In this context, it is important to examine the petroleum supply/demand fundamentals of the world’s largest consumer of oil - the United States:
Worldwide Oil supply
Total US petroleum consumption
Total US petroleum imports
Dependence on net petroleum imports
% US oil consumption for transportation
US Motor Gasoline Consumption
Looking at these figures, one can make a logical conclusion:
In order to meaningfully reduce foreign oil consumption, the US must significantly reduce demand from its transportation sector.
US dependence on foreign oil imports has led directly to huge American trade deficits and indirectly to massive American fiscal deficits. US policymakers continue to focus on financial based solutions (bailouts, fiscal stimulus, etc) in an attempt to solve a commodity based problem (oil). This approach has been and will continue to be ineffective. The only way to solve the economic, environmental, and national security problems facing the US due to its dependence on foreign oil imports is adoption of a strategic long-term comprehensive energy policy.
Since 70% of American oil is consumed in the transportation sector, US energy policymakers should first identify which domestically available fuel can reduce vehicle oil demand (gasoline) in an economically viable way. The fuel of choice must be capable of being scaled up over the next 5 years in order to significantly reduce foreign oil imports while doing so an in environmentally friendly manner.
Alternatives to the gasoline powered internal combustion engine existing today are:
- Hybrid Vehicles
- Electric Vehicles (EVs)
- Hydrogen fuel-cell Vehicles
- Natural Gas Vehicles (NGVs)
Although electric/gasoline powered hybrid vehicles do have higher fuel-efficiency standards, they suffer from a basic problem: they still run on gasoline
EVs in theory are an excellent choice. However, until nuclear or renewable wind and solar infrastructures are built out in order to supply the energy necessary to recharge a significant number of EVs, an energy policy based on adoption of EVs will necessitate increased burning of toxic coal. Despite the percentage growth of the last few years, solar and wind combined still produce less than 3% of US electricity demand – clearly insufficient to recharge a significant number of EVs. Additionally, large scale adoption of EVs would likely trade our foreign oil addiction for an addiction to Asian battery technology. And then there is the range anxiety of EVs. The US should continue to develop and deploy EVs and battery technology, but must be pragmatic about their ability to reduce foreign oil imports in the near term.
Within the next 20-50 years hydrogen will likely be the energy fuel of choice due to its abundance, efficiency, and its cleanliness. Yet hydrogen fuel-cell vehicles are simply not a mature technology today. Nor is hydrogen generation or delivery systems ready today.
Natural gas vehicles appear to be the best alternative available today. The technology is proven, mature, and can be readily available. The Honda Civic GX has a range of over 200 miles and is currently being refueled in Utah for $0.88/gallon equivalent. That said, the best solution is the electric/natural gas hybrid vehicle Toyota (NYSE:TM) introduced last year at the LA Auto Show.
This vehicle has the following advantages:
- A hybrid that runs on electric batteries and natural gas
- Over 20% lower CO2 emissions than gasoline vehicles
- Zero particulate emissions
- 33 mpg
- Reduces foreign oil imports
- 250+ mile range
It is clear that NGVs and CNG/electric hybrids are the best vehicles of choice to reduce foreign oil imports.
Fortunately the US is blessed with an abundant domestic supply of clean, cheap, and readily available natural gas. Recent discoveries of natural gas in the Marcellus, Barnett, Fayetteville, and Bakken shale formations led to a 9-10% increase in US 2008 natural gas production – the largest rate of increase since 1984. The Haynesville shale alone could well turn out to be one of the largest gas fields in the world.
The figure below shows monthly US natural gas production figures and is significant for two reasons. Note the vertical spike in supply over the last few years as companies successfully drilled into these new shale discoveries and brought large new supplies onto the market. This huge increase in supply has been significant enough to break the historical relationship between oil and natural gas price. While oil today is close to $50/barrel, the glut in natural gas supply has pushed prices below $3.60 per MMBtu.
In addition to lower-48 shale assets, there are huge proven reserves of Alaskan natural gas. Taken together, energy experts now estimate American natural gas reserves are adequate to supply all its home heating, industrial and electrical generation requirements for 60-100 years. If these experts are correct, and recent E&P data indicates they are, this means the US could very easily leverage its natural gas supplies to power cars and trucks in the transportation sector.
