Natural gas prices are trading at under $4.50 per million BTU despite a fairly cold winter. US natural gas production has increased from around 1,400,000 cubic feet per month in 1985 to over 1,700,000 cubic feet per month in 2008 as new drilling technologies have brought new gas production online from the Barnett, Haynesville, Bakken, and Marcellus shale formations.
In addition to new shale developments in the lower-48, a joint effort by ConocoPhillips (NYSE:COP) and BP called Denali – The Alaska Gas Pipeline, LLC, will deliver 4 billion cubic feet of natural gas daily from Alaska’s North Slope to North American markets. Denali, LLC has recently awarded a contract to Fluor Corp’s (NYSE:FLR) WorleyParsons Arctic Solutions for initial design work on a natural gas-treatment plant needed to process gas in order to feed the pipeline. It would be the largest gas-treatment plant in the world. Gas deliveries could start as soon as 2018. There is a competing pipeline project in which the state of Alaska chose TransCanada (NYSE:TRP) to build. That pipeline would carry 4.5 billion cubic feet of natural gas per day. It should be noted that TransCanada does not produce the Alaskan natural gas that would fill the pipeline. The producers would presumably be ConocoPhillips, BP, and Exxon Mobil (NYSE:XOM). Either pipeline would transport roughly 7% of the nation’s daily natural gas demand.
The North Slope has known reserves of some 35 trillion cubic feet of natural gas. Many geologists and energy experts agree there is much more North Slope natural gas yet to be discovered. Potential natural gas reserves have been estimated at 5 times current proven reserves. Even these estimates could prove conservative given the lack of exploration due to regulatory issues and the lack of an economical delivery system.
A good overview on natural gas recoverable estimates can be found here. Factoring in expected future demand growth, experts estimate the US has enough natural gas supply to last 40-60 years. Some geologists estimate the US has a 90 year supply.
From a US consumption perspective, here is the breakdown for 2007 (data from EIA):
US Natural Gas Consumption by End Use (2007)
(Million Cubic Feet)
Percentage of Total
Lease and Plant Fuel
Pipeline & Distribution Use
Volumes Delivered to Customers
Electric Power Generation
We can see from this chart that roughly 7.9% of US natural gas production is used for lease, plant, and distribution fuel – that is, just producing the natural gas and getting it to market. The percentages shown in the table are based only on the total volumes delivered to end use customers. Electrical power generation and industrial usage are the two biggest consumers of US natural gas and combined use 63% of total supply.
One reason natural gas prices are so low today is because industrial demand simply fell off a cliff toward the end of 2008 as the financial and economic crisis worsened. Residential home heating uses just under one quarter of total end user supply. Interestingly enough, natural gas providers across the country are reporting that, despite a much colder winter than last year, residential home heating demand for natural gas is down year over year. This proves that the economy is indeed affecting middle class American’s spending habits in a very real and chilling way (pun intended).
Highlighted in green is the component of consumption I would like to discuss today. At 0.12% of supply, US demand for “vehicle fuel” to power natural gas transportation can only be described as anemic. For a country that imports 65% of its oil from unfriendly foreign countries like Saudi Arabia (the real 9/11 perpetrators), Russia, Iran, Iraq, and Venezuela one could consider this small usage of natural gas for transportation “criminal neglect”.
Boone Pickens’s website has begun reporting monthly oil import numbers. For January, the US imported 408.7 million barrels of oil at a cost of $17 billion. This amounted to 67% of the total US oil consumption. Annualized, this is over $200 billion US citizens send out of the country every year. Many of those dollars end up in countries that support terrorism. We are truly funding both sides of the “war on terror” by bankrolling a military for oil wars and fighting terrorism while at the same time funding our enemies by buying their oil. The numbers above are for oil at around $40/barrel. Imagine the numbers when oil was $145/barrel. Only a nation of category 5 morons would continue on a path such as this.
Why Isn’t the US Using Natural Gas Vehicles (NGVs)?
