Move Over Ethanol, Market Forces Favor CNG as a Gasoline Replacement

More Slides from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/ Move Over Ethanol, Market Forces Favor CNG Posted March 16, 2011 Terms of Use: These slides are made available under Creative Commons License Attribution—Share Alike 3.0 . You are free to use these slides as a resource for your economics classes together with whatever textbook you are using. If you like the slides, you may also want to take a look at my textbook, Introduction to Economics , from BVT Publishers.

The Search for the Fuel of the Future
The US government has spent billions in the search for the elusive “fuel of the future” that will be clean, cheap, and made in America
Ethanol
Hydrogen fuel cells
Nuclear fusion
Meanwhile, few have noticed a humble, off-the-shelf technology that is all of these things, and is available right now: compressed natural gas (CNG)
Posted March 16, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com A Hydrogen Fuel Pump Hydrogen has been touted as the “fuel of the future” but it is decades away from widespread use. Photo source: EERE http://commons.wikimedia.org/wiki/File:Hydrogen_fueling_nozzle.jpg

CNG: The Fuel of Now
More than 100,000 buses and delivery vehicles in the United States run on CNG
CNG emits less carbon than any other fossil fuel and fewer of the gases that cause local air pollution and smog
Many individual consumers have converted cars, pickups, and SUVs to CNG or use of dual fuels
Honda is the only manufacturer that sells a street-ready CNG vehicle in the US (the Honda GX)
Posted March 16, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com A CNG Powered Bus in Arlington, VA Photo source: Mario Roberto Duran Ortiz, http://commons.wikimedia.org/wiki/File:CNG_buses_Arlington_Transit_ART_07_2010_9541.JPG

CNG Around the World
Although the United States is one of the world’s largest producers of natural gas, it lags behind in use of CNG as a transportation fuel
According to industry source NGV Global , the United States ranks 14 th in use of this reliable and proven technology
Posted March 16, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com

Barriers to CNG: Filling Stations
CNG suffers from a “chicken and egg” problem—demand for vehicles is low until there are more filling stations, but supply of filling stations is low until there are more vehicles on the road
There are about 1,000 CNG filling stations in the US now, but only about half of them are open to the public
The biggest number of stations are in California. Other clusters are found in New York, New Jersey, and the Washington, D.C. area
Posted March 16, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com Picture source: http://commons.wikimedia.org/wiki/File:CNG_pump_DCA_07_2010_9833.JPG

Barriers to CNG: Conversion Cost
Almost any vehicle can be converted to CNG or dual fuel use, but strict EPA regulations keep the cost of conversion extremely high, up to $20,000 or more per vehicle
Non-certified kits cost as little as $1,000 but installing them is considered to constitute illegal tampering with a vehicle’s emission system
Legislation has been introduced to simplify the certification process, but it has not yet passed
Clean energy tax credits offset only part of the high cost of regulatory barriers
Posted March 16, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com Almost any vehicle can be converted to CNG. NGV America maintains a business directory of conversion kits and installers http://www.ngvc.org/buz_dir/index.html Photo source: http://commons.wikimedia.org/wiki/File:Carroagas.jpg

Market Forces Now Favor CNG
New discoveries of unconventional natural gas (shale, tight sands, coal-bed methane) have increased supply
Growth of demand and political disturbances in the Middle East have sent oil prices upward
Result: The gap between natural gas and oil prices is now the greatest on record
Posted March 16, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com Follow this link to view a more detailed graph showing trends in oil and natural gas prices

Short-Run Market Reaction
The figure shows how the market for CNG vehicles (CNGVs) reacts in the short run to a lower price for natural gas
CNG fuel is a complement to CNGVs, so the demand curve shifts to the right
The market moves up and to the right along the supply curve to a new equilibrium at E 1 where more CNGVs are sold and the price of CNGVs rises

Long-Run Market Reaction
In the long run, supply is more elastic, because there is time for regulatory barriers to be overcome and for new suppliers to enter the market
Long-run demand is also more elastic, because more CNGVs on the road will make fuel more widely available
As a result, the long-run market equilibrium will look more like E 2 than E 1 , and the total quantity of CNGVs sold will increase more strongly

The Best Hope for CNG
The best hope for CNG is probably a market-driven, bottom-up approach rather than a top-down legislative breakthrough
Low CNG prices will gradually lead to more fleet vehicles and private conversions
More vehicles on the road will bring more CNG filling stations
More vehicles plus the price advantage will create pressure for more favorable regulation
Eventually, the US may catch up with Bangladesh in use of this fuel of the future

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Move Over Ethanol, Market Forces Favor CNG as a Gasoline Replacement

by Ed Dolan on Mar 27, 2011

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Move Over Ethanol, Market Forces Favor CNG as a Gasoline Replacement — Presentation Transcript