Modeling the impact of coal‐to‐liquids technologies on China's energy markets
| Pages | 162-177 |
| Published date | 06 June 2008 |
| Date | 06 June 2008 |
| DOI | https://doi.org/10.1108/17544400810884727 |
| Author | Haixiao Huang,Jerald J. Fletcher,Qingyun Sun |
| Subject Matter | Economics |
Modeling the impact of
coal-to-liquids technologies on
China’s energy markets
Haixiao Huang, Jerald J. Fletcher and Qingyun Sun
Natural Resource Analysis Center,
US-China Energy Center and Regional Research Institute,
West Virginia University, Morgantown, West Virginia, USA
Abstract
Purpose – The purpose of the study is to evaluate the impact of China’s current coal-to-liquids (CTL)
activities on its coal and oil markets from 2005 to 2025.
Design/methodology/approach – A partial equilibrium multi-equation model of China’s oil and
coal markets is developed based on data obtained from the existing literature. The impact of CTL
technologies on China’s oil and coal markets is evaluated using computer simulations by solving the
model under scenarios with and without CTL production.
Findings – The simulation results show that on average, the planned CTL activities will decrease
crude oil prices by 5.73 percent and China’s oil imports by 6.09 percent and increase China’s domestic
oil supply by 9.26 percent over the 20 year period. Also, China’s demand for oil will increase by 0.35
percent on average, suggesting that CTL production will slightly stimulate China’s demand for oil
because of the drop in oil prices. China’s demand for coal will also increase by 1.02 percent because of
the additional demand for coal created by CTL production. Surprisingly, both coal prices and China’s
coal supply will decline by 0.51 percent while the demand for coal and coal supply of the rest of the
world will be reduced by 1.63 percent and 0.28 percent, respectively.
Originality/value – The paper is the first study on the implication of CTL conversion from an
economist’s point of view. It applies an economic model to quantify the impacts of such technology on
overall energy prices and supplies.
Keywords Coal products, Coaltechnology, Oils, Market forces, China
Paper type Research paper
1. Introduction
Coal is the most abundant fossil fuel resource in China and an economically relevant
source of liquid fuels at current energy prices. Coal-to-liquid (CTL) technologies can
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This material is based on work supported by the US Department of Energy (DOE) under Award
Number DE-FC26-06NT42804 and West Virginia University. The authors are grateful to the two
anonymous reviewers for their helpful comments.
This report was prepared as an account of work sponsored by an agency of the United States
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represent that its use would not infringe privately owned rights. Reference herein to any specific
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does not necessarily constitute or imply its endorsement, recommendation, or favoring by the
United States Government or any agency thereof. The views and opinions of authors expressed
herein do not necessarily state or reflect those of the United States Government or any agency
thereof.
JCEFTS
1,2
162
Journal of Chinese Economic and
Foreign Trade Studies
Vol. 1 No. 2, 2008
pp. 162-177
qEmerald Group Publishing Limited
1753-4408
DOI 10.1108/17544400810884727
convert one ton (in metric tons throughout) of coal into about one-half ton of oil
liquids; such production is cost-competitive when oil is priced at around $35 per
barrel or higher (Research Reports International, 2006). In order to moderate its
dramatically increasing dependence on oil imports, China is striving hard at
developing and commercializing various CTL technologies. Currently the Shenhua
Group, one of China’s largest coal producers, is constructing a commercial scale
(20,000 bpd) CTL facility in Inner Mongolia, China. The Shenhua Group has eight
CTL projects scheduled with a production target of four million tons per year
(80,000 bpd) by 2010 and 30 million tons per year (600,000 bpd) of synthetic oil and
products by 2020 (Research Reports International, 2006). In addition Lu’an Group and
Yangkuang Group, also major coal producers in China, have launched a number of
similar CTL development endeavors (Technology & Management Services et al.,
2006). It is estimated that 10 percent of oil imports will have been replaced by
coal-liquefied oil by 2013 (People’s Daily Online, 2005), suggesting that CTL
technologies will exert a profound impact on China’s energy markets. This paper
investigates the implications of CTL technologies for China’s oil and coal demand and
supply over the next 20 years.
Although the world’s first commercial scale CTL production occurred in Germany
in the 1920s and South Africa has been relying on CTL technologies to produce fuels
since the 1950s, there is a general paucity of formal research on the potential impact of
CTL technologies on the energy markets. Previous efforts at commercial CTL
production were technically successful but unable to compete economically with
inexpensive crude oil. Hence they have been limited to wartime Germany and
politically-isolated South Africa. Recent crude oil price hikes have also renovated US
interest in converting coal to liquid fuels and other types of energy to meet its growing
energy needs. Considine (2006) calculated the effect of such massive coal conversion on
US aggregate energy prices by simply dividing the incremental percentage change in
energy supply from coal conversion by an own-price elasticity of demand and
predicted that US energy prices would be 33.3 percent lower than they would be
without coal energy conversion by the year 2025. A methodologically relevant study
by Gallagher and Johnson (1999) investigated the prospective impact of fuels made
from agricultural materials on the North American petroleum market using a multiple
equations model of oil supply and demand. There are also many economic studies on
fuel substitution in the economic literature (Pindyck, 1979; Bacon, 1992; Cho et al.,
2004). Based on either an econometric or engineering approach, these studies have
focused on the impact of energy prices on demand side behavior, i.e. the adjustments in
fuel consumption structure.
In our analysis, we developed a simultaneous equations system of oil and coal
supply and demand to examine the impact of the planned CTL activities on China’s
energy markets. Similar to Gallagher and Johnson (1999) study, our model is a partial
equilibrium framework and the oil supply market is assumed to be oligopolistic; OPEC
is the major supplier pursuing oligopoly pricing. Unlike Gallagher and Johnson, our
model also includes equations describing the supply and demand for coal. T he coal and
oil markets are linked together through interfuel substitution as well as demand and
supply effects resulting from CTL production. Thus, in our system, prices as well as
supply and demand for oil and coal are solved endogenously. The world coal market is
assumed competitive. The impact of CTL technologies on China’s oil and coal markets
The impact of
CTL
technologies
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