Natural gas offers new era for America’s roads

Gasoline’s New Era

Today Tesla releases earnings against a backdrop of plunging gasoline prices (NYMEX:RBZ13). Is this karma? For the last couple of years I have been talking about the end of the era of high gas prices. This is a concept that blew the minds of some people because it seemed to be an impossible dream if not outrageous. Yet as oil prices plummet (NYMEX:CLZ13) on surging U.S. oil production and U.S. refiners expand capacity, that impossibility is now becoming a reality.

Tesla is another reason, because they represent a future where our energy mix will be shuffled up. Not only will we be driving electric cars but also natural gas. We will have a choice at the pump and not just premium or regular. Gas prices at $3.26 a gallon are down 22 cents from a year ago.

The New York Times wrote last week:

Cars and trucks powered by natural gas make up a significant portion of the vehicle fleet in many parts of the world. Iran has more than two million natural gas vehicles on the road. As of 2009, Argentina had more than 1.8 million in operation and almost 2,000 natural gas filling stations. Brazil was not far behind. Italy and Germany have substantial natural gas vehicle fleets. Is America next?

With natural gas in plentiful supply at bargain prices in the United States, issues that have limited its use in cars are being rethought, and its market share could increase, perhaps substantially.

According to the Energy Department price information from July, natural gas offers economic advantages over gasoline and diesel fuels. If a gasoline-engine vehicle can take you 40 miles on one gallon, the same vehicle running on compressed natural gas can do it for about $1.50 less at today’s prices. To that savings add lower maintenance costs. A study of New York City cabs running on natural gas found that oil changes need not be as frequent because of the clean burn of the fuel, and exhaust-system parts last longer because natural gas is less corrosive than other fuels.

Today, those economic benefits are nullified by the initial cost of a natural gas vehicle — 20% to 30% more than a comparable gasoline-engine vehicle. But were production to increase significantly, economies of scale would bring prices down. In an interview by phone, Jon Coleman, fleet sustainability manager at the Ford Motor Company, said that given sufficient volume, the selling price of natural gas vehicles could be comparable to that of conventional vehicles.

It may be years before the economic benefits of natural gas vehicles can be realized, but the environmental benefits appear to be immediate. According to the Energy Department’s website, natural gas vehicles have smaller carbon footprints than gasoline or diesel automobiles, even when taking into account the natural gas production process, which releases carbon-rich methane into the atmosphere. Mercedes-Benz says its E200, which can run on either gasoline or natural gas, emits 20% less carbon on compressed natural gas than it does on gasoline.

The United States government appears to favor natural gas as a motor vehicle fuel. To promote the production of vehicles with fewer carbon emissions, it has allowed automakers to count certain vehicle types more than once when calculating their Corporate Average Fuel Economy, under regulations mandating a fleet average of 54.5 miles per gallon by 2025. Plug-in hybrids and natural gas vehicles can be counted 1.6 times under the CAFE standards, and electric vehicles can be counted twice.

Adapting natural gas as a vehicle fuel introduces engineering challenges. While the fuel burns clean, it is less energy dense than gasoline, so if it is burned in an engine designed to run on conventional fuel, performance and efficiency are degraded.

But since natural gas has an octane rating of 130, compared with 93 for the best gasoline, an engine designed for it can run with very high cylinder pressure, which would cause a regular gasoline engine to knock from premature ignition. More cylinder pressure yields more power, and thus the energy-density advantage of gasoline can be nullified. “Whenever you have the opportunity to run 130-octane fuel, a lot can be done to optimize engine operation,” said Gregg Black, Chrysler’s senior manager for advanced engine systems, in an interview by phone. Currently, there are no dedicated and fully optimized natural gas vehicle engines produced for the United States market, although vehicles capable of burning the fuel are available. Ford sells the most domestically — medium - and heavy-duty vehicles prepped for natural gas with some special engine parts on the assembly line but outfitted later by secondary suppliers with compressed natural gas hardware.  Because refueling stations are few and far between, all of the Ford offerings are bi-fuel and can run on both gasoline and natural gas, a capability that requires compromises. GM has similar offerings but also offers one dedicated natural gas vehicle — a work van.