From a pricing perspective, today’s low natural gas prices mean many NGV owners are refueling their vehicles at less than half the cost of gasoline. Historically, nat gas has run about 2/3 the price of gasoline. A meaningful shift to natural gas for transportation would significantly increase demand and provide upward pressure on prices. However several recent developments help mitigate these concerns:
- Recent shale discoveries have greatly increased domestic natural gas supplies.
- Recent shale discoveries have reduced reliance on hurricane threatened Gulf of Mexico natural gas.
- Plans to construct natural gas pipelines from Alaska to the lower-48 bold well for longer term natural gas supplies.
- Worldwide LNG and associated LNG terminal infrastructure will favorably influence natural gas availability and price.
Another factor to be considered when considering natural gas prices is long-term oil prices. If worldwide oil supply will not keep pace with worldwide oil demand, the skyrocketing oil prices of 2008 are only a preview of the future. Therefore, natural gas price estimates must be compared directly with future oil price estimates. In this comparison, abundant natural gas supplies win hands down. Even if natural gas prices do rise, the money US consumers would pay to refuel their NGVs would stay in the United States and go to US based energy companies and as royalties to US farmers and landowners. Who should be funded by American energy dollars? Fellow Americans or unfriendly countries like Saudi Arabia, Iran, Iraq, Russia, and Venezuela? This is a no-brainer.
Building a CNG refueling infrastructure would be a significant investment. However, in this day and age of financial bailouts and stimulus packages, why doesn’t it make sense to do so? Like the cross country interstate highway system, or man-on-the-moon projects, a CNG refueling infrastructure would pay dividends to all Americans for decades to come and would pay for itself within 5 years by significantly reducing foreign oil imports. Such an infrastructure build out would provide good jobs, revitalize American companies, and provide much infrastructure that could be reused by a future hydrogen based economy.
One of America’s biggest competitive strengths is its 2.3 million mile natural gas pipeline grid. This grid supplies natural gas to every major metropolitan area in the US. The grid connects 63,000,000 US homes where 130,000,000 cars and trucks could be refueled every night in the garage while their drivers sleep. America’s natural gas reserves combined with her natural gas pipeline grid is the best weapon the US has in the war on foreign oil addiction. Natural gas is the only US domestic fuel that can be scaled up over the next decade to meaningfully reduce foreign oil imports. The US simply needs to make the decision to do so and get it done.
The chart below summarizes the CO2 and particulate emissions of the various fuels.
C5H12 to C36H74
The US burns 390 million gallons of gasoline a day. Each gallon burned combines with oxygen in the air and emits 19 lbs of CO2 into the atmosphere. This means in one year US drivers release 2,704,650 million pounds of CO2 into the Earth’s atmosphere from burning gasoline. In addition to CO2, gasoline emits toxic particulates causing the smog which is visible in so many American cities.
How does natural gas compare? As the chart above shows, natural gas has half the CO2 emissions of coal and 30% less than gasoline. More importantly, natural gas has none (ZERO) of the toxic particulate emissions of coal and oil. It is clear natural gas is environmentally superior to both coal and oil. Environmental “purists” who simply lump natural gas into the “fossil fuels” category are mixing the historical environmental problems (coal and oil) with the 21st century solution (natural gas). Environmental purists who lack the ability to take a pragmatic view of the entire energy problem and support only wind and solar and EVs are shooting themselves in the foot by actually supporting continued short term addiction to oil and coal and the greenhouse gas emissions they spew into the atmosphere!
Natural gas should be the fuel of choice to serve as the backbone of a strategic long-term comprehensive US energy policy:
A Strategic Long-term Comprehensive US Energy Policy
STEP 1: Acknowledge the Problem
- No difficult problem can be solved until it is first acknowledged. US government and media should inform and educate the American people about the economic, environmental, and national security threats worldwide oil supply/demand realities pose to the US.
- Create a National Energy Council (NEC) to develop and speed implementation of top-level energy strategy. The director of the NEC should report directly to the President at the Cabinet level.
- US government and industry need to articulate and publicize a top-level energy strategy that can be summarized as follows: the US needs to use less dirty and expensive coal and imported oil and instead use more US domestic natural gas, wind, solar, nuclear and hydrogen.
