EU lawmaker wants a much lower auto CO2 target: report

Global Warming Or No, Coal Will Remain King

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It has been a hot month so far for investors who've backed coal.

Soaring oil prices and global coal shortages have powered the most recent bituminous run-up. Investors saw an additional boost Tuesday when the chief economist for the International Energy Agency said coal will be the world's biggest energy source for the next 25 years.

In addition to providing energy and heat, coal is a key ingredient in steel, polysilicon and cement. It's far cheaper than oil or natural gas and has four times the reserves.

It also is powering Van Eck's Market Vectors Coal (NYSEArca:KOL - News). The exchange traded fund has soared 15% since May 2, when it climbed 5% over one day. The five-month-old fund, the first to follow the global coal industry, tracks the performance of the Stowe Coal Index.

Though it has 63% of its weight in its top 10 holdings, the index includes 40 coal production and transportation companies from 12 countries. All companies in the index have at least 50% of revenue from coal-related activities.

Backbone Of Supply

Many of those companies will provide the backbone of the world's energy supply through 2033, said International Energy Agency chief economist Fatih Birol. The agency is composed of major oil consumers -- including the U.S. and European governments -- who try to keep petroleum markets stable during times of crisis.

Right now, the biggest crisis is in China, where power plants are running out of coal. Many areas of the country now have just a seven-day supply of coal and some have only a three-day supply. A seven-day supply is considered dangerously low. Already, 32 power plants have shut down because they have no fuel.

Chinese Supply

The shortage has several causes. China relies on coal for 70% of its power. In addition to power demands fueled by massive Chinese growth, price controls have kept officials from building up coal supplies. Following the May 12 earthquake, 200 mines in Sichuan province shut down for safety inspections, further cutting the supply.

While the biggest coal demand comes from China and India, it's on the rise in Western nations, too. It provides about 50% of U.S. power, and 50 coal-fired plants are planned in European countries by 2013. The World Coal Institute estimates that about 17% of the world's coal goes to make steel.

Demand could get more voracious in the next few weeks if South Africa decides to limit its coal exports. The country, which is the biggest coal supplier to European electricity companies and the third-largest coal exporter, might limit exports to ease its own power crisis.

Some of the fund's top holdings reflect anticipation of coal's further rise. Massey Energy (NYSE:MEE - News) helped boost the fund Monday when it hit an all-time high of 67, and Peabody Energy (NYSE:BTU - News) hovered around 79 on Tuesday.

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U.S. Military Launches Alternative-Fuel Push Dependence on Oil Seen as Too Risky; B-1 Takes Test Flight
By YOCHI J. DREAZEN

The Wall Street Journal

May 21, 2008; Page A1
WHITE SANDS MISSILE RANGE, N.M. -- With fuel prices soaring, the U.S. military, the country's largest single consumer of oil, is turning into an alternative-fuels pioneer.
In March, Air Force Capt. Rick Fournier flew a B-1 stealth bomber code-named Dark 33 across this sprawling proving ground, to confirm for the first time that a plane could break the sound barrier using synthetic jet fuel. A similar formula -- a blend of half-synthetic and half-conventional petroleum -- has been used in some South African commercial airliners for years, but never in a jet going so fast.

"The hope is that the plane will be blind to the gas," Capt. Fournier said as he gripped the handle controlling the plane's thrusters during the test flight. "But you won't know unless you try."

Synthetic fuel, which can be made from coal or natural gas, is expensive now, but could cost far less than the current price of oil if it's mass-produced.

Just as important, the military is increasingly concerned that its dependence on oil represents a strategic threat. U.S. forces in Iraq alone consume 40,000 barrels of oil a day trucked in from neighboring countries, and would be paralyzed without it. Energy-security advocates warn that terrorist attacks on oil refineries or tankers could cripple military operations around the world. "The endgame is to wean the dependence on foreign oil," says Air Force Assistant Secretary William Anderson.

Some Pentagon officers have embraced planning around the "peak oil" theory, which holds that the world's oil production is about to plateau due to shrinking resources and limited investment in many of the most oil-rich regions of the Middle East. Earlier this year, they brought Houston investment banker Matthew Simmons to the Pentagon for a presentation on peak oil; he warned that under the theory, "energy security becomes an oxymoron." House Democrats have proposed creating a new Defense Department position to manage the military's overall energy needs.