Natural gas vehicles in operation worldwide number in the tens of millions. Natural gas fleets for buses, commercial vans, and municipal garbage trucks have been in use around the world and even in many US cities for decades. Frustrated car and truck owners in Utah have made a mini-industry out of converting gasoline powered vehicles over to natural gas. So too are people in Latin America, Asia, and Iran. Natural gas vehicle technology is proven and it is mature. The perception that natural gas technology is “new” is simply not true.
The economics of natural gas are very advantageous. NGV users around the world are currently refueling their NGVs at less than $1/gallon on a gasoline equivalent basis.
So, if natural gas supply is adequate for decades into the future, if NGV technology is proven and mature, if NGV fuel is economical, and if the US is going bankrupt buying foreign oil, then why aren’t Americans using natural gas powered transportation? There are several main reasons:
- Lack of NGV availability
- Lack of natural gas refueling options
- Lack of adoption of a strategic, long-term, comprehensive energy policy
- Lack of adequate political, public, and media support
- Misplaced environmental concerns resulting in a focus on unrealistic alternatives
Let’s examine these issues one at a time.
Lack of NGV Availability
The Honda Civic GX is, so far as I know, the only NGV for sale directly to consumers in the US today. Yet, even this car is only available in California and New York. Toyota’s press release announcing the Toyota Camry natural gas/electric hybrid vehicle was troubling. After listing all the reasons why the car makes sense (high gas prices, lower emissions, foreign oil imports, etc.), the company said it had no plans to produce the vehicle nor make the vehicle available to consumers in the US (!). GM and Ford (NYSE:F) both make natural gas vehicles and sell them in Asia and Latin America. They do not sell them in the US. So, the issue is not one of technical feasibility.
The auto makers cite the lack of natural gas refueling options as an impediment to mass consumer adoption leading to economically viable vehicle volumes. As a result, the price of a Honda Civic GX is about $4k greater than its equivalent gasoline powered counterpart. However, given volume production levels, there is absolutely no reason this price premium cannot be reduced to near zero. That said, my favorite solution, a natural gas electric hybrid vehicle would be slightly more expensive than its gasoline counterpart. That expense would quickly be recouped by much lower fuel costs.
Lack of Natural Gas Refueling Options
Here we have the classic chicken-and-egg problem. Which comes first? NGVs or natural gas refueling stations? The answer is: they both need to become available at the same time with a coordinated energy policy. It is amazing that the US could put a man on the moon yet fail at such a simple problem.
There is currently only one manufacturer of a home natural gas refueling appliance – the “Phill” by Fuelmaker. This device allows overnight fueling in your garage (or outside if you have safety concerns). Not surprisingly, like the Honda Civic GX, the “Phill” is only available in certain states. Like any sole-sourced widget, the price is artificially high due to a lack of competition – it cost around $4k installed to connect to your current natural gas line.
Currently, the “Phill” connected up to a Honda Civic GX, would refuel the car overnight and the driver would have a range of 200 miles the next morning. This model works well for over 90% of the average Americans driving habits. That said, most Americans don’t want to own a vehicle incapable of making longer range trips for vacations, pleasure, or work. Abundant public refueling stations are an absolute necessity for mass public adoption of NGVs.
Refueling time at public refueling depots must also be acceptable. I have researched this issue a little bit, and have found no technical reasons why CNG refueling need be significantly longer than current gasoline refueling time. An excellent article on this issue can be read here.
Lack of a Strategic Long-Term Comprehensive Energy Policy
As I have written about many times on Seeking Alpha, the biggest policy failure in American history is not adopting a strategic long-term comprehensive energy policy in the face of importation of 65% of our oil, fighting oil wars, and going bankrupt in the process. Since the US government and media seemed incapable of developing this policy on their own, I even went so far as to document such a policy for them.
This policy has been refined over time and includes some excellent feedback from Seeking Alpha contributors. That said, despite my best efforts over the better part of 4 years, this policy has not be published in any major news media publication. I have contacted Barron's, Business Week, USA Today, and the Wall Street Journal. None of these publications responded positively. I find this very interesting considering the toll foreign oil importation has taken on the country’s economy, equity markets, and competitiveness.
