The Economist: A natural for driving?
By Ray Perryman
May 18, 2013 at 12:18 a.m.
Over the past several years, the U.S. supply of natural gas has grown dramatically as improved methods of recovery have allowed for the development of "unconventional" resources such as shale plays.
Between 2008-10, U.S. proved reserves virtually tripled, up from 34.4 trillion cubic feet (TCF) to 97.4 TCF, according to the Energy Information Administration (EIA). The biggest fish in the pond is the Barnett Shale play, which lies beneath Fort Worth with proved reserves in 2010 of 31.0 TCF. The Haynesville/Bossier runs from east Texas all the way to the Florida panhandle and saw a jump in proved reserves from 1.0 TCF to 24.5 TCF in just two years.
By the way, the standard for "proved reserves" is fairly high, based on known reservoirs and existing economic conditions; actual reserves are much higher. Proved reserves are only a small part of the natural gas that is technically recoverable; some estimates run into the quadrillions of cubic feet.
All indications point to growing supplies and a continuing trend toward improvement in recovery methods. In fact, not too many years ago, production and reserves numbers like those actually occurring today would have been thought impossible.
Not surprisingly, this huge supply growth has led to falling prices. From 2004 up until the national downturn, prices were bumping along in the $5-$7.50 per thousand cubic feet (mcf) range, with some higher spikes. (In the summer of 2008, the wellhead price peaked at $10.79.) Now, prices are closer to $3 per mcf.
Based on the energy content in each fuel, this is a bargain compared to oil - which, of course, is the key determinant in gasoline pricing. The fact that natural gas is still largely a domestic market - while oil is a global market - has created this situation in which we have essentially a glut of gas, and, therefore, natural gas is cheap.
Where switching from oil or other fuels to natural gas is quick and easy, changes are occurring, such as in electric power generation and other contexts. One big area still not making much of a move, however, is transportation.
There are cars and trucks that run on compressed or liquefied natural gas. Emissions from such vehicles are much lower than with conventional engines, and environmental concerns have been a key reason for implementing natural gas-powered fleets and buses for a number of years.
Given the fuel price differential now in place - and likely to remain for a while - the question becomes whether more companies and individuals will begin to make the switch.
Several stumbling blocks will have to be removed before we see widespread usage of natural gas-powered vehicles. One problem is that the engines are so much more expensive that average drivers won't recoup costs through fuel savings within a reasonable timeframe.
Moreover, fueling stations are sparse in most areas, and because they are expensive to build, will be slow to reach the level required to support the needs of many drivers. There would likely also be concerns that widespread vehicle use would work to drive up prices, thus eliminating the advantage.
However, technology and market forces are at work, and things may begin to change. One advancement on drawing boards is an inexpensive home refueling station, which would capitalize on the fact that many Americans already have natural gas piped to their homes.
Currently, the needed equipment is expensive, but affordable alternatives are on the horizon. In addition, automakers may also improve engines and/or reduce costs to the point that they make economic sense for more people. Moreover, there have been calls for regulatory support for natural gas along the lines of the renewable fuel standard legislation now in place.
Will you be looking at a natural gas-fueled car in the next few years? I think it's a possibility, although the barriers are notable, particularly if oil prices jump. The longer the large fuel cost advantage persists, the more likely it is that innovation will bring about new ideas and approaches.
Dr. M. Ray Perryman is president and chief executive officer of The Perryman Group (perrymangroup.com). He also serves as institute distinguished professor of economic theory and method at the International Institute for Advanced Studies.