Natural gas is a beautiful fuel and should not simply be lumped in the same "fossil fuel" category as oil and coal. Let's take a look at some of the advantages of natural gas and why natural gas transportation is the key to America's #1 economic problem: its 58% dependence of foreign oil imports.
The advantages of natural gas are fairly well known:
- Natural gas is abundant.
- Natural gas is cheap.
- Natural gas is a domestic fuel.
- Natural gas is clean.
- Combined with our 2 million plus natural gas pipeline distribution system, our abundant natural gas reserves are the #1 economic advantage the U.S. has against every other country on Earth.
- Combined with NGVs, natural gas is the only domestic fuel capable of significantly reducing foreign oil imports by, say, 5,000,000 barrels/day within 5 years.
Let's take these bullets one at a time and dig down a little deeper.
Natural Gas is Abundant
Everyone is aware that recent technology has enabled the lower-48 to uncover enough natural gas reserves to power this country for at least 100 years, some estimates say 150-200 years. But there are also huge nat gas reserves in Alaska. China is estimated to have more natural gas reserves than America. Recently, there have been massive discoveries off the east coast of Africa, and off-shore Israel and Australia. Russia has huge nat gas reserves, as does Qatar and Iran. In the last decade, while searching for oil, exploration companies have discovered more natural gas. There is no question: natural gas is abundant the world over.
Natural Gas is Cheap
Natural gas is currently trading at $2.67/MMBtu. Nymex crude is trading at $95.70/barrel and Brent is $116/barrel. The oil to natural gas ratio is now 43. Although this is down from the highs seen back in April, when nat gas was under $2 and Brent oil over $120, it is still significantly above its 10 year average (see chart below).
Not one to say "I told you so" …. But ….I did tell you back in March of 2010 in this Seeking Alpha article that the historical oil-to-gas ratio was becoming irrelevant in the United States. The breakout began in 2008 and has ramped to the present. Why? Abundant and cheap American natural gas, and expensive and increasingly scarce foreign oil.
Back here at home a gallon equivalent of natural gas is over $2 cheaper than diesel.
It is clear the U.S. has a huge advantage in price over the rest of the world. Combine it with our world-class pipeline distribution system, and, well, the United States is very fortunate indeed. If only our economic and energy policymakers could grasp this potential game-saving advantage many of us see staring us right between the eyes.
Natural Gas is Domestic
Not much to say here but this: the United States has an abundance of natural gas, yet our foreign oil import bill for July was $34.6 Billion. It's clear: although America has abundant domestic natural gas reserves, the country is still going broke importing foreign oil. And that's a fact.
Natural Gas is Clean
Natural gas emits 30% less CO2 than does gasoline, and 50% less than coal. With respect to toxic particulates, natural gas emits 100% less than coal or gasoline (that's right, ZERO toxic particulates). So, to those environmentalists that want to lump natural gas in with the "fossil fuels" oil and coal, perhaps you should do some more research. If you try to tell me the electric car is the solution to your environmental goals, first answer me this:
1) Where is an affordable electric car? GM just stopped production of the expensive Volt.
2) Why is there still no economical battery pack for 100% EV despite hundreds of millions of tax-payer dollars spent on battery research?
3) If the electric car is re-charged at home, via coal, how is that better for the environment?
4) If the electric car is re-charged by natural gas generated electricity, how do the losses and inefficiencies in the transmission of power to the recharging station help the environment?
Nope, my environmentalist friends (and I do say friends - as a trout fisherman, I definitely consider myself an environmentalist of the first class, you could even call me a tree-hugger), natural gas is the answer, not the problem. Luckily, the huge advantage of natural gas power generation is beginning to take hold. Not only are natural gas generators much easier and cheaper to install, operate, and maintain - they also have faster start-up/shut-down characteristics and don't have the nasty headache of burning coal: storing the massive amounts of toxic fly-ash remains. As a result, we are seeing many coal plants shut down. American Electric Power (AEP) has announced it is shutting down numerous coal plants around the country (thanks Nick!). Also, it is important to remember that the most efficient, cleanest burning coal in the U.S. has already been mined and burned since it was the most economical coal. So from now on, the coal that will be mined and burned is more inefficient (that is, more dirty and less economical). There really is no such thing as "clean coal". The phrase is a myth and an oxymoron.
On the plus side, a federal judge recently ruled the TVA liable for the Kingston, TN fly-ash release into the Tennessee River system. This was one of the worst environmental disasters in U.S. history. American needs more rulings like this to prove the true cost of burning coal and accelerate the transition to natural gas.
Now, I know some of you will say, hey Fitzman, what about the environmental issues as a result of fracking to produce natural gas? Well, I believe these issues to be solvable by practical common sense procedures and regulation. First of all, most all major tight gas reserves are thousands of feet below the water table. Secondly, dual sleeve piping through the water table can insure it is kept clean, as evidenced by the fact that hundreds of thousands of wells have been successfully drilled in this manner all over the country. What we have to deal with is the fracking fluids themselves when lifted back out of the hole. And what better way then to store them than by putting them back down-hole where they were used after the gas has been produced? Bottom line is I think these issues are solvable, but there must be government oversight and a zero policy for failure. No releasing of fracking fluids into creeks, stream, and rivers! Big fines is the key. Once producers know they'll be hit, and hit hard, when they mess up I think you'll see the majority of spill and disposal related occurrences fall off dramatically. But the economic and liability penalties for polluting the environment must be high and rigorously enforced. Otherwise, natural gas will do just what coal did: pollute our fresh water resources and cause major health care issues for Americans.
