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The Cost of Synthetic Fuels in Relation to Oil Prices-Revisited

... you can catch phenomena in a logical or in a mathematical box. The logical box is coarse but strong. The mathematical box is fine grained but flimsy. The mathematical box is a beautiful way of wrapping up a problem, but it will not hold the phenomena unless they have been caught in a logical box to begin with.In the beginning we generally believed that if the price of conventional oil continued to increase, at some point the price of synthetic fuels would become competitive. But in March 1981 we learned from a report prepared for the 97th Congress (Congressional Research Service, 1981) that the costs of synthetic fuels are driven by the cost of oil: even if oil were to reach $100 per barrel, synthetic fuels would still be more expensive! 2 Finally we knew that synthetic fuels could never be justified on an economic basis. The additional knowledge gained from the work (to wit, that interest rates could be predicted with a high degree of confidence on the basis of oil prices alone) was merely incidental.

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Energy Specializations: Petroleum – Markets and Prices for Crude Oil and Products; Unconventional Fossil Resources –Synfuels; Unconventional Fossil Resources – Oil and Liquids

JEL Codes:
L13 - Oligopoly and Other Imperfect Markets
Q42 - Alternative Energy Sources

Keywords: Oil prices, Synthetic fuel, Conventional oil

DOI: 10.5547/ISSN0195-6574-EJ-Vol5-No3-10

Published in Volume 5, Number 3 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.