You Can't Eat Coal

With the biofuels backlash in full swing, it may be time for coal-to-liquids (CTL) to retake the spotlight. In fact, Sasol (NYSE: SSL) just did exactly that.

At a press conference in China on Friday, the South African energy heavyweight announced that it's moving forward with two coal-to-liquids projects in the country. Sasol is the world's leading maker of synthetic fuel from coal, and its partner in the endeavor is none other than Shenhua Group, China's coal king.

Shenhua is no stranger to coal-to-liquids. The firm has been tweaking its own technology for years in partnership with Headwaters (NYSE: HW). Later this year, Shenhua will fire up the largest CTL plant outside of South Africa. The company is also working with Royal Dutch Shell (NYSE: RDS-A) (NYSE: RDS-B) on another CTL project elsewhere in China.

China is looking to top a quarter million barrels per day of CTL capacity by 2020. While U.S. companies like Arch Coal (NYSE: ACI) are trying to get the ball rolling here at home, there's far less of a focus on CTL today than there was even a year ago. Coal's carbon problem is probably the biggest sticking point, so a breakthrough in carbon capture and storage technology by someone like BP (NYSE: BP) or Chevron (NYSE: CVX) would be crucial for any sustained charge toward coal-derived fuels.

If you agree with me on that point, though, it's not altogether clear that CTL has an advantage over "clean coal" electric generation as a power source for plug-in hybrid electric vehicles. Sure, we already have the infrastructure in place for fuel distribution, but electric generation opens up our fuel supply to a much more diverse array of inputs, be it coal or solar or nuclear. Coal-to-liquids may begin to regain favor as food prices fly, but its rise is far from a fait accompli.

Related Foolishness:

• Sasol has been reporting some slick results.
• My Foolish colleague suggests adding a lump of this coal miner to your portfolio.
• Shenhua is a top holding of this all-coal ETF.