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CNG vehicles, another reason to be long-term bullish on natural gas

2013.04.04 - CNG Fuel CostsEnlarge Graph

  • Most U.S. vehicles are powered by gasoline, a product of crude oil. Compressed natural gas (CNG) vehicles provide a cheaper fuel alternative which could incentivize consumers to switch from gasoline vehicles.
  • In the short-term there are hurdles to increased CNG vehicle usage, however, factors such as fuel price savings, cheaper CNG equipment, and emissions concerns are likely to drive usage higher.

Currently, most vehicles in the U.S. are powered by gasoline, which is a product of crude oil. However, on an energy equivalent basis, gasoline is much more expensive than natural gas. Natural gas vehicles run on compressed (pressurized) natural gas, or CNG. A recent search for pump prices in the New York tri-state area (sourced from http://www.cngprices.com/station_map.php) showed costs of $2.40-$2.80 per GGE (gasoline gallon equivalent). Meanwhile, a search for conventional gasoline prices in the area returned costs of $3.40-4.20 per gallon. If the price difference between the two commodities persists, it should give a strong long-term incentive to consumers and companies to switch to natural gas as a vehicle fuel.

However, there are some hurdles to this process. For one, natural gas fueling stations are not nearly as abundant as conventional gasoline fueling stations, as it does not make economic sense to install a CNG fueling station if there aren’t enough CNG vehicles on the road. Likewise, consumers may not wish to purchase a CNG vehicle if refueling it will be too inconvenient due to a lack of natural gas fueling stations. There exists equipment to refuel at home, however, the cost of several thousand dollars could make it prohibitively expensive for many consumers. Companies are working on more cost-friendly equipment. For example, last year Chesapeake Energy (CHK) announced that it was working with General Electric to develop a $500 appliance for CNG home refueling.

Another hurdle to quicker CNG vehicle penetration is that CNG vehicles are currently more expensive than traditional gasoline powered vehicles. As a sample data point, the Honda Civic Natural Gas base model costs $26,305  compared to the Honda Civic bas model of $18,165 (as a sidebar, Honda was offering a $3,000 fuel card for CNG as an incentive to purchase the Civic Natural Gas). An alternative to buying a new CNG vehicle is to convert an existing gasoline vehicle to use CNG.

Again, CNG vehicle usage is not yet very widespread as current market penetration is still less than 1% of the total U.S. vehicle market. However, aside from the cheaper cost of fuel there exist other incentives for consumers to switch to CNG over the long term. Broadly speaking, CNG vehicles generate lower emissions than their gasoline burning counterparts. At present, greenhouse gas reduction has become highly topical. Additionally, some states are offering inducements for CNG vehicle usage, such as tax credits or carpool late status.

So, while in the short-term CNG vehicle usage is not very widespread, several factors, such as fuel price, cheaper equipment, and emissions concerns, are likely to push CNG vehicle usage higher. Thus, increased CNG vehicle usage would be a positive long-term demand driver for natural gas, which could provide price support to the commodity, and also higher revenues for domestic natural gas producers, such as Chesapeake Energy (CHK), Southwestern Energy (SWN), and Range Resources (RRC). Investors can also gain exposure to natural gas through ETFs such as the United States Natural Gas Fund (UNG), which aims to track the front month natural gas futures price, and United States 12 Month Natural Gas Fund (UNL), which aims to track the average of the next twelve months’ natural gas futures prices.

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