In December 1972, the prestigious National Petroleum Council reported that if it became necessary to make synthetic oil from the nation's shale reserves, the selling price would be about $8.29 a barrel, including shipping costs. If the synthetic crude oil were made from coal, the NPC estimated the cost at $7.75 to $8.25 a barrel.
The price of imported crude oil at that time was less than $3.50 a barrel.
Today, as a result of price-setting by the Organization of Petroleum Exporting Countries, crude is selling for $16 to $18 a barrel - and increases of $3 to $4 a barrel are expected to be forthcoming. Spot prices have hit $30 a barrel. Even allowing for inflation since 1972, the NPC estimates for synthetic crude don't match the current import price.
"You would think that as the market price of natural petroleum went up," said one Canadian expert, "the price of synthetics would become attractive" and U.S. companies would begin producing synthetic crude.
It hasn't happened that way.
Instead, "Every time the OPEC price goes up," said Harvard economist Hendrick Houthakker, a member of the Council of Economic Advisers during the Nixon administration, "the price of synthetics goes up with it."
Since the 1972 NPC report, the oil industry has repeatedly raised its cost estimates for producing synthetic crudes - syncrudes - on a large scale. No matter how high the OPEC price, the projected costs of shale oil and liquid crude from coal have always managed to jimped a few dollars higher.
Today, industry is talking $20 to $35 a barrel for syncrude, a price increase of $250 to 400 percent, compared to a cost of living increase of about 80 percent since 1970. Oil companies say it is still more profitable to look for conventional oil than to produce synthetic crude and that new technical and environmental problems on synthetics are being discovered all the time.
As a result, there still isn't a single major synthetic crude plant in the United States and none is under construction. And the oil industry has spent paltry amounts on research and development in synthetics.
Synthetics production doesn't require extremely exotic techniques: extraction of oil from shale by heating the marlstone rock to about 900 degrees has been accomplished here and in other countries. During World War II, Germany produced 100,000 barrels a day of airplane gasoline made from coal - a technique copied by South Africa's SASOL I plant, which is now being enlarged.
The remarkable climb in the projected cost of synthetics since 1972 raises questions: Have estimates delibrately been inflated by industry (and as a result by U.S. agencies depending on the industry for information) because it doesn't want to invest in costly conversion plants when there is plenty of profitable liquid oil in the world? Do they fear that the relatively cheap production of syncrude would force a ceiling on the price of imported and domestic conventional crude?
A synthetics expert at the House Commerce Committee suspects this may be the case. The leap in the estimated synthetics price, the expert said, could reflect the fact that "the industry is not particularly interested in bringing it on" because "they've got plenty of" existing conventional sources "and they're making plenty of money. . . . I think as the OPEC price went up, they continued to up their synthetics estimates without a particularly close look."
It's interesting to trace the parallel course of skyrocketing OPEC prices and syncrude calculations.
In mid-1973, when the price of conventional crude was still about $3.50 a barrel, Massachussetts Institute of Technology President Jerome B. Wiesner told a House hearing that oil from shale could be produced for $4.50 a barrel in constant dollars (a price not adjusted for inflation) - even lower than the NPC estimates.
On June 22, 1973, Charles DiBona, now head of the American Petroleum Institute but then the president's energy adviser, estimated a price of $5.50 to $7 a barrel.
Then, at the end of 1973, came the Arab oil embargo, and the OPEC price rises started.
At first there was little corresponding increase in the estimated cost of syncrude.
Early in 1974, Deputy Energy Administrator John Sawhill gave the same $5.50-to- $7 estimate that DiBona had given a half-year earlier. The National Academy of Engineering said oil from shale would cost $6 to $8 a barrel (using the richest shales) and crude produced from coal liquefaction perhaps $8 to $9 a barrel.
A navy study predicted that the price of imported crude would rise to $13.60 a barrel by 1977 (impressively hitting the ultimate figure almost on the nose), but that oil from shale might be produced for $8.77 a barrel, and synthetic crude from coal for about twice that.
The Federal Energy Administration's November 1974 "Project Independence" report speculated that the world price for crude might drop back to $7 or so a barrel. Because of uncertainly over prices, it calculated the profitability of shale and coal syncrude on the assumption that in 1985, the market price of oil might be either $7 a barrel or $11 (both in 1974 dollars.)
It concluded that synthetics would be only "marginally economic" $7 a barrel but "at $11 they are economic."
By 1975, however, the estimated costs for synthetics caught up with OPEC prices and began surpassing them. The OPEC import price was around $13.
The Oil Shale Corp. (TOSCO) told a Housing hearing that if it could get funding it could produce oil competing with "today's price for Middle East sweet [low-sulfur] crude landed in U.S. ports . . . for $13.15 a barrel." A government task force estimated the cost of oil from shale (in 1975 dollars) at $10 to $13 and syncrude from coal at $19 to $26 a barrel. Standard of California put the figures at $17 for shale oil and $30 for syncrude from coal.