America's Natural Gas Pipeline Distribution System
(click to enlarge)The United States has the most extensive natural gas pipeline distribution system of any country on Earth. This natural gas distribution system has over 2 million miles of pipeline and connects every major metropolitan area and millions of homes where over 100,000,000 cars and trucks reside and could be refueled in their garages while the owners sleep. America's nat gas pipeline system, combined with its abundant reserves, are its #1 economic advantage against all other countries on Earth. A Chinese energy policymaker, clearly envious of the mature and extensive U.S. pipeline distribution system, said if China were lucky enough to have such an infrastructure, natural gas transportation would be a no-brainer.
Natural Gas Transportation Can Solve America's Oil Crisis
The chart below summarizes foreign oil import data for the month of July 2012:
July's U.S. Foreign Oil Import Data
Barrels of Oil Imported
% Oil Consumption Imported
Money Sent Overseas
My last article showed, if this rate of imports continued, and using the current price of gold, the U.S. will effectively ships the entire value of the country's gold reserves overseas in the next 10.5 years. That is a profound observation, at least to this author.
American policymakers seem to think QE and printing more money is the solution. It is not. If QE was a successful strategy, why do we require round #3? I will repeat what I have written many times):
"Fitzman's Law of Economics":
A commodity based problem (OIL) cannot be solved with monetary policy.
It simply won't work and is a very dangerous "strategy" because it actually makes the problem much worse:
QE --> lower dollar --> higher oil prices --> more wealth leaves country
Instead of realizing the obvious, experts at the Federal Reserve and Department of Treasury seem to take every possible step to ignore the inconvenient truth about foreign oil imports. They report inflation "minus food and energy". They report the trade deficit "minus oil". My question is, what good is all this economic data if we remove the most important (and strategic) item in the calculation of the data ?
It is obvious that natural gas is the only domestic fuel that can substantially reduce foreign oil imports. By substantially, we are talking about 5,000,000 barrels/day within 5 years. It is doable. I have written many articles explaining how. Think of it, at $100/barrel oil, that is a half billion dollars a DAY that would stay inside America's borders instead of flowing out of the country. The economic impact of that savings would power the American economy like gangbusters! We stand on the precipice of an era of re-industrialization and economic prosperity that few today can even imagine. If only government and private industry would work together to make it happen. The man-on-the-moon project, the Manhattan project, and interstate highway system are examples proving such a grand project is possible.
The "real inconvenient truth," Rober Hefner III says in his highly successful book The Grand Energy Transition, is that government subsidies are impeding the adoption of abundant, cleaner and cheaper natural gas by extending the life of oil and coal well beyond what otherwise would have been their natural rates of decline. If government policy instead allowed the full external costs of coal and oil (military costs to secure supply, health care costs due to toxic emissions, environmental costs, efficiency costs, etc.) to bleed through to the consumer, the superior energy solution of natural gas would come to the fore. Natural gas would then attain its destiny as the "go-to" fuel of choice and accelerate the decline of coal and oil consumption while significantly reducing greenhouse gas emissions.
The Superior Engine Architecture
Natural gas vehicles (NGVs) have been around for 100 years. It is a mature technology that does not require the billions of dollars of research that have been throw at battery technology and electric cars which have yet to yield an affordable solution for a middle class already battered by economic stagnation. Honda Motor (HMC) continues to be the only company selling an NGV in America. Ford (F) and General Motors (GM) both make NGVs and sell them overseas but not in the United States. While many countries around the world are adopting natural gas transportation (Brazil, Iran, Pakistan, Singapore, Italy, etc. etc), many doing so to enable them to export oil to the U.S., the United States has been very slow to adopt NGVs. Why is it that countries paying 2-5 times the costs of natural gas that Americans can pay are successfully adopting natural gas transportation? Why is it that countries that can export oil are adopting NGVs, yet a country with a foreign oil import crisis (the U.S.) cannot grasp such a simple and logical solution to its biggest economic and national security problem? The time is long past for the United States to wise up, act pragmatically and responsibly, and take the steps necessary to change its transportation infrastructure from gasoline to natural gas.
The best engine architecture to lead the transition to natural gas transportation is the natural gas / electric hybrid unveiled by Toyota (TM) way back in 2008. This is basically the same architecture as the highly successful Prius with the gasoline power internal combustion engine (ICE) replaced with a natural gas ICE.
This vehicle is affordable, has a 250 mile range, and gets over 30 mpg. It has no toxic particulates and emits 30% less CO2 than does a gasoline vehicle (when running on natural gas) and 100% less when running on battery power. The battery pack in this vehicle is much smaller than a 100% EV, much less expensive, much more reliable, and is a proven solution as shown in the Prius. This is the clearly the engine architecture capable of solving American's oil crisis.
The benefits of natural gas transportation for America are clear. It will happen. How fast it happens is a question for American policymakers. Meantime, investors have an opportunity to invest in natural gas related companies prior to the trend becoming a clear cash-cow. Here is a list of companies worthy of consideration:
- Clean Energy Fuels Corp (CLNE): leader in long-haul trucking refueling infrastructure
- Exxon Mobil (XOM): the United States' largest natural gas producer
- Westport Innovations (WPRT): leader in natural gas engine technology
- Fuel Systems Solutions (FSYS): leader in nat gas home refueling technology
- General Electric (GE): leading industrial and energy infrastructure company
- Honda Motor : only pure NGV provider in America
- Chesapeake Energy Corp (CHK): the United States' #2 natural gas producer
Exxon and GE are probably the safest bets due to their diversity, dividend, and size. Chesapeake could be a real surprise to the upside if it can solve its leadership and financial issues and if natural gas prices have bottomed. Westport Innovation might be the most highly levered company to adoption of natural gas transportation on a grand scale. I am bullish on the long-term outlook for Clean Energy Fuels based on its build out of the natural gas highway. This is probably the most meaningful energy policy the United States has adopted to date. Good luck!
Disclosure: I am long XOM.