Lack of Adequate Political, Public, and Media Support
Every US president since Harry Truman has been concerned about American dependence on foreign oil. Every US president since Jimmy Carter has announced plans to make America more energy independent. Jimmy Carter’s speech in 1977 is worth re-reading today.
Jimmy Carter’s excellent energy policy reduced foreign oil imports by 50% between 1977 and 1982. This led to a reduction of oil prices in the 1980’s and a subsequent economic recovery. Since then, American energy policy under Reagan, Bush, Clinton, and Bush has been nothing short of abysmal. The US today imports 65% of its oil, a high of $145/barrel was reached in 2008, we are fighting oil wars at the cost of much treasure and human life, and our economy is in the midst of the worst economic crisis since the Great Depression.
In spite of all these facts, the American media is partly to blame. It seldom sheds light on the real reasons we went into Iraq (oil), seldom publicizes the national security and economic threats posed by foreign oil, and as I have already mentioned, never publishes strategic, long-term, and comprehensive energy policies. The media seems to take delight into lambasting Boone Pickens’s efforts by painting him as a profiteering oil-man as opposed to the patriotic American whose purpose of reducing our foreign oil imports by moving to natural gas powered transportation and wind energy is spot on.
In spite of every US President since Carter saying the US will become less dependent on foreign oil, the simplest, quickest, most economical way to do this is to use more US produced natural gas in the transportation sector. Yet, it has been almost completely ignored. We could, conservatively save 2-5 million barrels of foreign oil imports within 3-5 years by migrating gasoline powered cars and trucks to US produced natural gas.
The politicians had an excellent opportunity during the big 3 auto bailout hearings to questions the CEOs on a lack of NGV initiatives. They had an excellent opportunity to require NGV manufacturing as a condition of US tax-payer money, yet the words “natural gas vehicle” were not uttered once during Congressional questioning. Likewise, Obama’s stimulus package, while containing some good legislation with respect to energy, completely missed a grand opportunity to hit the nail on the head. There is very little in this package in the way of incentives to promote natural gas vehicles and the corresponding infrastructure to support them. This was very disappointing as yet another big opportunity was missed.
Misplaced Environmental Concerns Resulting in a Focus on Unrealistic Alternatives
Folks who have taken the time to read my energy policy and my previous Seeking Alpha articles know that I am a big supporter of electric vehicles, wind and solar energy to feed them, and initiatives such as Project Better Place and the PickensPlan. In a future in which worldwide oil supply will not keep up with worldwide oil demand, I believe these efforts are the future not only economically, but environmentally and from the viewpoint of future gasoline (oil) cost and availability.
All that said, I believe the recent focus on hybrid and electric vehicles has in my mind done very little to reduce foreign oil imports and greenhouse gas emissions. The promise of electric vehicles, like the hydrogen fuel cell craze of the 1990’s, has been just another tool by the auto and oil industries to keep Americans addicted to gasoline powered internal combustion engines. We are wasting very valuable time here. Let me explain.
I love the Toyota Prius. That said, the Prius still requires gasoline. I love the thought of electric cars. However, electric cars are simply not available in quantity. Even though electric cars are well supported by environmentalists, the true impact of electric cars on the environment does not appear to be well understood. Suppose electric cars were available today in mass volumes. It will be a decade before adequate wind and solar energy generation and the transmission lines to transport this clean energy efficiently will be available to charge these vehicles. Meantime, since our nuclear energy infrastructure is not being built out, more coal burning will be required to charge these electric cars. Since the emission requirements on coal burning plants have actually been reduced over the past 8 years, the truth is that electric cars at the end of the day could well cause just as much, if not more pollution, than their gasoline powered counterparts!
Another problem is battery technology. I’m certainly not an expert on current battery technology (read Seeking Alpha contributor John Petersen for some excellent articles on this subject), but several things are apparent to me today:
- The US is falling behind in battery technology and manufacturing.
