Market for transport fuels in the US will remain subject to diversification

Oct. 1, 2012
Natural gas and oil from unconventional resource plays, rightly characterized as "revolutionary," will supplement but not necessarily dominate a market for transportation fuel that is likely to remain subject to long-term diversification.

Philip E. Lewis
Consultant
Houston

Michael J. Economides
Energy Tribune
University of Houston

Omobola Ajao
Consultant
Houston

Natural gas and oil from unconventional resource plays, rightly characterized as "revolutionary," will supplement but not necessarily dominate a market for transportation fuel that is likely to remain subject to long-term diversification. Contrary to popular suspicion, moreover, they do not represent existential threats to renewable energy.

Historic confusion over the various forms of energy and over their distribution across a range of applications tends to distort analysis in the US. The confusion began in 1973 after the second Arab-Israeli military conflict, the Yom Kippur War, when Arab members of the Organization of Petroleum Exporting Countries and several other Arab oil producers declared an oil embargo against the US and the Netherlands because of their support of Israel. It was the first time that a cartel used oil as a weapon in pursuit of a political aim.

Shortly thereafter, "energy crisis" became part of the American lexicon. Oil prices started moving up from a decades-old price of $2/bbl to $20/bbl in a matter of months. A few years later, with turmoil in the Middle East brewing, former President Jimmy Carter broadcast images from the White House wearing a cardigan, sitting by a fireplace, preaching homilies on energy conservation and "energy independence." One recommendation: Lower your thermostats in the winter and raise them in the summer to save America from increasing oil imports.

The advice was silly then, and it has become sillier since, although it is still repeated as an obvious but superficial environmentalist mantra. At the simplest level, the US uses hardly any oil for power generation and relies almost solely on oil for transportation.

Energy diversity—using different energy sources in different applications—and not just supply, has been and remains the dominant problem. It is in that context that potential uses of new oil and gas supplies from unconventional resource plays—especially their potential in transportation markets—must be assessed.

The US market

The US spends about 28% of its primary energy on transportation, which is typical of the rest of the world (Fig. 1). Fig. 2 shows how primary energy sources are used in the various sectors of the US economy. It is clear that petroleum is insignificant in power generation (about 1%) but dominant in transportation, of which 94% derives from petroleum, 4% from renewable sources (corn-based ethanol), and 2% from natural gas (mostly to transport other gas, as fuel for pipeline compressors).

The automobile is an extraordinary tool in the evolution of modern society and economy. Table 1 shows the vehicle population in selected countries. Much has been written about the economic and social impact of motor vehicles. Although trains are far less expensive to transport a given mass of goods per unit distance, they do not offer the ability to target a specific destination, as can be done with interstate trucks and, even more precisely, with regional trucks.

For private use, it has often been repeated that ownership is a litmus test of the evolution of a society from underdeveloped to developing status. It is intimately related to improved living standards but also, and even more important, with democracy and personal freedom.

The world total of private and commercial vehicles has exceeded 1 billion. This means about 145 vehicles/1,000 people. However, the developed world, headed by the US, has a highly disproportionate share of vehicles. The US in particular—with a population amounting to slightly over 4% of the world total—encompasses over 23% of the world's automobiles.

Fig. 3 shows automobile densities in numbers of vehicles per 1,000 people. The US heads the world with almost 800, closely followed by Europe and Japan. However, China, the emerging world economic superpower, trails far behind with 56 vehicles/1,000 people. Other emerging economic powers, such as Brazil and India, are even further behind, with 46 and 19 vehicles/1,000 people, respectively.

It can easily be calculated from Fig. 3 that bringing the world population of 7 billion to a vehicle density of, for example, Japan would require 4 billion vehicles, quadrupling the current world total. This would be a massive undertaking, unlikely to happen and, in fact, almost certainly undesirable, although trends in many countries have persistently been strongly upward.

Continued reliance on petroleum for transportation is also untenable even if only half of the forecast future vehicle population is realized. Penetration by other fuels has been barely noticeable in spite of large government subsidies. Table 2 outlines the number of alternative-fuel vehicles in the US, representing a minuscule fraction of the total.