When asked if the van’s engine was modified to take advantage of the 130 octane of natural gas, Dick Kauling, engineering manager for gaseous fuels at GM, said, “We haven’t at this point done all the optimization that’s possible to take advantage of the octane that’s available in natural gas.”

Chrysler produces a version of its Ram pickup fully prepped for natural gas, but it is a bi-fuel model too, and, according to Mr. Black, it is engineered to be at its best when running on gasoline. Honda sells the only natural gas passenger car available in the United States. A version of its Civic subcompact, the car has a revamped version of a gasoline engine that has been prepped for natural gas with a higher compression ratio and modified control systems. Produced in small numbers, it is $8,000 more costly than a comparable gasoline-engine Civic.

In brief, little effort has been expended on the optimization of natural gas engines, and that probably will not change unless demand and volume justify the expense. Until the pressurized fuel tanks of natural gas vehicles can be easily and quickly refueled, the fleet cannot grow substantially. The number of commercial refueling stations for compressed natural gas has been increasing at a rate of 16% yearly, the Energy Department says. And, while the total is still small, advances in refueling equipment should increase the rate of expansion. Much of the infrastructure is already in place: America has millions of miles of natural gas pipeline. Connecting that network to refueling equipment is not difficult.

Although commercial refueling stations will be necessary to support a substantial fleet of natural gas vehicles, home refueling may be the magic bullet that makes the vehicles practical. Electric vehicles depend largely on home charging and most have less than half the range of a fully fueled natural gas vehicle. Some compressed natural gas home refueling products are available, but they can cost as much as $5,000.

Seeking to change that, the Energy Department has awarded grants to a number of companies in an effort to develop affordable home-refueling equipment. Among them is Eaton Corporation, which announced in July 2012 that it was developing a compressed natural gas home refueling station that would be available “before the end of 2015, with a target production price of $500.” When asked how that figure might translate to a selling price, James J. Michels, Eaton’s communications manager, said in an email that the company had not established a selling price.  If Eaton can offer it at a reasonable price, it could be a game changer. 

Today Tesla releases earnings against a backdrop of plunging gasoline prices. Is this karma? For the last couple of years I have been talking about the end of the era of high gas prices. This is a concept that blew the minds of some people because it seemed to be an impossible dream if not outrageous. Yet as oil prices plummet on surging U.S. oil production and U.S. refiners expand capacity, that impossibility is now becoming a reality.

Tesla is another reason, because they represent a future where our energy mix will be shuffled up. Not only will we be driving electric cars but also natural gas. We will have a choice at the pump and not just premium or regular. Gas prices at $3.26 a gallon are down 22 cents from a year ago.

The New York Times wrote last week “Cars and trucks powered by natural gas make up a significant portion of the vehicle fleet in many parts of the world. Iran has more than two million natural gas vehicles on the road. As of 2009, Argentina had more than 1.8 million in operation and almost 2,000 natural gas filling stations. Brazil was not far behind. Italy and Germany have substantial natural gas vehicle fleets. Is America next?

With natural gas in plentiful supply at bargain prices in the United States, issues that have limited its use in cars are being rethought, and its market share could increase, perhaps substantially.

According to the Energy Department price information from July, natural gas offers economic advantages over gasoline and diesel fuels. If a gasoline-engine vehicle can take you 40 miles on one gallon, the same vehicle running on compressed natural gas can do it for about $1.50 less at today’s prices. To that savings add lower maintenance costs. A study of New York City cabs running on natural gas found that oil changes need not be as frequent because of the clean burn of the fuel, and exhaust-system parts last longer because natural gas is less corrosive than other fuels.

Today, those economic benefits are nullified by the initial cost of a natural gas vehicle — 20% to 30% more than a comparable gasoline-engine vehicle. But were production to increase significantly, economies of scale would bring prices down. In an interview by phone, Jon Coleman, fleet sustainability manager at the Ford Motor Company, said that given sufficient volume, the selling price of natural gas vehicles could be comparable to that of conventional vehicles.

It may be years before the economic benefits of natural gas vehicles can be realized, but the environmental benefits appear to be immediate. According to the Energy Department’s website, natural gas vehicles have smaller carbon footprints than gasoline or diesel automobiles, even when taking into account the natural gas production process, which releases carbon-rich methane into the atmosphere. Mercedes-Benz says its E200, which can run on either gasoline or natural gas, emits 20% less carbon on compressed natural gas than it does on gasoline.

