The Gas Price Roller-Coaster: It’s Not an Amusement Park Ride

President-elect Obama took office less than a week ago. While many are watching closely to see how he handles the ongoing financial crisis, I’ll be equally interested to see how he handles a far more ominous one: our ongoing energy and infrastructure crisis.

Regular readers know I believe energy and infrastructure are inextricably combined. We need cheap energy to fuel sustained economic growth. And we need infrastructure in place to move and dispense the energy from its source to its destination. Today I’m going to give you a perfect example of how the two are intertwined, and how one can play off the other to create a positive benefit for all.

In the face of gas prices that are less than half of what they were only a few months ago, it’s easy to think the 'oil crisis' has passed. We can all return to “business and life as usual” -- revert to our old driving habits -- and just pay the lower price at the pump, right?

That would be a huge mistake. The real price we’ll pay will be our continued dependence on foreign oil. Last year, U.S. consumers and businesses spent over $475 billion hard-earned dollars for it. With today’s lower prices forcing the cancellation or postponement of exploration projects around the world -- and OPEC threatening more cuts -- higher prices are just around the corner.

Just imagine for a minute, if – year after year – we took that nearly half a trillion dollars and reinvested it here. We’d have a stronger dollar, less susceptibility to economic downturns and recessions, and perhaps even a trade surplus as opposed to a trade deficit.

Well there’s one state that’s doing just that, setting an example the rest of the country should follow. As a result of their efforts, a growing percentage of money spent on auto fuel stays here. And car sales there are on fire. You see, these cars don’t burn gasoline. They run on a much cleaner fuel, one that’s found in abundance right here in the United States: natural gas.

We’re behind the natural gas as a fuel for cars curve, however. Worldwide, there are about 8 million vehicles operating on natural gas. Here in the U.S. we only have 116,000. But Utah, with its estimated 6,000 vehicles, is breaking new ground. Even Utah’s Governor Jon Huntsman Jr. converted his state S.U.V. to run on the clean burning fuel.

Why So Popular in Utah?

One word: cost. Natural gas prices at the pump in Utah are controlled, and are the cheapest in the nation, at the equivalent of roughly 85 cents-a-gallon. The other big advantage Utah has is the infrastructure to fill the cars. It’s fairly scarce in most other areas of the country.

And while natural gas is widely used in Europe at the consumer level, here its use is relegated to a few fleet vehicles. At the consumer level, it’s the classic Catch-22 situation. Carmakers – with Honda as the only notable exception – aren’t willing to make natural gas powered cars with so few filling stations available.

On the other side, filling stations don’t want to fork over the money to install expensive equipment to compress the gas, something that’s required in order to fill the tank on the car.

As is often the case, government intervention in the form of tax incentives or financing will go a long way towards breaking the logjam. California is leading the way, with legislation that offers a minimum $2,000 rebate to buyers of natural gas fueled cars.

Congress has legislation it will be considering this year that offers tax credits to consumers and producers alike, and mandates to install pumps at service stations across the country. The goal? Have the nation’s consumer fleet 10% powered by natural gas within 10 years.

Energy & Infrastructure Plays with a Natural Gas Bent

U.S. natural gas production remained stagnant for nearly nine years, and then in 2007, abruptly increased 9%. Improved drilling technology accounts for a large portion of the increase. Horizontal drilling and fracturing is fast becoming the preferred method of producing gas from difficult geological formations like shale.

And there’s plenty of it: big shale deposits include the Marcellus, Bakken, Haynesville, Barnett, and Woodford. Navigant Consulting, an industry consultant, estimates natural gas production can be ramped at least 50% to 30 trillion cubic feet per year between now and 2020, if necessary.

A simple way to play the gas game is to bet on one of the big producers, like Chesapeake Energy (CHK), Anadarko Petroleum (APC), or BP, PLC.

One the gas is brought to the surface, it has to be distributed through our nation’s pipeline network. It’s currently being expanded at a rapid rate to meet growing gas demand, primarily from utility customers. Kinder Morgan (KMP), El Paso (EP), and Williams (WMB) are three of the largest natural gas pipeline infrastructure companies in the U.S.

