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To Avoid Volatile Gasoline Prices, Why not use More Natural Gas?

By Barry Stevens | Wed, 27 February 2013 22:54 | 0

This story is old. Unless you’re one of the walking dead, then it’s no surprise that gasoline prices are back on the rise. Seems like every time when gasoline prices reach a level where alternatives seem to make sense, the price falls to a new threshold where most are left to grin and bear the new sting. Who would ever believe that $3.00 a gallon would make American’s breathe easy. Back in February 2011, my piece “Here We Go Again – Up Up and Away With Oil Prices!” warned or our servitude to oil the king of transportation. This has been talked about in the public and private sectors prior to the oil crisis of 1973, some 40 years ago.

In itself, the instability of retail gasoline prices is not the problem. The problem is that there are viable alternatives that lay in wake. We will return to this point later in this discussion.

Figure 1 shows the annual percent change in U.S. retail gasoline prices from 1970 to 2010.

% Change in Petroleum Prices
Figure 1

Over the past 40 years, “historical decompositions suggest that nearly all the fluctuations in oil prices and oil output are due to oil-specific shocks— either oil supply shocks originating in the oil-producing country or oil efficiency shocks originating in the manufacturing countries.”

According to Global Financial Data:

“….. Higher oil prices have historically led to recessions because they act as a tax on spending by absorbing consumer dollars, by reducing corporate profits, and by causing higher inflation which in turn causes higher interest rates.”

“….. biggest problem for oil is the concentration of reserves in the Middle East.”

“….. disruptions to oil supplies resulting from conflict in the Middle East are the primary concern for traders.”

Bloomberg reported that “A boom in oil production from the shale formations of North Dakota and Texas has the U.S. on a course to cut its reliance on imported crude oil to about 42 percent this year, the lowest level in two decades.”

A look at the dollar value of U.S. Oil Imports from 1980 to 2010 is shown in Figure 2.

dollar value of U.S. Oil Imports from 1980 to 2010
Figure 2 Source: International Monetary Fund – 2011 World Economic Outlook

The Value of U.S. oil imports was $79 billion and $353 billion in 1980 and 2010, respectively. While the expenditure for foreign oil seems alarming, a comparison to the 1980 and 2010 GDP of $2.767 Trillion and $14.419 Trillion, respectively, support the positive trend in reducing reliance on imported oil. Oil imports constituted 2.87 percent and 2.45 percent of U.S. GDP for 1980 and 2010, respectively. A marginal net reduction of less than a half a percent in the 30 year period!

The price of regular grade gasoline at retail outlets by region in the U. S. for 2003 and 2010 as well as a table summarizing the percent change in prices is shown in Figures 3, 4 and 5.

Gasoline Prices in US States
Figure 3

Regular Gasoline Price by Region
Figure 4

Related article: BP Makes Play for Tanzanian Gas Assets

Gasoline Prices by Region
Figure 5

The data shows an average inflation rate of 128 percent for gasoline over the 10-year period. As a point of reference, the Consumer Price Index (CPI) from January 2003 and January 2013 was 181.7 and 230.28, respectively. By comparison, the CPI showed a paltry inflation rate of 27 percent over the same 10-year period.

The EIA attributes four factors of gas prices: the price of crude oil, federal and state taxes, refining costs, and the cost to distribute and market the gasoline (Wars and natural disasters can also drive prices up), Figure 6.

“The majority of the cost of gas is based on the price of the crude oil. As of January 2012, the price of crude oil was 76 percent of the price of gasoline.   The second cost is federal and state excise taxes. Gasoline taxes account for approximately 12 percent of the price of gasoline. As of January 2012, the price of taxes was 12 percent of the price of gasoline.

The Third is the refining cost, where crude oil is “cracked” and formulated into its chemical components and made into gasoline, although the final cost varies regionally as different parts of the country require different additives and processing steps in their gasoline formulations. As of January 2012, the price of refining was 6 percent of the price of gasoline.   Finally, a retail dealer’s costs and profits affect the price of gasoline. The vast majority of oil companies are independent businesses that purchase gasoline for resale to the public.  As of January 2012, the price of marketing and distribution was 6 percent of the price of gasoline.

The final pump price reflects the purchase costs for gas, and the operating costs of the gas station. The desirability of the location and marketing strategy can also affect the final price.”

Composition of Gasoline Prices
Figure 6

Most of what was said above and what will be mentioned below are far from new revelations. This time around the stress level is getting higher. That is with Natural Gas.