The United States government appears to favor natural gas as a motor vehicle fuel. To promote the production of vehicles with fewer carbon emissions, it has allowed automakers to count certain vehicle types more than once when calculating their Corporate Average Fuel Economy, under regulations mandating a fleet average of 54.5 miles per gallon by 2025. Plug-in hybrids and natural gas vehicles can be counted 1.6 times under the CAFE standards, and electric vehicles can be counted twice.

Adapting natural gas as a vehicle fuel introduces engineering challenges. While the fuel burns clean, it is less energy dense than gasoline, so if it is burned in an engine designed to run on conventional fuel, performance and efficiency are degraded.

But since natural gas has an octane rating of 130, compared with 93 for the best gasoline, an engine designed for it can run with very high cylinder pressure, which would cause a regular gasoline engine to knock from premature ignition. More cylinder pressure yields more power, and thus the energy-density advantage of gasoline can be nullified. “Whenever you have the opportunity to run 130-octane fuel, a lot can be done to optimize engine operation,” said Gregg Black, Chrysler’s senior manager for advanced engine systems, in an interview by phone. Currently, there are no dedicated and fully optimized natural gas vehicle engines produced for the United States market, although vehicles capable of burning the fuel are available. Ford sells the most domestically — medium - and heavy-duty vehicles prepped for natural gas with some special engine parts on the assembly line but outfitted later by secondary suppliers with compressed natural gas hardware.  Because refueling stations are few and far between, all of the Ford offerings are bi-fuel and can run on both gasoline and natural gas, a capability that requires compromises. GM has similar offerings but also offers one dedicated natural gas vehicle — a work van.

When asked if the van’s engine was modified to take advantage of the 130 octane of natural gas, Dick Kauling, engineering manager for gaseous fuels at GM, said, “We haven’t at this point done all the optimization that’s possible to take advantage of the octane that’s available in natural gas.”

Chrysler produces a version of its Ram pickup fully prepped for natural gas, but it is a bi-fuel model too, and, according to Mr. Black, it is engineered to be at its best when running on gasoline. Honda sells the only natural gas passenger car available in the United States. A version of its Civic subcompact, the car has a revamped version of a gasoline engine that has been prepped for natural gas with a higher compression ratio and modified control systems. Produced in small numbers, it is $8,000 more costly than a comparable gasoline-engine Civic.

In brief, little effort has been expended on the optimization of natural gas engines, and that probably will not change unless demand and volume justify the expense. Until the pressurized fuel tanks of natural gas vehicles can be easily and quickly refueled, the fleet cannot grow substantially. The number of commercial refueling stations for compressed natural gas has been increasing at a rate of 16% yearly, the Energy Department says. And, while the total is still small, advances in refueling equipment should increase the rate of expansion. Much of the infrastructure is already in place: America has millions of miles of natural gas pipeline. Connecting that network to refueling equipment is not difficult.

Although commercial refueling stations will be necessary to support a substantial fleet of natural gas vehicles, home refueling may be the magic bullet that makes the vehicles practical. Electric vehicles depend largely on home charging and most have less than half the range of a fully fueled natural gas vehicle. Some compressed natural gas home refueling products are available, but they can cost as much as $5,000.

Seeking to change that, the Energy Department has awarded grants to a number of companies in an effort to develop affordable home-refueling equipment. Among them is Eaton Corporation, which announced in July 2012 that it was developing a compressed natural gas home refueling station that would be available “before the end of 2015, with a target production price of $500.” When asked how that figure might translate to a selling price, James J. Michels, Eaton’s communications manager, said in an email that the company had not established a selling price.  If Eaton can offer it at a reasonable price, it could be a game changer. 

About the Author
Phil Flynn

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.

 

Futures and options trading involves substantial risk of loss and may not be suitable for everyone. The information presented by The PRICE Futures Group is from sources believed to be reliable and all information reported is subject to change without notice.


Copyright 2014 Bloomberg. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

Comments
comments powered by Disqus
Check out Futures Magazine - Polls on LockerDome on LockerDome