Why Natural Gas Vehicles Won't Decrease Oil Dependence, Part III

Includes: OIL, USO
by: Eamon Keane

<< Return to page 2

In a technical note in 1990 by T. Michael French, the Director of the Department of Natural Resources:

Recent articles in newspapers and other news publications and comments at the recent Compressed Natural Gas (CNG) Conference in Baton Rouge indicate that a growing number of people are beginning to think that CNG is a panacea for our ailing economy and oil and gas industry. Examining technical and economic realities, however, produces little to support this optimism.

The supporters of CNG vehicles state that the economics have long justified and continue to justify the conversion of at least all fleet vehicles to CNG. Yet, the gas utility industry itself has converted only about 5% of its fleet to CNG and has a long way to go in setting an example for others to follow.

Experience indicates that when the advantages and economics for something are as wondrous as indicated by many CNG proponents, then incentives, subsidies, or legal mandates are not needed. Approximately 30,000 vehicles in the U.S. are CNG fueled.This represents only 0.017% of the 181 million registered cars, trucks, and buses in the country, of which 139 million are automobiles. (There are approximately 2.8 million registered cars, trucks, and buses in Louisiana, 1.9 million of which are automobiles.) These facts indicate that the CNG motor fuel proponents have a lot of convincing to do.

Mandates to convert arbitrary percentages of fleet vehicles to CNG without examining specific vehicular types and use patterns is dangerous and can be costly and counterproductive.

Nevertheless, in 1992, the EPAct decreed:



(1) The Federal Government shall acquire at least--

(A) 5,000 light duty alternative fueled vehicles in fiscal year 1993;

(B) 7,500 light duty alternative fueled vehicles in fiscal year 1994; and

(C) 10,000 light duty alternative fueled vehicles in fiscal year 1995.

(2) The Secretary shall allocate the acquisitions necessary to meet the requirements under paragraph (1).


(1) Of the total number of vehicles acquired by a Federal fleet, at least-

(A) 25 percent in fiscal year 1996;

(B) 33 percent in fiscal year 1997;

(C) 50 percent in fiscal year 1998; and

(D) 75 percent in fiscal year 1999 and thereafter, shall be alternative fueled vehicles

From 1994-2005 (pdf), NGV growth was "largely driven by federal EPACT requirements", according to the Utah Public Service Commission. Thus, with the very visible hand of government, the market cooperated and we are now free from foreign oil. Wait, hold on, the US still only has 150,000 NGVs from a total fleet of 246m for 0.06% of all vehicles.

Westport (NASDAQ:WPRT) (pdf), a CNG & LNG engine maker, now gushes about NatGas Act tax credits being a "game changing opportunity".

Have we been here before? Yes, actually, with the Energy Policy and Conservation Act of 1975; the Alternative Motor Fuels Act of 1988; the Energy Policy Act of 2005 and many more.

The US government's track record on energy policy and alternative fuels is abysmal. But this time is different, right?

What is most shocking is that Pickens doesn't actually have a plan. Take a look at his website. I searched the site for the detailed plan, the report which goes into all the costs, benefits and constraints, but all I found were press releases. The Pickens' Plan, although he means well, is actually just a xenophobic-tinged campaign which relies on specious and unsubstantiated claims. He has spent $62m on media. He could have spent $0.1m on a consultant's report.

There is actually a striking parallel in Ireland, where I'm from. Successful multi-millionaire goes over the heads of policy experts and pitches directly to the public. The goal is to achieve independence from Russian gas. This time it was with wind turbines and gigantic pumped storage. None of the figures added up. There was no report. This is the same modus operandi of ill-conceived energy policy ideas worldwide.

If the US really wanted to get serious about energy security, maybe you should just send the market a strong, stable, long term price signal. That's how they work best. Price the externality, it's not rocket science.

The EU Emissions Trading Scheme has been running for a couple of years now. The carbon price has wildly fluctuated, reaching €0/ton for extended periods. It does nothing for investors with 20 year time horizons thinking about deploying, say, a carbon capture and storage plant. That's why worldwide, governments have to backstop nearly all green investment. This was made quite clear in the excellent Davos report (pdf) "Green Investing 2010".

The externality is energy security. Markets will never account for externalities of themselves. So if you don't want people using so much oil, what do you do? Place a tax on gasoline and diesel, as high as is required, to incentivise the market to invest in solutions. This is then technology neutral, the government doesn't have to pick winners. It should also be revenue neutral, so you reduce labor tax, a most inefficient tax, and it's a win-win. You may also need to provide support to vulnerable members of society.

The person about to buy an SUV to drive around an exurb will then know with certainty that it's going to cost a lot. The vicissitudes of the oil price will be moderated. This is the best kind of energy policy. I'm aware, though, that market barriers are such that some double regulation may be required occasionally.

Disclosure: No Positions