Figure 7, from Lawrence Livermore National Labs shows the energy flow in the U.S. for 2011. The chart is a single page reference that shows energy and material flows in a way that distinguishes between resources, transformations and demand sectors. It illustrates the connections between the primary energy resources (fossil, nuclear, hydro and renewables) on the left side and end-use sectors categorized into residential, commercial, industrial, and transportation on the right. The size of each box and the thickness of each line is a relative measure of the amount of energy delivered, received or lost.

The only point of this chart relevant to this discussion is that petroleum is the primary source of energy in the U.S. and the negligible quantity of natural gas consumed by the transportation sector of the economy.

What needs to be considered is the demand side of things. Looking at natural gas as it is today, it makes sense to increase consumption by Electricity Generation. With natural gas reaching coal parity and more stringent EPA emission regulations effecting coal-fired Electricity Generation stations, Utilities are creeping forward to construct new gas-fired plants and switching over coal-fired to gas-fired stations.   Concurrently, the industrial, commercial and residential can benefit by increasing their use of Natural Gas. However, the U.S. economy, which is both in the recovery stages and still rather fragile, is not building many new factories, developments and homes.

Estimated US Energy Use in 2011
 Figure 7

Related article: The US still Imports Natural Gas, so Why the Desire to Export it?

Even the U.S. trade market could benefit by exporting natural gas. Currently, natural gas is trading at $3.34 MMBtu in the U.S. and is imported at $11.87 MMBtu in Europe. Japan has been reported to be eager to tap U.S. natural-gas supply. But like most things in Modern America, there is a “debate over whether the U.S. should export its abundant new supplies of natural gas, The National Association of Manufacturers (NAM) and the American Chemistry Council (ACC) both posted statements online this week in support of natural-gas exports, saying free-trade policies will allow U.S. businesses to expand. In response, Dow Chemical Co., a leading opponent of unfettered exports, said “We disagree with ACC and NAM and believe their decisions on this issue are being influenced by the oil and gas industry.”

This leaves transportation as a potential market for natural gas. Currently, there are over 255 million registered motor vehicles on the road in the U.S. The United States although the world leader in both unconventional natural gas production and number of driver’s is ranked 15th worldwide with only 123,000 NGVs (natural gas vehicles) and 6th with 1,000 CNG refueling stations. Pakistan and Iran are the world leaders in the number of NGVs. The seemingly high upfront Costly Compressed Natural Gas (CNG) refueling stations and the cost of converting vehicles to run on natural gas have been blamed to limit the growth of NGVs.

To test this assumption, Figure 8 shows the dashboard of TBD America’s CNG Vehicle Savings Calculator. http://www.tbdamericainc.com/Contact_Us.html

Vehicle Savings Calculator
Figure 8

For example, an owner of Taxi cab fleet of 100 vehicles can save over $2.7 million in fuel and maintenance costs over a 6-year period. If the CNG vehicle conversion cost is $10,000 per cab and the owner decides to build a dedicated CNG fueling station at the central facility at a cost of about $1 million, it will take 3.5 years to break even. Further savings can be realized by designing the CNG fueling station for public access, which would provide the owner with another revenue stream.

Fleets that go and return to a local base are a good way to start ramping up the usage of CNG and building the necessary infrastructure to make CNG to a wider market, see Figure 9.

Census of the U.S. Commercial Fleet & ‘Non-Fleet’ Market for 2008
Figure 9

Figure 9 shows the results of a Census of the U.S. Commercial Fleet & ‘Non-Fleet’ Market for 2008. The census includes corporate and utility fleets only, where “Trucks” include trucks, vans and SUVs. The 6,838,000 commercial fleets in operation are nearly divided among fleets and non-fleets, defined as companies that operate 5-14 vehicles. Therefore, in the U.S. there are 6,645 fleets with over 3 million vehicles that exceed 100 or more vehicles per fleet. This is a sufficient number to jump start America’s energy independence through the use of a relatively inexpensive domestic resource that is the cleanest of all fossil fuels.

For those screaming for EV’s, no one is stopping you from purchasing them. EV’s are a technology push that missed the boat on consumer needs. Sure low cost fuel is universal, but getting from A-B without a lump in your throat is another thing. Forget 4Q 2012 sales peaks when incentives were available, today the deflated numbers speak for themselves.

In closing, the benefits and challenges of switching vehicles over to natural gas is far from a secret. Natural gas is neither a salvation nor a holistic answer. Nevertheless, the current course of inaction is devoid of any tangible benefits and littered with future challenges the likes of which is hard to fathom. Forget government, forget the Pickens Plan, and forget screaming out the window “I’m as mad as hell and I’m not going to take it anymore!” Take a pencil and paper and do some simple math. See if natural gas rather than a tiger in the tank or an EV better labeled “Eventual” will serve your needs. Many may be pleasantly surprised!

By. Barry Stevens

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