Diatribes of Jay

This is a blog of essays on public policy. It shuns ideology and applies facts, logic and math to economic, social and political problems. It has a subject-matter index, a list of recent posts, and permalinks at the ends of posts. Comments are moderated and may take time to appear. Note: Profile updated 4/7/12

25 February 2012

New Energy Series: Why Cars and Trucks Should Switch to Natural Gas Now

Introduction: A Series of Essays on Energy

The defining issue of our time is not immigration, so-called “Islamo-Fascism,” the deficit, or big versus small government. The defining issue of our time is energy. If the recent leap in gasoline prices makes you nervous, you ain’t seen nothin’ yet!

The issue will come to a head this year and next, when global market forces will force us to choose. For the near term, we will have to choose between natural gas and oil/gasoline. For the medium and long term, we will have to choose among solar power, wind energy, nuclear power and coal. We will make these choices partly as consumers, partly with our business decisions, and partly with our votes.

Nothing we do in the next two years will have a greater effect on our future and our prospects for maintaining our present standard of living, let alone improving it. And nothing we do in the next five to ten years will affect our children’s lives more. If we make a big mistake, they will pay for it their entire lives, literally (in dollars and reduced income) and figuratively (in a lower standard of living, poorer health and quality of life, and a declining society).

In recognition of these facts, today’s post inaugurates a series of essays on energy. It’s not—by far—my first post in that series. But it’s the first to be designated as such. And I’m starting with this post because it offers vital practical advice to anyone who manages a fleet of cars or trucks, plus many consumers.

Readers who want background on current hot energy topics should see the following recent posts:

Graphical Extrapolation of Gasoline Prices: Six or Seven Dollars a Gallon in Ten Years
The Big Lie about Wind and Solar Power
Possible International “Trade” in Wind and Solar Power
How to Make Solar Power Seem Expensive When it Isn’t

Readers who want more general theoretical background should consult the following:

Energy Economics
“Daddy! Mommy! I Want More Oil!”
Innumeracy, Economics and the Great Accommodation
Coal versus Nuclear Power: Do You Like to Breathe?
The Dangerous Illusion of “Clean Coal”
Energy Policy: Good Batteries and How to Get Them
Liquid Fluoride Thorium Reactors
Lack of Imagination III: Selling Engineering, for a Change

Readers who want some insight into why gasoline prices are slowly and steadily increasing might like the following:

Update on Oil and Gasoline Price Projections [January 2011]
Four Dollars a Gallon by Next Summer [2011, correct prediction]
Assertions of a Speculative Bubble in Oil Prices

Today’s post follows:

Energy economics is a complex subject. When you drill down to regional price differentials and monthly fluctuations, it gets even more complex. And it’s easy to confuse temporary trends—due to things like pipeline shutdowns and refinery capacity—with longer-term trends like the secular (and daily growing!) global supply crunch in oil.

But once in a while, it’s possible to draw a clear and useful conclusion from existing data and news. Now is one of those times. That conclusion leads to simple and useful advice for any consumer, business or governmental agency (large or small) that owns or leases one or more cars or trucks.

The advice is as follows: run, do not walk, to your nearest conversion shop and have every car and truck you run converted to burn natural gas. If your fleet is up for replacement, in whole or in part, buy natural-gas replacements.

If you follow this advice, you will save yourself oodles of money, enormous headaches, and many sleepless nights.

There are only two caveats. First, if your operations require long-range hauls—i.e., long runs on a single tank of fuel—you should first investigate where natural-gas stations are and what the range of your vehicles will be after conversion. Natural-gas vehicles tend to have shorter single-tank ranges than those burning gasoline or diesel fuel. Second, you should make sure that natural-gas stations in your area are conveniently located for your operations.

But apart from those caveats, converting from gasoline to natural gas will win big. Here’s why.

Let’s start with the present. As of February 20, 2012, the average price of gasoline in our nation, for all grades, was $3.65 per gallon. Gasoline is made from oil, which cost about $105 per barrel on that same day. The energy equivalent of a barrel of oil—5.8 million BTU—you can get from a quantity of natural gas that, at last week’s price, cost 5.8 x $ 2.6 = $15.08. So if you had bought natural gas to run your vehicles last week, rather than gasoline, your cost of fuel would have been seven times cheaper.

Let’s put that in simple terms. Just last week, the natural-gas energy-equivalent of a gallon of gasoline cost $3.65 x 15.08/105 = 52.4 cents. That’s a saving of $ 3.65 − 0.524 = $3.13. If you’d converted earlier, you’d now be saving more money per gallon than you spent on gasoline a few years ago!

I know, I know. Crude oil is not gasoline, so this arithmetic is not exact. But it costs additional money to refine crude oil into gasoline (which cost appears in its price). In fact, refinery bottlenecks are largely responsible for the recent rises of and severe fluctuations in the price of gasoline, especially in the Midwest. So the arithmetic energy-equivalence calculation above actually understates the huge price advantage of natural gas.

How much does it cost to convert a vehicle? Well, according to the popular radio show CarTalk, you can pay more, but you can get the job done for $3,500. Or you can buy a brand new natural-gas car for about that much additional cost.

