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

by: David Fessler

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 (NYSE:CHK), Anadarko Petroleum (NYSE: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 (NYSE:KMP), El Paso (EP), and Williams (NYSE: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