Question

Researchers at Penn State have developed the means to produce high quality liquid fuels from coal, and are working on scaling up the process to produce commercial quantities at costs that are competitive with oil-derived fuels. At the same time, coal mining technology continues to improve and lower extraction costs. Assume the above initiatives and trends continue, and that there are no other major factors in the coal market, and ignore potential interactions with other markets, etc.: a) What are your expectations for the quantity of coal produced going forward? Explain. b) What about your expectations for the price of coal? Can you say if it will go up or down? Explain. c) Now, consider the crude oil market. If coal-derived liquid fuels displace crude oil in some end-uses, what would you expect to happen to the price of crude oil, all other things being equal? Explain.