The following table, based on simple arithmetic, shows how quickly you can recover this capital investment, depending on your current gasoline vehicle’s fuel efficiency (miles per gallon) and the number of miles it runs per year:

Time to Recover $3,500 Investment in Converting
Vehicle to Natural Gas

Miles Driven Per YearVehicle’s Gasoline Mileage (MPG)Conversion-Cost Recovery Time (Months)

So unless your vehicles don’t run much (less than 15,000 miles per year) and/or you already get much better mileage than 20 miles per gallon, you’ll recover your investment in converting to natural gas in less than 18 months.

That’s not just good. It’s stupendous, especially if your vehicles run up a lot of miles and get poor mileage! And after that break-even point for conversion, you’ll save at least $3.13 with every gasoline-gallon-equivalent that your fleet burns. The savings will go directly to your bottom line, like money from heaven.

But what about the future? Well, as I’ve written at length (1, 2 and 3), in the long run the price of oil is only going to go up. (It may go down temporarily in economic downturns, as it did in 2009-2010 and at the onset of the Greek debt crisis. But in economic downturns you have less money to spend on gasoline, too.)

In contrast, the current gas “fracking” craze is likely to drive the price of natural gas down, at least in the near term, by increasing supply. Some day natural-gas prices will start to rise as more and more smart people switch to natural gas from oil and global demand for natural gas increases, as it is doing now with oil.

But by then you will have long since paid for your fleet conversion. And how high can natural gas prices rise? Even if they triple, you’ll still be saving at least $2 a gallon-equivalent for every mile your fleet drives.

The clincher is what’s going to happen this summer. In June, an obscure oil pipeline called “Seaway” from the US Gulf Coast to Cushing, Oklahoma, will reverse direction, sending US crude to the Gulf for export. The purposes of the switch will be: (1) to relieve a glut of crude (but not gasoline, due to refinery bottlenecks) in the Midwest and (2) to bring the two global benchmarks for crude oil prices (West Texas Intermediate (WTI) and Brent) closer together, so that the so-called “global” market looks more uniform. (For a good review of the excruciating details, read this.)

According to Goldman Sachs, this change will raise the price of crude in the US, and consequently the price of gasoline (refiners are not charities and are hard-pressed now), by about 7 percent by next August. Based on the February 20 price of gasoline, $3.65 per gallon, it will also increase the price of every gallon that you buy by 25.5 cents.

That amount—25.5 cents, multiplied by every vehicle you manage and every mile it runs, will come directly off your bottom line. And it won’t wait until June to do so, because futures markets are raising prices right now.

So shouldn’t you get started converting your fleet yesterday?

Footnote: I know, I know. I don’t much like Goldman Sachs either. But no one ever questioned their brains, just their morals and their ability to destroy the global economy with absolutely no accountability.

Update (2/27/12):

Indirect “mainstream” confirmation of this blog’s advice came even more quickly than usual today. In an article about Warren Buffet’s utility-investment mistake, Bloomberg.com reported what experts think future natural-gas prices will be. Hsulin Peng, an analyst at Robert W. Baird & Co., believes prices per million BTU won’t reach $5 until 2015. Another analyst, Andy DeVries at CreditSights Inc. (New York), thinks they won’t hit $6.15 until 2022.

If the DeVries projection is right, and if you convert to natural gas a gasoline-burning car or small truck now running 30,000 miles per year at 20 MPG, you’ll save at least $33,687 in ten years, even accounting for your investment-recovery time.

That’s enough to buy a new vehicle. The arithmetic is irresistible and offers a clear path to energy-independence in transportation, too.

Update II (2/29/12):

I don’t think Bloomberg.com’s reporters are working to confirm this blog, but sometimes it looks that way. Today they reported that, in 2011, and for the first time since 1949, the US exported more oil products than it imported.

Read that quickly and you’ll miss the point. The story is not about crude oil, but about oil products, principally gasoline and so-called “distillates” like diesel fuel and heating oil. Demand for those products inside the US has fallen, due both to a weak economy and conservation efforts, including higher mileage cars.

As domestic demand for those products decreases, prices threaten to fall. Refineries, which usually operate on small margins anyway, don’t want to waste their capacity and lose money. So they turn to Europe and Latin America for sales. That’s exactly what the story reports.

The result is globalization not just of the crude oil market, but of the markets for oil products refined in the US. Our refineries are importing foreign crude oil only to export their refined products.

What does that mean for consumers? Even as independence in oil for our own needs in the US increases, domestic prices of gasoline and diesel fuel won’t fall because the US is now part of an international market for them. This is just one more example of globalization making life more “competitive,” i.e., harder, for the American consumer.

There is really only one way you can fight back: convert your car or small truck to natural gas ASAP and hope that: (1) globalizing the natural-gas market through international shipments of liquified natural gas (which have been planned for some time) takes a while; and (2) the “fracking” craze keeps natural-gas prices here low for as long as the reports of futures experts mentioned above predict.

On Friday, I’m going to post a table showing per-mile energy costs for various sources of energy capable of propelling cars and small trucks. The results might surprise you.

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