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

Includes: BP, CHK, GAZ, OIL, UNG, USO
by: Eamon Keane

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In part I, I offered evidence that a diesel fleet conversion to natural gas should be coupled with a decrease in gasoline use if crude oil imports are to be abated. In part II, I provided recent shale gas production projections which show that reaching the level of natural gas production to cover the diesel fleet in 10 years would be very difficult. In part III, I suggested that the Pickens Plan was unsound energy policy. In part IV I'll take a look at the economics of NGVs.

Figure 1 shows the price differential between CNG and gasoline at the pump as of October 2009 (pdf):
Green means natural gas is $0.00-$0.50/gallon dearer than gasoline
Blue means natural gas is $0.00-$0.50/gallon cheaper than gasoline
Purple means natural gas is $0.50-$1.00/gallon cheaper than gasoline
Red means natural gas is $1.00-$1.75/gallon cheaper than gasoline
White are states with no CNG penetration

Firstly this shows that in Wisconsin, natural gas is acutally more expensive than gasoline on a Gasoline Gallon Equivalent (GGE) basis. In some states the natty is significantly cheaper than gasoline. I'm not going to go state by state, but the example of Utah (in red), which is widely cited for its NGV adoption, may be indicative.

In Utah the state regulators oblige Questar (NYSE:STR), the natural gas provider, to sell half their gas to retail customers at the cost of production. This is an excellent example of government market distortion and is a recipe for sweated assets.

Questar has had filling pumps around the state to fuel its own fleet of service vehicles since the 1980s, and because it had excess capacity, it opened those stations to the public. According to the NYT:

Demand has grown so fast that the compressors at many of Questar’s stations run low during the day, forcing drivers to settle for half a tank or fill up during off-peak hours.

Utah is one of the few states where a driver can travel across the state without being out of range of a station. Utah is thus not representative of other states, and as such, should not be held up as an example.

Figure 2 compares the prices at the wellhead, to the residential customer & at the NGV pump. These are averages across the US. Data here.

Figure 3 shows a better view of the data.

There was a remarkable divergence in 2007 from the usual Residential-NGV spread. From 1990-2000, the spread averaged $2/MMBtu. Natural gas prices were 50% dearer to the residential customer than the NGV customer. Then, in 2007, the spread widened to $6, or 75% dearer than NGV prices. The EIA doesn't offer the data for 2009 yet.

Even with this 50% difference, though, for the majority of the states in Figure 1, the differential between gasoline & CNG obtained via a Phill would vanish, and it would actually be more expensive per mile than gasoline. When you couple this with decreased range, slightly increased maintenance, about $5,000 more expensive car costs, a couple of $'000 on the Phill, the long recharge times & the volatility in the residential gas price, I'm not sure where the value for the residential customer is.

Perhaps it's in patriotism. If so, it would presumably be equally patriotic to buy an electric motorbike, move to a city, walk to the shops, not fly, telecommute, not eat meat, eat organic food, not turn on the AC, not drink beer, recycle plastic bottles and so forth. In fact, almost every economic activity in America can be thought of as unpatriotic, as almost every activity has some oil input. Even domestic American oil production should not be consumed domestically. Exporting it improves the balance of payments.

America doesn't have to buy oil from its enemies. You do so because of everyday decisions by Americans e.g. to buy SUVs and to fly for business meetings. You do not account for the externality of energy security by levying higher taxes on gasoline and jet fuel, so people don't account for energy security in their everyday decisions.

A natural gas car and a Phill require about $8,000 extra up front. We are still in a consumer recession. Wages are stagnant. 30% of those in the lowest wage decile are unemployed. Banks aren't lending. In these situations, people's discount rates rise even higher than usual.

Meaning they can't afford the extra capital for natural gas vehicles. I haven't done this, I may get round to it, but even if the cost of gasoline were to go to like $4.00, the total cost of ownership of a natural gas vehicle vs. gasoline could be higher for most states. Especially when you account for high discount rates. Someone should make a cost of ownership calculator like the one for electric vehicles and then you can work out the breakeven gasoline price.

The US should raise taxes on gasoline and diesel to account for the energy security/peak oil externality. Then people can decide to either:

(a) drive less
(b) buy a CNG vehicle
(c) cycle
(d) get an electric bike
(e) move to the city
etc. etc. etc.

The government picking the winner is bad policy. End of story.

Part III offered a quote from 1990 from the Director of the Department of Natural Resources that's worth repeating:

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.

This is Seeking Alpha. Since when do people like government intervention?

Disclosure: No Positions

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