Alternative fuels are part of a broader -- and not so long ago unlikely -- conversion by the military to "green" initiatives. Producing synthetic fuel itself can cause more pollution than conventional fuel if the emissions aren't captured. But Army engineers also are pushing contractors to build armored vehicles with hybrid engines. The Air Force is experimenting with making engine parts out of lighter metals such as titanium to boost fuel efficiency.

In December, Nellis Air Force Base near Las Vegas opened one of the largest solar arrays in the U.S., a 140-acre field of 72,000 motorized panels that powers the base and sells energy to nearby communities. The Pentagon is soliciting bids for three similar arrays on other bases. The military even has begun looking into the possibility of building small nuclear-power plants on unused portions of its more remote bases, though it has no firm plans yet.

The Pentagon is hoping its push for alternative energy will feed civilian applications as well. For synthetic fuel, the Air Force is working with aircraft manufacturers such as Boeing Corp. and the Pratt & Whitney engine unit of United Technologies Corp. North American synthetic-fuel processors including Rentech Inc., Baard Energy and Syntroleum Corp. all operate or hope to build synthetic-fuel refineries to feed the military's growing thirst.

"Our goal is to drive the development of a market here in the U.S.," says Mr. Anderson.

Military use of synthetic fuel faces significant obstacles. The energy bill signed into law by President Bush last year included a clause preventing the government from buying the fuel if it emits more pollution than petroleum. Manufacturers have promised to meet that target by recapturing carbon dioxide and other greenhouse gasses produced in refining. Without those efforts, synthetic fuel can emit up to twice as much pollution in refining as conventional petroleum.
Prices' Impact Synthetic-fuel prices also need to fall: Formerly stratospheric, they're still about 50% above the soaring prices for petroleum. That should happen if companies can begin operating commercial-scale refineries, says David Berg, a policy analyst who studied the nascent synthetic-fuel market for the Energy Department in December. He estimated that commercial-scale synthetic-fuel refineries would be able to sell artificial fuel for approximately $55 a barrel, less than half the current cost of conventional crude oil.
But many in the field say they're unwilling to invest the necessary billions until they can sign long-term contracts with the government. Right now, the Air Force legally can sign deals only for five years. It has asked the White House's Office of Management and Budget to seek congressional approval for the rule change, but the Bush administration has yet to act on the request, Mr. Anderson says.
"These plants are not likely to get built without government help" such as guaranteed long-term contracts, says Mr. Berg, who recently retired. "And they may not get built even then."

The problems are particularly acute for the Air Force, which uses about 2.6 billion gallons of jet fuel a year, or 10% of the entire domestic market in aviation fuel. The Air Force's fuel costs neared $6 billion last year, up from $2 billion in 2003, even as its consumption fell by more than 10% over the same period because of energy-savings measures, including a campaign to shut off lights and lower thermostats at bases.

The Air Force launched its artificial-fuel initiative in the spring of 2006. Testifying before the Senate that March, Air Force Secretary Michael Wynne told lawmakers that "we realize our reliance on petroleum-based fuels must be curtailed." The Air Force gave a small team at its Wright-Patterson base near Dayton, Ohio, the mission of finding a synthetic fuel capable of powering all of the service's fighters, bombers and other planes.

Despite its high-tech connotations, synthetic fuel -- often dubbed "synfuel" for short within the industry -- has been around for decades. The basic technology for transforming coal or natural gas into synthetic fuel was invented by a pair of German researchers, Franz Fischer and Hans Tropsch, in the 1920s. The Nazis later used the Fischer-Tropsch process to mass-produce synthetic diesel fuel. During the apartheid-era embargo against South Africa, scientists there tweaked the technology so it could also produce synthetic jet fuel.

The Fischer-Tropsch process transforms a synthetic gas derived from coal or other material into liquid gas. The resulting synthetic fuel is different from biofuel, commonly produced from corn, sugar or other plants. Continental Airlines Inc. has announced plans for an experimental flight using biofuel this spring, which would be the first by a U.S. carrier; Virgin Atlantic also has done some testing.

The Wright-Patterson team oversaw experiments on a wide array of synthetic fuels, but quickly settled on a 50-50 blend of conventional jet fuel -- known as JP-8 -- and artificial fuel made using the Fischer-Tropsch process. That mixture is used in South Africa, where Johannesburg-based Sasol Ltd. is one of the world's biggest synthetic-fuel producers. Air Force officials decided it was the safest combination.

