The top energy play for the last few years has been converting gasoline and diesel-burning motors to run on natural gas. I wrote about that in Energy Forecast 2013-2014: Convert to Natural Gas. Local delivery vans, over-the-road trucks and even farm tractors have been switched over. Now that oil is cheap, bringing with it drops in gasoline and diesel prices, does it still make sense to convert to natural gas? First we’ll review the economics of natural gas, then discuss business strategy in an uncertain energy future.
Historically, the prices of oil and natural gas (on an energy-equivalent basis) have moved together, with gas typically selling at a discount to oil. Folks in the industry say that’s because you can’t carry natural gas in a bucket. (They think that’s funny.)
The prices diverged starting in about 2006. The global economy was booming, pulling up the price of oil. Natural gas production was about to increase rapidly in North America. Oil is a global market, and increased production here in the United States and Canada reduced our oil imports, which spread the price impact over the world.
Natural gas, in contrast, moves mostly through pipelines and is thus a continental market. Increasing production impacted only North American natural gas prices. Because the price impact was not spread around the world, it was much more pronounced.
The wide gap between oil and natural gas prices, which has been especially strong since 2009, has led to fuel conversion efforts. The first conversions were in electric generation plants, which can switch from oil or coal to natural gas fairly easily. Other energy-intensive industries, such as chemicals, metals, and ceramics, converted next. The real challenge has been for transportation. However, in the past years we have seen liquefied natural gas power locomotives, tugboats and trucks, with compressed natural gas used for shorter-run vehicles. Refueling stations are spreading.
