Liquid coal — synthetic fuel produced from coal — could make a big dent in the Defense Department’s energy bill, as it struggles to find alternatives to sky-high crude oil prices.

This from The Wall Street Journal:

With oil’s multi-year ascent showing no signs of stopping — crude futures set another record Tuesday, closing at $129.07 a barrel in New York trading — energy security has emerged as a major concern for the Pentagon.

The U.S. military consumes 340,000 barrels of oil a day, or 1.5% of all of the oil used in the country. The Defense Department’s overall energy bill was $13.6 billion in 2006, the latest figure available — almost 25% higher than the year before. The Air Force’s bill for jet fuel alone has tripled in the past four years. When the White House submitted its latest budget request for the wars in Iraq and Afghanistan, it tacked on a $2 billion surcharge for rising fuel costs.

Synthetic fuel, which can be made from coal or natural gas, is expensive now, but could cost far less than the current price of oil if it’s mass-produced.

The report also reveals that the Pentagon has embraced planning around peak oil theory:

Earlier this year, they brought Houston investment banker Matthew Simmons to the Pentagon for a presentation on peak oil; he warned that under the theory, “energy security becomes an oxymoron.”

“The U.S. will adopt liquid coal (also known as coal to liquid or CTL), because it has to do so,” says Byron King in his Energy and Oil blog.

“There are few other large-scale industrial alternatives. Windmills, biofuels, conservation and every other energy-saving and energy-extending idea will help. But the world we live in is built to run on oil, and nothing else will cut it for some things when it comes to running a fast-transforming economy. So stand by for liquid coal.”