B-52 Bomber Test

In June 2006, the Air Force agreed to buy 100,000 gallons of artificial fuel from U.S.-based Syntroleum to mix with petroleum for testing. The next month, military engineers bolted an engine from a B-52 bomber to a table at Tinker Air Force base in Oklahoma and ran it for 50 consecutive hours to see how it would perform on the synthetic blend. Engineers detected no differences from conventional fuel.

The Air Force began conducting test flights. In September 2006, a B-52 took off from Edwards Air Force Base in California with two of its eight engines burning the synthetic-fuel blend, the first time a military aircraft had flown on artificial fuel. The plane's performance was the same as if it had flown on conventional fuel, and the Air Force decided to push ahead.

As the Air Force's experimentation increased, so did the involvement of the private sector. Military and civilian aircraft share many parts and are often built by the same companies. The military's Boeing C-17 cargo jet, for instance, uses the same Pratt & Whitney engine as a Boeing 757 passenger plane. Pentagon officials are sharing their research into synthetic fuels with such firms to help civilian companies certify their equipment on the synthetic-fuel blend.

At the military's direction, Pratt & Whitney, Rolls-Royce PLC, Honeywell International Inc. and General Electric Co. have agreed to work together to develop joint specifications for how their engines perform on artificial fuels. Last November, engineers from Pratt & Whitney mounted one of the company's C-17 engines in a high-tech pressure chamber at Arnold Air Force Base in Tennessee and simulated a variety of altitudes and weather conditions to gauge the engine's performance. The tests were "enormously uneventful," says Alan Epstein, the company's vice president of technology and environment – an encouraging sign.

But other companies haven't followed suit. Syntroleum shut down the plant that produced the fuel used in the B-52 test flight; it had only been designed to produce small samples for experiments. Rentech is building a new refinery in Colorado, but its plant also is meant to only refine minute samples of synthetic fuel.

"It's a chicken and egg thing: We'll build a larger plant if we can get the money to finance it and find customers willing to buy what it produces," says Rick Penning, Rentech's executive vice president of commercial affairs.

The pure synthetic fuel Syntroleum sold the Air Force for the B-52 test flight in 2006 cost almost $20 a gallon. Its price since has come down sharply, but the synthetic product used in the B-1 supersonic test in March still cost $4.62 a gallon. It was mixed with petroleum fuel costing $3.04 a gallon, according to government officials.

Testing Its Planes
The Air Force plans to finish testing all of its planes on the fuel blend by 2011. Last month, it was time to test artificial fuel on supersonic flights. Air Force officials decided to start with a B-1 bomber, a supersonic plane that has been in service since 1986.

The test flight was assigned to Capt. Fournier and a two-man crew from the 9th Bomber Squadron at Dyess Air Force Base, in Abilene, Texas. The unit's Latin motto, "Mors ab Alto," translates into "Death From Above."

On a clear day in March, the three men took off for New Mexico with a reporter aboard. When the B-1 crossed into the closed airspace above the White Sands Missile Range, Capt. Fournier yanked back his throttle and sent the plane climbing almost straight up, throwing the bomber's occupants back into their seats. He then pitched into a steep dive, Pens and other small objects hovered around the cabin, weightless, until the plane leveled off again. Capt. Fournier fired the plane's afterburners and sent the bomber roaring over the range. A small dial in the cockpit showed that the bomber was flying faster than Mach 1.
Back at Dyess, the crew packed into a small conference room to analyze the flight with a crew of military and civilian officials, including a pair of engineers from GE, which makes the bomber's engines. Capt. Fournier said the plane handled normally at high speeds and on sharp turns. The only difference he noticed was that the synthetic fuel had a different smell than conventional jet fuel. "So it didn't give you the normal buzz?" one of the engineers joked.

With the B-1 certified to fly on the synthetic mix, Maj. Donald Rhymer, the deputy director of the Air Force's alternative-fuels certification office, said the Air Force would soon test fighters such as its workhorse F-16.

"Our biggest litmus test was Capt. Fournier coming out of the B-1 and saying that it was an unremarkable flight," Maj. Rhymer said as the meeting ended. "That's the subjective endorsement we're looking for with all of the planes."

Write to Yochi J. Dreazen at yochi.dreazen@wsj.com1