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CNG (Compressed Natural Gas) is increasingly being substituted for gasoline and diesel oil as a motor fuel. Although the number of vehicles that have switched is still tiny, compared to the numbers running gasoline and diesel oil, the trend is clear. Commercial fleets of trucks and buses have been switching. The number of available CNG filling stations has been increasing. But will the trend continue?

It is possible to predict that a continuing disparity between the prices of natural gas and crude oil will cause demand for CNG to increase. Take gasoline, for example. Gasoline first became more expensive than CNG in March 2006 when both were priced at $2.34 per gallon. Although gasoline was briefly priced lower than CNG in November 2008, due to a worldwide recession, by the end of March 2009 gasoline had again become more expensive than CNG. At the end of May 2012, the price differential was $3.58 for a gallon of gasoline and $1.72 for the equivalent in CNG (calculated as the price of natural gas to commercial consumers plus 70ยข), as shown in the graph below:

There are two primary reasons why gasoline and diesel oil are rising in price:

  1. Rapidly Growing Demand. As the emerging market countries continue to grow, they are demanding ever increasing amounts of gasoline and diesel oil.
  2. Slowly Growing Supply. Worldwide proved reserves of crude oil have only been growing slowly.

The graph below shows the most recent statistics for America's proved reserves of natural gas and crude oil (calculating 1 trillion cubic feet of natural gas = 188 million oil barrels). As shown in the graph, since the beginning of 2000, U.S. proved natural gas reserves have nearly doubled from 167 to 318 trillion cubic feet while U.S. proved crude oil reserves have only risen from 21.8 to 25.2 billion barrels.

According to the economics principle of substitutes (i.e., when the price of coffee goes up, demand for tea will increase), demand for CNG should continue to increase into the foreseeable future.

Source: Will The Trend Toward Compressed Natural Gas Continue?

Additional disclosure: I get royalties from natural gas wells and own stocks and mutual funds that are involved in oil and natural gas exploration and in building CNG filling stations and compressors.