- Batteries for a plug-in vehicle of sufficiently long range are not yet economically available.
- It will take some time for battery technology usage in fully electric cars to mature.
- Like NGVs, PHEVs will also require a significant refueling infrastructure.
Perhaps I am missing something with the above impressions. However, given these impressions, I conclude the following:
- A shift from gasoline to all electric vehicles today would currently result in a shift from foreign oil addiction to foreign battery addiction.
- A shift from gasoline to all electric vehicles today would not significantly reduce greenhouse gases and could quite possibly increase emissions.
- Due to economic limitations of battery technology and fully electric vehicle range, the best short term vehicle options continue to be hybrids, which still require gasoline.
According to the U.S. Environmental Protection Agency, CNG vehicles really shine:
- They reduce carbon monoxide emissions 90 to 97 percent.
- They reduce carbon dioxide emissions 25 percent.
- They reduce nitrogen oxide emissions 35 to 60 percent.
- They potentially reduce non-methane hydrocarbon emissions 50 to 75 percent.
- They emit fewer toxic and carcinogenic pollutants.
- They emit little or no particulate matter.
- They eliminate evaporative emissions.
Since each gallon of gasoline burned in an internal combustion engine released 19 lbs of CO2, and since the US burned 390,000,000 gallons of gasoline per day last year (both from the EIA), the environmental benefits of switching to natural gas powered vehicles are readily apparent. When compared to burning more coal to power electric vehicles, the case for migrating to NGVs, today, is compelling.
Now, all that said, I do still support going full steam ahead with the deployment of wind and solar energy generation and the electric lines to efficiently transmit this energy from source to consumer. I still support battery research and development and of electric vehicle development. However, in order to quickly and significantly reduce both foreign oil imports and greenhouse gas emissions quickly I strongly suggest the US do the following:
- The US government should pass legislation requiring any company selling a gasoline powered vehicle in the US to also offer a NGV vehicle or NGV/electric vehicle available.
- The US government should pass legislation requiring NGV/electric hybrid vehicle manufacturing be a condition for receiving future “Big 3” bailout money from US taxpayers.
- The US government, partnered with natural gas providers and local nat gas utility companies, should begin a massive build out of high speed natural gas refueling stations along the US interstate highway system.
- The US government should require each automotive manufacturer of NGV to also manufacture and sell a natural gas home refueling appliance.
- The US government should give incentives by way of low interest loans in order to insure the trans-Canadian Alaskan to lower-48 natural gas pipeline(s) be built at an accelerated pace.
(NOTE: these policies are only those associated with natural gas initiatives. For a strategic long-term comprehensive US energy policy, please see here.)
I can hear the criticisms now: Fitzman, you want government to take over!? Well, in this area I certainly do. Besides, in that last year of the Bush administration we saw the government take over the insurance, banking, financial services, and national mortgage markets. Why then shouldn’t the government actually do something productive for the economy and for middle class Americans and take a proactive position to get the natural gas transportation sector jump started? American automakers have proven they can’t manage themselves and build the right vehicles for the country. This way, at least we’d get something for our tax dollars as opposed to making the ultra rich bankers, investment “professionals”, and car executives wealthier. It is also the only way I can think of to solve the chicken-and-egg problem with respect to the availability of NGVs and nat gas refueling stations.
The declaration that it would take auto manufacturers years to retool in order to build NGVs is invalid. Today you can drive your gasoline powered auto or truck into many shops in Utah, Iran, Brazil, and Asia and in less than 4 hours leave with a car that runs on CNG. So, the automakers can do it, they just don’t want to do it. The government, since it is now bankrolling these companies, should require it.
Others will say, “Fitzman, you just want the energy companies you have supported these many years to profit off natural gas!” Well, who would you rather enrich with your money? US firms like ConocoPhillips, Chesapeake Energy (NYSE:CHK), and Exxon Mobil; or Saudi Aramco, Petroleos de Venezuela, Gazprom, and Iran Petroleum? The choice is yours. You already know who I would prefer to send my energy dollars to. Either way, you will pay. It’s just of question of whether your money will stay with companies headquartered in the US, or, to companies controlled by anti-American foreign governments.