Today, the estimated costs are comfortably beyond the $16 to $18 price of world market OPEC oil. The department of Energy is now talking $22 to $25 a barrel for oil from shale, and for synthetic crude from coal, in the upper $20's.
What accounts for this amazing upward flight of the estimated costs of producing syncrude, paralleling the upward flight of OPEC cartel prices and far outstripping the general rise in the cost of living?
One explanation is that the oil and coal industries clearly haven't pressed too hard on research and other spending to make the technological break throughs that would assure low production costs for syncrude.
A Census Bureau study for the National Science Foundation shows total spending in 1978 by U.S. industries to research and develop syncrude production was $23 million for shale and $178 million for coal, including some government subsidies.
Department of Energy sources say these figures may be understated because some of the research and development costs may be tucked away in other accounts.
But even if the figures were doubled, they are peanuts compared with the $7.8 billion the Census Bureau calculates the oil industry spent in 1977 exploring for conventional sources of oil and gas in the United States and surrounding waters.
The U.S. government isn't doing all that much either. President Carter's request for all syncrude projects for fiscal 1980 is about $285 million - $70 million less than fiscal 1979. DOE spokesmen say several projects flopped and one is to be funded from the oil windfall profits tax. Some consider this a strange posture in an administration with apparently deep concern for the nation's energy problems.
Another explanation of the rocketing cost estimates on syncrude - one widely shared by respected engineers and economists - is that many of the optimistic earlier projections really were based on inadequate engineering and economic studies, and those projections couldn't take into account the pressure of inflation, especially in construction costs.
Harry Perry, a chemical engineer who was coal research director of the U.S. Bureau of Mines and is now with Resources for the Future, said that inflation, added environmental cleanup requirements, higher capital costs, and exhaustive engineering studies that uncover unforeseen problems are what account for the big boosts.
"The closer you get to building the plant the more you take a real hard look on the ground and the more the costs go up," he said.
Also the costs of heavy construction, coal and borrowing money have risen rapidly.
Perry; Dr. Robert Stobaugh, director of Harvard Business School's energy project, and many others stressed that until plants are actually built, first a small one, then a goodsized one, all the problems and costs can't be known.
Still another factor is that oil companies fear they will plunk down huge amounts of money - $1 billion to $2 billion for 50,000-to 75,000-barrels-a-day commercial-sized plants to convert shale or coal into crude at $20 to $30 a barrel - then see the Saudis cut the guts out of the market by lowering the price for conventional crude.
"Keep in mind any time the Saudis want to they can break the bank," said Dr. Larry Goldmuntz, a consultant and science planner.
To counter this fear, a House Banking Committee bill authorizes $2 billion in subsidies to cover losses if the market drops below certain target prices.
There also is the inertia factor: the oil and coal companies are accustomed to producing conventional forms of fossil fuels. The oil industry is making money. Why go into expensive new technologies?
"The mentality of the oil companies is to drill," said a Fluor executive. An Exxon executive said recently that the decision not to undertake certain projects "is purely economic": right now oil companies can make more money by drilling for new oil.
Meanwhile, however, several companies are moving cautiously into syncrude. Occidental, which has taken over one of the oil shale tracts leased from the government in the West, is experimenting with an underground ("in situ") shale method that would avoid some environmental problems and produce oil for sale at a price, after upgrading and shipping, of $19 to $24 a barrel. With a proposed tax credit on shale sought by DOE, this could translate to oil at about $14 to $20 a barrel - a price competitive in the world market.
Union Oil is going ahead with a $130 million, 9,000-barrel-a-day pilot plant. And Exxon and Shell, fairly bullish on Canadian tar sands, are negotiating for big plants (100,000 barrels a day or so) that will cost $5 billion and $4 billion, respectively.
Former Rep. Charles Brown, then respresenting TOSCO, warned Congress a few years ago that big oil was unlikely to invest much in syncrude production until it had sucked most of the easy conventional crude out of all the nooks and crannies of the earth.
"Major oil companies are generating substantial internal capital and have AAA credit," he said, "but drilling for conventional petroleum is their primary business, and it has priority claim on their capital. They say, quite frankly, that synthetics must come later, after Alaska, after the North Sea and after offshore drilling of petroleum."
Companies like Union, Occidental and the Canadian tar sand venturers insist that they are serious and will go ahead.
As soon as the tax credit is passed, said Union's Tom Hairston, "you will see very fast whether we'll start pouring concrete." CAPTION: Graph 1, Rising Costs of Synthetic Fuel, The Washington Post; Graph 2, The Escalating Price of Shale Oil, By Alice Kresse - The Washington Post