(FORTUNE Magazine) – Good news from the oil front. In a recent issue of Science, Robert Lumpkin, the director of coal conversion projects at Amoco, writes that coal can now be liquefied at a cost competitive with crude oil at $35 a barrel and that the price of liquefaction may come down 20% in the next few years. Trouble is, oil now sells for about $16 a barrel. Are we seeing the law of substitute products in effect? You remember Economics 101 and the cup of coffee that costs more than the cup of tea. If the price of tea goes up, some tea drinkers will be driven to . coffee, sending its price up as well. When the price of coffee comes down, tea drinkers will be drawn to the stronger brew, sending tea down. All other things being equal, coffee will always be dearer than tea. This lesson comes to mind with every breakthrough in synthetic fuel production. No matter what the price of oil, synfuels always seem to cost quite a bit more. In the early 1980s, when Saudi light crude hit $31.50 a barrel, liquefied coal rose to $80. In the 1980s technological improvements in the manufacturing processes, with a deflationary assist from lower oil prices, have helped to make synfuels cheaper -- but still not as cheap as oil. Given the ever present gap between oil and synfuel, does it pay to press ahead with research? Yes, says Michael Koleda, president of the Council on Alternate Fuels in Washington. ''Anything that promises to reduce the demand for oil is good to have on the shelf,'' he notes. As synfuel gets less expensive, it caps the price that OPEC can charge for its oil without triggering a flight to substitutes.