In summary, natural gas-burning vehicles represent a clean alternative to fossil fuels, and a good bridging solution until improved batteries enable meaningful numbers of plug-in electric hybrids. All the companies mention stand to score big if a serious natural gas auto mandate gets underway. And we’ll all be the better off for it.

Disclosure: None

Comments

[Donald Johnson:]

I guess I'm very skeptical. The other day I saw an analysis that said an investment in the electricity grid would reduce demand for natural gas by 10%.

The last thing we want is for politicians to pick the winners and losers in the energy and auto markets, because they make huge bets that often turn out very badly.

To me, the article is promoting long-term trends that cannot be used by investors. Smart traders deal with reality, not with wish lists.

Jan 27 10:13 AM

[Ozarker:]

Natural gas powered vehicles are the "greenest" cars on the road and they are the only immediate answer for energy independence within a 10 year time frame. We need to start promoting their use.

Jan 27 10:30 AM

[thinking ahead:]

Good article and some interesting information about Utah. I like the NG investment options even without the move to NG cars. Of the two types you mention I own more of the MLP's because of their very high dividend rates and steady earnings. Instead of CHK stock I like their convertible bonds. In both cases I'm willing to trade big upside for modest (10%+) upside and less volatility.

Jan 27 04:31 PM

[E Thomas St.:]

Obama is no longer "President-Elect". He is simply President.

Jan 27 04:45 PM

[skiin_da_trees:]

Ozarker makes a very important point. Wind and Solar can only take us so far. But it can free up Nat Gas from generating Electricity and make it available for running our vehicles. We are the Saudi Arabia of Natural Gas, it's cleaner burning and we can bring it to market cheaper. Ford, Chevy, & Honda already make Nat Gas models that they sell in other countries. View the Picken Plan,,, Natural Gas is our best option to drastically reduce our dependence on foreign oil. As T.Boone Pickens says, "Nearly 20% of every barrel of oil we import is used by 18-wheelers moving goods burning imported diesel. An over-the-road truck cannot be moved using current battery technology." But we can on Nat Gas.

All we have to do is build the infrastructure. We can create jobs, stimulate the economy, become energy independent,reduce greenhouse gases, and possibly save our suffering automobile industry. It's an all of the above solution but Nat Gas has to be part of the puzzle, at least until technology can catch up to our needs. View the Pickens Plan!!!!

Jan 27 04:46 PM

[APB:]

Let me say that I work for a gas and electric utility and I drove a dual fuel vehicle for several years. It ran on gasoline or natural gas at the flip of a switch. It worked fine.

Unfortunately, the author assumes that natural gas producers, i.e. exploration and production companies, are going to take on the considerable risk needed to produce the natural gas needed to meet these goals on the cheap! Natural gas is way too cheap in the USA. Producers need the option to tap foriegn markets by exporting LNG and bring the price of natural gas in line with world wide prices. This is the only way natural gas will help our trade deficit. The USA DOES NOT BURN OIL TO PRODUCE ELECTRICITY!!!! Nit wits like BO like to trumpet this BS, and the public believes him...Natural gas is way too cheap for E&P companies to justify busting hump to increase production.

There is a major flaw in this article as well as in the general populations knowlegde. The USA does not depend on foreign oil to generate electricity. The media and Obama seem to be willing to perpetuate this misperception.

Jan 28 12:08 PM

[2222:]

The other big flaw in the article is that burning natural gas does not significantly reduce green house gas emissions. From Los Alamos National Lab report it makes way more sense to turn NG into hydrogen and use it in fuel cells to get a 60% reduction. Thats where your real clean fuel pathway lies. We can't afford to change the infrastructure twice, lets go to hydrogen and get on with it already. How much did T Boone pay you for this article?

Feb 06 11:16 AM

[PeteK:]

So many people misunderstood the use of Natural Gas.
Before anything is invented, what else do we have ?
We are paying so much money to those oil nations, which mostly are unfriendly to us, why not use our own resources and at the same time develope other ways of energy. At least Natural Gas is cleaner than oil or coal.
There won't be any Nuclear energy allowed by most states and the Greenies. Solar & Wind are too expensive and almost impossible to get public support.
Politics shouldn't be an obsticle in this urgent matter.

Mar 12 10:12 PM

[PeteK:]

2222;
You want to reduce the green house effect ?
Then don't cook your food, eat them raw.

Mar 12 10:14 PM