Decision analysis of the
synthetic fuels commercialization program
by STEVEN N. TANI
SRI International
INTRODUCTION
In his State of the Union Message in January 1975, President
Gerald Ford called for the accelerated development of U.S.
energy technology and resources and proposed a compre­
hensive set of energy supply and conservation measures to
reduce U.S. requirements for imported oil. As one of these
measures. the President proposed a federal incentive pro­
gram whose goal would be the commercial production of
one million barrels per day of synthetic fuels by 1985. In
such a program, the Federal Government would provide
suitable financial and regulatory incentives to stimulate pri­
vate sector investment in commercial-scale plants to convert
coal, oil shale, and other relatively abundant domestic re­
sources into clean liquid and gaseous fuels. It was generally
believed that without such incentives, industry would be
unlikely to undertake the large risks of synthetic fuel plant
investments.
The benefits to be achieved by the synthetic fuels program
would be the following:
I. An accelerated accumulation of experience and infor­
mation on the technical. environmental, economic, and
institutional aspects of commercial-scale synthetic fuel
production for better-informed private sector invest­
ment decisions.
2. The development of an industry infrastructure to sup­
port subsequent expansion of the synthetic fuels in­
dustry.
3. Insurance against high world oil prices and against
early depletion of domestic sources of conventional
fuels.
4. Protection against the losses of an oil embargo.
5. Improvement in the U.S. international bargaining po­
sition.
These benefits, however, would be counterbalanced by
the possible costs of subsidizing synthetic fuels relative to
less expensive energy sources such as imported oil and other
domestic resources and by the environmental and socio­
economic costs associated with rapid development of coal
and oil shale reserves.
In response to the President's message, the Interagency
Task Force on Synthetic Fuel Commercialization was
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formed to evaluate the economic and environmental costs
and benefits of the program and to recommend to the Pres­
ident a program of appropriate size and scope. The Task
Force was chaired by the Office of Management and Budget
and included members from the Federal Energy Adminis­
tration, the Environmental Protection Agency, the Depart­
ments of State, Commerce, and Treasury, the Council on
Environmental Quality, and the National Science Founda­
tion. We, in the Decision Analysis Group at Stanford Re­
search Institute (now SRI International), were engaged to
assist the Task Force in conducting an analysis of the pro­
gram.
STRUCTURE OF THE ANALYSIS
The fundamental question addressed by this analysis was
whether the U.S. should have a synthetic fuels commer­
cialization program and, if so. how large the program should
be. The Task Force defined four distinct program alterna­
tives to be evaluated:
I. No Program-No federal funding of synthetic fuels
commercialization but continuation of research and
development.
2. Informational Program-A minimal program designed
primarily to generate technical, environmental, and
economic data on various resource-to-fuel conversion
processes, with synthetic fuel production of about
350,000 b�rrels per day by 1985.
3. Medium Program-A program designed to generate
more complete information on a wider range of pro­
cesses and to meet the President's goal of 1,000.000
barrels per day by 1985.
4. Maximum Program-A program designed to achieve
the greatest amount of synthetic fuel production in 1985
possible without causing major dislocations in the
economy: 1,700,000 barrels per day.
The object of the analysis was to determine which of these
alternatives would be of greatest net benefit to the nation as
a whole, where net benefit includes both economic and non­
economic impacts.
 Nation:,: Computcr Confe:·encc. 1978

We defined four components of nd national benefit for

the ,::va]uati,1n Llf the program altemauv.:s: econ0mic impact PRICE LONG-TERM SUPPLY CURVE
�
on consumers. economic impact on producers, embargo pro­
tection, and environmental and �oci,i-�cunom1c impacts.
To measure the economic impact on ctrnsumers, we uti­
lized the concept of consumer surplu�. Consumer surplus is
the difference between the value of a good to consumers NEGATIVE CONTRIBUTION
TO PRODUCER SURPLUS
and the amount of money they must pay for it. This is shown
graphically in Figure I. The demand curve, by definition, is
the most consumers would pay for each unit of the good, I
which is the value of that unit. If the market price is p. then I

4 units will be purchased. For every unit except the last I

one. the vaiue of the good exceeds the price paid for it. The I
shaded area between the price line ar.d the demand curve POSITIVE CONTRIBUTiON
TO PRODUCER SURPLl}S
represents the total excess value the consumers receive from I
this good; this is called the consumer surplus. I
In the case of the synthetic fuels program, it was felt that
a demonstration that synthetic fuels could be produced q
cheaply. if achieved, would have the effect of holding down SYNTHETIC
FUEL
the price of imported oil. The resulting increase in consumer CAPACITY
surplus would then be credited as a positive benefit of the QUANTITY
program. Figure 2-Producer surplus
To measure the impact on producers, we used a concept
analogous to that of consumer surplus-producer surplus.
This is the difference between the amount producers receive
for a good and their marginal cost of producing it. Clearly, and the supply curve is equal to the total producer surplus
producer surplus is directly related to the idea of profitabil­ for that good.
ity, Figure 2 shows producer surplus graphically. The supply We assumed in this analysis that synthetic fuel would be
curve represents the marginal cost of producing each unit of a substitute for imported oil. Therefore, if the cost of the
the good, which is the least amounc of money the producers synthetic fuels turned out to be less than the cost of imported
would accept for it. The shaded area between the price line oil, the industry would accrue positive producer surplus,
which would be credited to the program as a benefit. How-

SHORT-TERM (EMBAAGOI DEMAND CURVE

E�BAAGO EQUILIBRIUM POINT

CONSUMER SURPLUS

EQUILIBRIUM POINT
LOSS DURING EMBARGO
UJ
u DEMAND CURVE
� p�....::....::...�:...c...L-c..,:;_.:..;:�
a.

Po

AMOUNT OF
EMBARGO

q Qo
QUANTITY QUANTITY
Figure !--Consumer surplus Figure .l--E mbargo loss

438