Of projections and policies – natural gas and transportation fuels

Between half-time breaks in football games and during free evenings, I read the recent projections from Exxon Mobil Corp. and EIA for future energy consumption. Both analyses, one by a major global oil company, and the other by a government agency, essentially said the same thing concerning the potential for natural gas and its derivative methanol. Natural gas use now is only about 1 percent of the total fuel used in vehicles; in 2040, it will only rise to 4 percent.

EIA indicates that natural gas usage will double the agency’s outlook in 2011-not exactly a confidence building fact when considering precision of projections. The increase will take place in the trucking sector and liquefied natural gas (LNG). Owners of automobiles will not rush to natural gas, because of lack of pumping stations and the low density of natural gas. Adam Sieminski, EIA administrator, said, “what really holds natural gas back is the infrastructure to refuel and how much energy you can put into a vehicle is limited.”

Exxon Mobil’s annual report parrots EIA on a global basis. “Globally, Exxon Mobil expects to see growth in plug-in hybrids and electric vehicles (by 2040), along with compressed natural gas (CNG) and liquefied petroleum gas (LPG) powered vehicles. However, these will account for only about 5 percent of global fleet in 2040, their growth limited by cost and functionality considerations.”

ExxonMobil Transportation Fuel DemandBoth reports appear to underestimate the future demand for natural gas and methanol. In the past, both annual reports have understated natural gas and oil supplies and made misjudgments concerning prices and demand. Paraphrasing and amending the words of the great Greek philosopher, Socrates, “an unexamined projection is not worth having.”

Exxon Mobil’s study does not reveal its assumptions concerning the price of gasoline versus natural gas. Both Exxon Mobil and EIA suggest that gasoline prices will peak in the next decade and begin to decline because of energy efficiency, CAFE standards and the increased use of alternative fuels, particularly powered by electricity. Neither explores in depth the impact of price differentials on efficiency. Yes, gasoline is denser and gets more miles per gallon gasoline equivalent (MPGe). But technology has reduced the differential and the price of gasoline remains comparatively high, permitting differences concerning density to be minimized considerably. Natural gas and its derivative methanol are likely to remain cheaper than gasoline and attract many cost conscious consumers.

EIA’s report, contrary to Exxon Mobil’s, repetitively indicates that its projection is dependent on most current laws, policies and regulations remaining intact, with respect to the production, distribution and sale of oil and natural gas. However, Exxon Mobil, reflecting lots of chutzpah, recommends that natural gas development occur without government involvement or support, despite the fact that it receives billions of dollars in tax subsidies for oil and despite the benefits it receives from government regulations that help create a near-monopolistic market for gasoline.

Neither report discusses the impact on the demand for natural gas and methanol, should Congress decide to end the laws and regulations that generally restrict the transportation fuel market to gasoline and discourage the production of flex-fuel automobiles. Neither report grants great weight to the probable development of policies and legislation to curb GHG emissions from cars and trucks. Both will favor natural gas and methanol-fueled automobiles. They emit far less GHG emissions than gasoline-powered cars.

The EIA and Exxon Mobil reports indicate that a lack of infrastructure, primarily fuel stations, will limit use of natural gas and methanol, as well as other alternative fuels. Funny, but oil producers, like Exxon Mobil, often limit their franchise gas stations from adding a pump or two for alternative fuels. There are now over 1,000 stations offering alternative fuels in the country and natural gas companies have promised to help fund many more over the next few years. To some extent, the fuel station and demand issue reflects a chicken-egg debate. Clearly, easier access to alternative fuels in fuel stations, combined with opening up of the market place to alternative fuels, will increase demand for natural gas.

Neither the EIA nor Exxon Mobil reports dwell for long on the demand effect of easier conversion of existing cars to natural gas or methanol. There are upwards of 300 million aging vehicles in the U.S. alone. More flexible regulations, certainly sensitive to the environment but also sensitive to consumer costs, would significantly increase the ability of existing car owners to convert their cars to natural gas and methanol, as well as other alternative fuels. Relatively inexpensive changes to existing cars would allow for conversion from gasoline to methanol. The cost of converting new cars to natural gas from gasoline, while still too high for many low and moderate-income households, seems to be decreasing every year. Scale and technology will bring costs down in the near future for conversion of both older and new cars.

Most oil companies have a vested interest in limiting demand for natural gas and retaining sometimes outmoded government regulations. Even though many, like Exxon Mobil, have bought natural gas fields, their main stake is in oil. The new addition of natural gas appears focused mainly on business and utilities. It, also is a protection should markets change. I believe Exxon Mobil’s projections reflect, to some extent, their company’s fiscal objectives. Conversely, why EIA’s primary projections portray a miniscule demand for natural gas from the transportation sector over the next three decades, despite the fact that policies and regulations are likely to soon change, remains a mystery.

Interestingly, Gov. John Hickenlooper (D) of Colorado and Gov. Fallin (R) of Oklahoma have one-upped the projections concerning demand and the costs of natural gas as well as the development of cheaper natural gas cars. In a way, they are trying to prove projections from both government and Exxon Mobil, are wrong. Their coalition of many states (unfortunately, not including California) have secured Detroit’s and dealer commitments to produce newer, cheaper CNG vehicles to replace older state cars. Their bipartisan effort has made progress. Fallin recently indicated, “Our ambitious plan that we started more than a year ago is well on its way. A total of 22 states are now participating in the initiative, enough to demonstrate to vehicle manufactures that there is ‘pent-up demand’ for CNG vehicles.” Hickenlooper said, “natural gas burns cleaner and is less expensive than gasoline and diesel” and predicted that there will be sufficient demand for CNG vehicles within two years and that they will be widely available for public fleets and private car buyers. By the way, the national average price for a gallon of self-serve regular gasoline recently hovered around $3.78, compared to around $1.35 for the gallon equivalent of natural gas. So there!