move over ethanol, market forces favor cng as a gasoline replacement
DESCRIPTION
The gap between the price of oil and natural gas is at its widest in history. That should favor wider use of Compressed Natural Gas (CNG) as a motor fuel. This slideshow examines the advantages of CNG and discusses some of the economic barriers that stand in the way of its wider use.TRANSCRIPT
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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.
Posted March 16, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com
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)
A Hydrogen Fuel PumpHydrogen 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
Posted March 16, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com
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)
A CNG Powered Bus in Arlington, VAPhoto source: Mario Roberto Duran Ortiz, http://commons.wikimedia.org/wiki/File:CNG_buses_Arlington_Transit_ART_07_2010_9541.JPG
Posted March 16, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com
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 14th 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
Picture source: http://commons.wikimedia.org/wiki/File:CNG_pump_DCA_07_2010_9833.JPG
Posted March 16, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com
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
Almost any vehicle can be converted to CNG. NGV America maintains a business directory of conversion kits and installershttp://www.ngvc.org/buz_dir/index.html
Photo source: http://commons.wikimedia.org/wiki/File:Carroagas.jpg
Posted March 16, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com
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
Follow this link to view a more detailed graph showing trends in oil and natural gas prices
Posted March 16, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com
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 E1 where more CNGVs are sold and the price of CNGVs rises
Posted March 16, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com
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 E2 than E1, and the total quantity of CNGVs sold will increase more strongly
Posted March 16, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com
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