On the other hand, the natural gas policies suggested above would do many positive things for the American economy and for Americans:
- Reduce foreign oil imports.
- Keep our energy dollars in America.
- Provide many good paying jobs in the energy industry.
- Reduce green house gas emissions.
- Build an infrastructure that would pay dividends for decades.
- Reduce the cost of NGV ownership.
- Reduce the cost of NGV home refueling appliances.
- Reduce the cost of transportation.
- Produce jobs in the area of compressors, pumps, steel, pipe, and other solid manufacturing industries.
- Make America competitive again in auto manufacturing and basic industries.
Think of the jobs to be created at local natural gas utilities, companies like US Steel, GE, the energy and energy services firms, as well as to auto makers Ford and GM.
What are the negatives aspects of this program? Honestly, I cannot see them. Just think how much better off the country would be today if the $700 million dollars in bonus money that was paid out to Merrill Lynch executives with US taxpayer “bailout” money provided by the Bush/Paulson/Bernanke $350 billion package if the money would have instead been used for building natural gas refueling stations.
Imagine if instead of giving millions of dollars to executives at bankrupt AIG if instead that money had been used to set up another company to manufacture the “Phill” home appliance in order to bring competition to that market and bring the price of the appliance down. Imagine the benefits if instead of giving the “Big 3” billions in dollars with no strings attached, the government had instead mandated they build NGV/electric hybrid vehicles in return for the money. Finally, imagine if the US government told Toyota if it wants to sell its gasoline powered cars and trucks into the US market, it will have to make that NGV/electric hybrid Camry available as well.
In other words, economists and policymakers say they don’t know what effects all these various bailout packages and stimulus bills will provide. However, it should be clear that investments in natural gas transportation won’t be “busy jobs” or a waste of time and money. This work would pay the American people dividends for decades.
America is at the economic crossroads in so many ways today. Due to years of unsound fiscal policies, we are a country that depends on foreign capital from China, Japan, and the Middle East to buy our bonds and finance our fiscal debt. At the same time, unwise energy policies have deepened our reliance on foreign oil. Combine the two, and the country is going on its way to permanent bankruptcy and a fiat currency. Some say we are already there.
It is very unwise for American policy makers to attempt to solve a commodity problem (oil) with financial, fiscal, and military policies. They simply aren’t working. Meanwhile, the US is the world’s largest consumer of worldwide oil supply (25% of the total supply) and faces a grave risk entering a future in which worldwide oil supply will not keep pace with worldwide oil demand. That is, the price of oil in the future will spike much higher than the highs seen in 2008. Current low energy prices are not due to huge supplies coming online. They are the result of collapsing demand due to the financial crisis.
Instead of taking advantage of the current situation and using the low cost of energy, steel, and the low employment rate to put people to work at building out a natural gas infrastructure, the Obama stimulus package is “natural gas lite”. That is, there is very little in the package to promote NGV’s and the required infrastructure to refuel them. Obama and Congress missed a golden opportunity to address the US’s biggest national security and economic threat: its addiction to foreign oil.
In summary, US natural gas supplies are adequate for at least the next 50 years. Natural gas vehicles have been used for decades. NGVs are a proven, mature, and viable transportation technology. Natural gas vehicles are much cleaner than gasoline powered internal combustion engines and can be cheaper than gasoline powered cars and trucks. Natural gas vehicles can be quickly and advantageously utilized while the research and development of electric battery technology, PHEVs, and fully electric vehicles continue forward. NGVs can be used today in order to reduce foreign oil imports and greenhouse gas emissions while we wait for the wind and solar energy infrastructures to be built out. NGVs can revitalize the US economy, provide good paying jobs, and will benefit multiple basic industry sectors.
Natural gas transportation is a no-brainer. We merely need our policy makers to engage and make it happen and get us over the initial chicken-and-egg problem of vehicle availability versus refueling stations.