

Indeed, just before this month's G-8 Summit, both China and India stated that addressing global warming cannot come at the expense of economic development and declared their opposition to mandatory caps on greenhouse emissions.

Only the U.S. has the political leverage to try to curb the greenhouse gas emissions of the three biggest potential CTL producers -- China, India and itself. Although it may seem like another age, only 10 years ago the U.S. led world negotiations on the Kyoto Climate Change Protocol that provided the first mandatory greenhouse emissions caps. If the U.S. seized leadership of the issue again and applied its political, economic and diplomatic capital in concert with Europe and allied developing nations, it stands a real chance of striking a new global greenhouse emissions agreement that would include China and India.

So keep your eye on Washington. If we elect a president and Congress in 2008 that aggressively pursue greenhouse emissions caps, then CTL's prospects may dim. If we do not, get out your sunscreen and go long on CTL.

To see Keith Lieberthal discuss this issue, check out the following videos:

Liquid Coal's Promise and Pitfalls

U.S. Pols Pose a Hurdle

Liquid Coal's Future Is Brightest Overseas

Greens Will Decide Liquid Coal's Fate