- US energy policy must recognize that natural gas is the only domestic fuel supply capable of being scaled-up within the next 5-10 years to meaningfully reduce American's foreign oil imports and greenhouse gas emissions. America should become the world leader in CNG vehicles and CNG refueling.
STEP 3: Conservation and Energy Efficiency
- Increase fuel-efficiency standards substantially and immediately.
- Increase gas guzzler green taxes and encourage non-gasoline powered vehicles via increased tax rebates.
- Impose a top speed limit of 60 mph nationwide.
- Adopt four-day workweeks wherever and whenever it makes sense.
- Conservation and efficiency guidelines should be issued by federal, state, and local governments.
STEP 4: Transportation Initiatives
- Convert at least half of all American cars and trucks to run on CNG by the year 2015. This will be done by retrofitting existing vehicles to run on natural gas, and by increased production of CNG vehicles. Tax credits should cover conversion costs.
- Focus on natural gas home refueling appliances to enable widespread ownership of NGVs to the 130 million vehicles already residing in homes on the existing natural gas grid. Tax credits should cover the installation costs of a CNG home refueling appliances.
- Tax credits should be given to gas stations in order to cover costs of providing natural gas refueling pumps. Tax credits should also be available to businesses so employees can refuel with CNG at work.
- Substantial government assistance for US automakers to tool-up CNG and CNG/electric hybrid vehicle production. Government assistance will extend to the production of home refueling appliances.
- Tax credits to build out natural gas refueling stations along the nation's interstate highway system.
- All government vehicle fleets should switch to NGV’s. Encourage local municipal use of natural gas (refuse pickup, buses, mass transit, etc). Develop the natural gas conversion kit market to convert existing gasoline powered vehicles to NGVs.
- Develop electric and natural gas powered mass transit for people and goods.
- Place a green tax on all imported oil and all coal usage. The revenue generated will go *only* toward building the natural gas, wind, solar, and electrical infrastructures needed to move toward a gas based energy society. The taxes should be ramped up over a 5 year period to allow for economic planning and adjustment.
STEP 5: Prioritize and Invest in Sustainable Green Energy Sources
- Abolish federal subsidies for the oil and coal industries.
- Abolish biofuel and ethanol mandates. Abolish import taxes on Brazilian ethanol.
- Eliminate the construction of new coal power plants. Replace existing coal plants with more distributed natural gas electrical generation.
- Construct a trans-Canadian natural gas pipeline from Alaska to the lower-48.
- Begin a government sponsored “battery technology” program in order to insure that the US is a leader in battery research, design, and manufacturing.
- Invest in wind, solar, nuclear, geothermal, and tidal energy generation to power non-gasoline powered transportation solutions.
- The natural gas & electric grid infrastructures must be updated and their capacities dramatically increased.
- The government must deem electric transmission lines a matter of national security and invoke eminent domain in order to construct them as needed to deliver solar and wind energy from source to consumption.
- Streamline permitting and construction of latest generation nuclear power plants and LNG terminals.
- Open the continental shelf and Alaska to natural gas drilling. The royalties on these resources will help fund other components of this energy plan.
- Use wind and solar power generation of hydrogen via electrolysis as a storage mechanism for calm and cloudy days. Hydrogen power generation needs encouragement.
- Increase funding for hydrogen fusion research and development.
STEP 6: Social Initiatives
- Encourage local sustainability in energy generation, food production, and transportation.
- Encourage population control through education.
- Encourage green power education, business, and industry.
- The US voting public should demand energy accountability by its political leadership.
Investment ideas based on such an energy policy:
- For natural gas vehicles: Honda Motor Company (NYSE:HMC), Toyota Motor (TM), and Clean Energy Fuels (NASDAQ:CLNE). Hopefully Ford (NYSE:F) and General Motors (NYSE:GM) could be added to this list in the near future.
- For natural gas: Chesapeake Energy (NYSE:CHK), ConocoPhillips (NYSE:COP), Range Resources (NYSE:RRC), British Petroleum (NYSE:BP), and Quicksilver Resources (NYSE:KWK).
- For natural gas infrastructure plays: General Electric (NYSE:GE), Ingersoll Rand (NYSE:IR), Fluor (NYSE:FLR), and Air Products & Chemicals (NYSE:APD).
Disclosures: The author owns COP.