Current low prices for natural gas and the ongoing production boom in shale gas should provide the perfect impetus to boost natural gas vehicles (NGVs) in the country’s automobile fleet. There are of course a number of hurdles to this goal, but the benefits are extensive—more diversity and cost savings for consumers in transportation, decreased reliance on foreign oil supplies, reduced emissions, and support for the struggling natural gas industry.
Even with the rapid fall in oil prices starting in mid-2014, natural gas provides a cheaper alternative to automobiles that run on gasoline and diesel.
Interest in NGVs has picked up in recent years amid the surge in U.S. domestic production, which has risen 40 percent from 2006 to 2015, and ongoing weak prices. Even with the rapid fall in oil prices starting in mid-2014, natural gas provides a cheaper alternative to automobiles that run on gasoline and diesel. For instance, U.S. natural gas is now trading around $2.25 per MMBtu, the equivalent of oil at $13.50 per barrel. The graphic below illustrates how the spreads between different transportation fuels continuously benefit consumers of natural gas.
In its “high resource” scenario, the Energy Information Administration (EIA) sees U.S. natural gas prices rising only modestly over time, remaining in a low-price environment for more than two decades and averaging just $4.38 per MMBtu in 2040. Simply put, prices are likely to remain low for the foreseeable future, while gasoline and diesel are much more uncertain. The fuel savings for NGVs are particularly beneficial to industries and government agencies at both the state and federal level that have to deal with high transportation costs from using heavy duty commercial vehicles, transit buses, or long-haul trucks.
The public sector appears to be in the lead in adopting NGVs. In public transit, as of last year, NGVs made up more than 20 percent of existing vehicles and possibly accounted for 50 percent of new vehicle purchases, as pointed out in a study by the Alternative Fuels Data Center division of the Department of Energy. ExxonMobil notes that in the U.S., although the costs to equip a truck to use natural gas are very high, these costs are paid back with fuel savings in just five years. These savings have the potential to make a large difference for companies whose fuel costs sharply cut into their margins. There are currently more than 1,500 compressed natural gas (CNG) fueling stations and more than 110 for liquefied natural gas (LNG), according to NGVAmerica, but those numbers are expected to rise with the growing popularity of NGVs, making it easier for the trucking industry to transition.
Users of NGVs do not have to contend with price volatility, outages in unstable petro states, and an overall uncertain global oil market.
The energy security gains of using NGVs are obvious. The U.S. has an abundance of natural gas supplies and is a net importer by only small amount, with most coming from Canada, a stable supplier. Domestic production has continued to grow even in the face of lower prices because of innovative drilling methods. This situation will not change anytime soon (see graphic below), guaranteeing higher security of supply than we see with petroleum. Against this backdrop, users of NGVs do not have to contend with price volatility, outages in unstable petro states, and an overall uncertain global oil market.
With oil prices having plummeted in the past year, demand for gasoline has risen. Meanwhile, the lower oil price has hurt U.S. shale oil production, which has begun to fall. The combination of these two factors has caused the decline in crude imports to level off, halting energy security gains for the time being. Lower pump prices and the abundance of oil supplies have brought about a complacency with regards to energy security gains. Transitioning to NGVs would naturally reverse this worrying trend.
Support from both sides
With backing from both environmentalists and oil companies—many of which have gas assets—NGVs could penetrate the vehicle fleet faster than expected.
Because natural gas is seen as a cleaner fuel than petroleum products, it is being embraced by some environmentalists as a transportation fuel that would spur both fuel diversity and lower emissions. With backing from both environmentalists and oil companies—many of which have gas assets—NGVs could penetrate the vehicle fleet faster than expected.
Although natural gas has extraction and transmission issues, particularly methane leaks, that concern some environmentalists, it emits less greenhouse gas emissions than oil products, and some NGV trucks may see lower emissions requirements than their diesel counterparts.
The natural gas industry
The shale gas boom has been mainly the result of innovation on the part of independent producers, which rely on short-term profits instead of long-term investment like the integrated oil majors. But even with prices low, independents have boosted production from new drilling practices, such as adding more wells per wellpad, extending laterals, using more sand per frack job, and a number of other ways to extract more gas with each given rig.
With prices so weak, producers need new pockets of demand to stimulate prices and in turn bolster cash flow.
Nevertheless, with prices so weak, producers need new pockets of demand to stimulate prices and in turn bolster cash flow. Investment in petrochemicals, the displacement of coal in the power sector, and LNG demand from overseas buyers should provide some outlets for producers, but a substantial uptick in the transportation sector would benefit the industry over the longer term.
Obstacles for NGVs
There numerous obstacles to NGVs, including higher up-front costs in purchasing vehicles and limited refueling infrastructure.
Although NGVs have grown in popularity, they are still only a fraction of the transportation fleet and are expected to remain a small portion. The EIA, in its reference case scenario, says natural gas will make up just 2.6 percent of transportation demand by 2040—although that number rises to 10 percent in a “high oil price” scenario, an indication of how important NGVs can be in tempering the country’s reliance on oil.
There are numerous obstacles to NGVs, including higher up-front costs in purchasing vehicles and limited refueling infrastructure. However, the biggest problem is likely inadequate understanding among the general public about cost savings and energy security gains. To overcome these hurdles, there needs to be public-private partnerships and long-term commitments from both sides to spur large-scale deployments of NGVs.