"If coal-derived liquids were added to the world oil market, such liquids would cause world oil prices to be lower than what would be the case if they were not produced," says James Bartis, with the Rand Corp., in testimony before the Senate Energy and Natural Resources Committee. If production of such fuel ever reached 6 million barrels per day, he said it would yield a world oil price decline of 6-10 percent.

Coal liquefaction is a technology that takes a solid such as coal and breaks it down to form a fuel oil. To do so, it removes all the toxins such as mercury, sulfur and heavy metals. But, the process does nothing to reduce carbon dioxide (CO2), the emission that is tied to global warming. And in a typical coal-to-liquids plant, about 40 percent of the energy is lost in the conversion process.

South Africa's Sasol Co. is the world's leader when it comes to coal-to-liquids technology. Its plants have been around since 1955 and now produce as much as 150,000 barrels a day of oil from coal. This technology came of age during the Apartheid era when the world had embargoed South Africa and it was forced to come up with new methods to replenish its oil needs. Sasol's three plants meet 40 percent of the oil demand in the country. Sasol, meantime, licenses its technology to Mossgas, which takes natural gas and turns it into liquids -- all as a means to replace crude oil.

Indeed, coal-to-liquids may be within reach in this country. The National Energy Technology Laboratory has studied the feasibility of building a 50,000 barrel per day plant in Illinois. Its report says that at oil prices of $60 a barrel, such a facility could pay for itself in five years and then offer a 20 percent return on investment.

The lab conducted a similar study in the Appalachia region that concludes a stand-alone coal liquefaction plant using gasification technologies would promise at least a 14 percent return on investment, based on $57 per barrel of crude oil. If the plant were to run at full capacity, it would take seven years to recoup the initial investment.

Prevailing Technologies

The most prevalent technology is the Fischer-Tropsch process. Basically, that involves turning the coal into a syngas before converting it to a liquid at high temperatures. General Electric, Rentech, DKRW Energy and Arch Coal are all combining their resources and knowledge to bring projects to market. Those companies want to produce 11,000 barrels a day of low-sulfur diesel fuel out of coal mined in Wyoming.

Denver-based Rentech is upbeat about its coal-to-liquids technology and its prospects: It has signed a handful of memorandum of understandings to develop such plants and it is working on six potential projects in the United States. It says that some of the plants will be up and running by 2010 while some bigger projects, such as one planned for Pennsylvania, will be on line around 2012.

Meantime, China is constructing an 80,000 barrel per day coal-to-liquid facility, and the government there has proposed using as much as 1 million barrels of coal-to-liquid a day by 2020. China Shenhua Energy Co., for example, says that it expects to be producing 20,000 barrels a day by the end of this year.

"Coal is a resource that we have in abundance, and if we develop it wisely and lead the march to new clean coal technology, it will give us the economic potential to compete with the world's emerging economies," says Sen. Pete Domenici, R-N.M., ranking member of the U.S. Senate Committee on Energy and Natural Resources.

To be sure, world oil prices are constantly changing while the technology is expensive and the level of performance unknown. It takes 5-8 years to build a plant. To be practical, the snafus need to be ironed out while the price of oil must remain in the $50-$60 a barrel range during the construction phase if lenders are to get on board.

Beyond that, experts say that the liquid fuel from coal produced using the Fisher-Tropsch process actually results in twice the levels of CO2 than if petroleum is burned by itself. "The impacts that a large coal gasification program could have on global warming pollution, conventional air pollution and environmental damage resulting from the mining, processing and transportation of the coal are substantial," says Antonia Herzog, staff scientist at the Natural Resources Defense Council.

However, technologies are on the horizon that would reduce CO2 emissions. Carbon sequestration and storage is one option. And so is gasifying coal and biomass together. The Princeton Environmental Institute says that a plant that combines co-gasification of switch-grass and coal could potentially be carbon neutral. Meantime, the Rand Corp. says that the federal government could facilitate the development of the early commercial projects by buying down some of the risks.