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Thanks for the Cheap Gas, Mr. Hitler! How Nazi Germany and apartheid South Africa perfected one of the world's most exciting new fuel sources.

By Daniel Gross
Posted Monday, Oct. 23, 2006, at 3:30 PM ET

When it comes to racial policies, it may be somewhat hyperbolic to say that the apartheid regime that came into power in South Africa in 1948 picked up where the Nazis left off. It's not at all hyperbolic to observe that the apartheid regime picked up where the Nazis left off when it came to producing gasoline from coal. Nazism, apartheid, and international sanctions created a fuel source that might never have existed in a better world.

The circuitous travels of the Fischer-Tropsch process, a chemical technique to convert natural gas and coal into liquid fuels, provide an object lesson in historical irony. Used by the Nazis to make oil from coal during World War II, it was commercialized by the century's second-most-odious racial supremacist regime in the 1950s through South Africa's state energy company. Now, that privatized company, Sasol, may help liberate Western democracies (and non-Western ones, like India) from the grip of crude oil produced largely by loathsome authoritarian regimes.

Sasol is the ExxonMobil of South Africa, though its annual sales of about $10 billion are around what Exxon Mobil does in about 10 days. With 30,000 employees, including the largest number of Ph.D.s of any company in the Southern Hemisphere, Sasol is one of South Africa's largest employers. It produces about 38 percent of South Africa's fuel needs and accounts for about 4.4 percent of the country's GDP.

The process that Sasol uses to turn coal or natural gas into liquid fuels was first developed by two chemists working in Germany in the 1920s: Franz Fischer and Hans Tropsch. The two men died in the 1930s. But their invention was used by the Nazis to fuel the Wehrmacht and the Luftwaffe. After World War II, the vast oil fields of Arabia made it uneconomic for most free nations to pursue the technology. But South Africa, which had plenty of coal but little petroleum, wasn't a free nation. In 1948, the newly elected National Party regime formally instituted apartheid. Two years later, it created Sasol. Aside from mining and manufacturing chemicals, Sasol set out to develop a domestic gasoline-production capability, a goal that became more urgent when many oil-producing nations refused to sell oil to the apartheid regime. In the late 1970s, using government loans, the firm built a huge complex at Secunda, where it has produced some 1.5 billion gallons of gasoline that is functionally no different than the gas produced from Texas crude.

Since the end of apartheid, Sasol has prospered, finding new markets and customers outside its borders. But with the spike in oil prices of the last few years, it has really caught fire. (Note this five-year chart of Sasol, whose shares were listed on the New York Stock Exchange in 2003, against ExxonMobil.) And that has much to do with the company's technological promise.

Transportation, which accounts for about 40 percent of the world's energy use, relies overwhelmingly on liquid fuels produced from oil. But oil supplies are (a) controlled by regimes that are politically unstable and frequently hostile to the United States and (b) in danger of depletion. Meanwhile, the world is blessed with vast reserves of natural gas and, particularly, coal, that reside under soil that is more congenial to democracy. The United States, for example, is the Saudi Arabia of coal, with 200-plus years of reserves. And some Americans, among them Montana Gov. Brian Schweitzer, believe that coal-to-fuels technology has the potential to make the United States energy independent (and his constituents rich).

But Sasol may have difficulty getting off the ground in the United States for some of the same reasons it has had so much success in its home market: government incentives and low costs. As a favored company in apartheid-era South Africa, Sasol enjoyed cheap credit, land, and labor. Regardless of the global market price of oil, it found a ready market for its products. Today, the privatized firm continues to make profits off of earlier investments and still enjoys significant cost advantages operating in South Africa. But it must compete against global oil producers. And even with oil near $60 a barrel, the extra expenses involved in the Fischer-Tropsch process don't make aggressive expansion a no-brainer. Sasol's first international joint venture, a factory in Qatar that turns natural gas into liquid fuel, cost $1 billion, or about $30,000 per barrel of capacity. According to Sasol CEO Pat Davies, that's twice as much as a more conventional oil refinery costs.

Without the sort of special government assistance that it received as it grew, Sasol faces a challenge. In theory, producing synthetic fuels should be profitable in the United States if oil prices remain near their current levels. But big energy companies—in the United States and abroad—won't brave new technologies without government subsidy. "We can't go forward until incentives are in place," said Davies. In the U.S. market, he notes, ethanol receives a 51-cents-per-gallon subsidy. (Here's a helpful Sasol presentation on the U.S. market.)

Sasol's smooth-talking CEO is in something of a tricky spot. Meeting with a group of visiting American and European journalists, he practically apologizes for Sasol's massive earnings: "We're just a little company stuck on the bottom of Africa." And he says the right things about South Africa's transformation. "We can't deny that we were part of a regime that was not just and fair. We acknowledge that, are not happy about that. But we move on." But Sasol hasn't been seen as particularly cooperative when it comes to facilitating black ownership. And given South Africa's chronic underinvestment in public infrastructure, management rightly fears the imposition of a windfall tax. Indeed, the firm that built its competitive advantage during the apartheid years is clearly concerned that it may be asked to help pick up the cost of atoning for the country's sins—which could make it harder for Sasol to bring its snazzy technology, incubated in Hitler's Germany and Botha's South Africa, to the United States.

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Daniel Gross visited South Africa on a study tour sponsored by the German Marshall Fund of the United States.
Photograph of Adolf Hilter on Slate's home page by Muzej Revolucije Narodnosti Jugoslavije/USHMM. Courtesy Revolucije Narodnosti Jugoslavije.
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Remarks from the Fray:

If this technology takes off, that will truly bring global warming to the brink. Our real global warming issue is the total amount of carbon that we release into the atmosphere. Right now we are limited largely by the amount of oil we can pull out of the ground. Decreasing reserves have the benefit of driving up prices and making alternative fuels more competitive. Our biggest ally against global warming is limited access to fuel. If we figure out how to add coal to the list of "things we burn before we find an alternative", we will be sitting on the beach in Nevada in no time. A car running on coal is the biggest threat to the environment yet, even if it's a Prius.

--sortaSean

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(10/24)

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