One of the obvious reasons for the continued dominance of petroleum is the existing massive infrastructure. Another reason is the continued relatively low price of petroleum compared with any other fuel. China, whose infrastructure is relatively immature, will probably lead the search for the alternative fuels that will likely dominate the world economy for decades.

But even for the US, recent events may lead to substantial reconsideration of motor vehicle fuels.

The unconventional 'revolution'

Recent increases in natural gas production from shale formations around the US have been touted as "revolutionary." Shale oil, while available not quite on the massive scale of shale gas, is complementary. The use of the hackneyed term "revolutionary" for these developments is, for once, appropriate and accurate. Fuels derived from oil and gas (diesel, gasoline, LPG, compressed natural gas, and LNG, for example) will clearly benefit directly from the shale revolution. Nonbiogenic alternative fuels—such as methanol, ethanol from nonagricultural sources, butanol, and dimethyl ether—also might be ramped up with the advent of cheap natural gas.

Many analysts have predicted that alternative and renewable fuels will face headwinds brought on by an abundance of natural gas. Last October, the share prices of a number of alternative-fuel companies swooned in response to multiple National Academy of Sciences findings that renewable fuels are neither competitive with conventional fuels nor necessarily superior in environmental performance.1

At least on the surface, CNG vehicles make sense. Some, like oil man T. Boone Pickens, have advocated a massive transformation and have given tantalizing examples of the impact of such a move. Although theoretical and in need of massive studies and analysis, the conversion of the nation's 9 million tractor-trailer trucks, capable of long-distance, large-volume transport, from diesel to CNG would reduce US consumption by 3 million b/d of oil.

Nontraditional options

Increased oil and gas production and lower prices can boost options for nontraditional energy forms. Oil and gas are in fact major—probably dominant—cost components in the production of biofuels. Some have suggested that corn-ethanol production is essentially a natural gas-to-ethanol conversion process, albeit a low-efficiency one. Cheap conventional fuels support expensive, exotic fuels the way reliable conventional power plants backstop the use of unpredictable and erratic wind-generated power.

But the political appeal of biofuels has worn thin. The US spent $22 billion on biofuels during 2009-11 alone, as shown in Fig. 4. Fig. 4 also shows a rapid decline ("collapse" might be more accurate) in federal biofuels spending beginning in 2012. Federal biofuels programs and subsidies have recently been allowed to expire, with more likely to expire soon as shown in Fig. 5. Another bellwether: Biofuels producer Coskata Inc. is switching from a biomass source to natural gas to produce ethanol. "Advanced biofuels," such as cellulosic ethanol, would hopefully have lower impact on food prices than corn ethanol, but they remain commercially unavailable.

A long, slow decline in biofuels seems inevitable, certainly in relative importance and probably even in actual volume. Renewable energy is failing in other areas, too. In spite of wind farms stretched to the horizon, massive federal and state subsidies, and questions of federal investment propriety (e.g., Solyndra), renewables have still declined as a percentage of total power generation of the past 20 years.2

Other nontraditional energy forms have brighter futures, made all the more so by the abundance of conventional energy available at diminished cost.

Natural gas can make a major contribution to clean electric power generation, which in turn can enable a higher penetration of plug-in electric vehicles than would be otherwise practicable. But the electric vehicle (EV) star is rising only for very light-duty vehicles. The public's EV infatuation may soon wane since a recent report by the Organization for Economic Cooperation and Development has questioned the environmental benefits of these vehicles.3

Proliferation of options

Continuation of one very long-term trend seems quite clear: a proliferation of fuel options. A single, undifferentiated gasoline served for the first 20 years of automotive history until premium "ethyl" (leaded) gasoline became available in the late 1920s.

More choices came on the market in US around 1960: diesel and multiple octane rating gasolines. In the 1970s, ethanol-gasoline blends became widely available, and by the 2000s, those blends were available in multiple mix ratios. Meanwhile, the US Environmental Protection Agency balkanized the gasoline market by specifying "boutique" fuels with multiple specifications for vapor pressure and octane rating for multiple markets.

This is sensible. It was never logical to use the same fuel-engine system for a 2,000-lb, four-passenger vehicle used occasionally to pick up groceries as for an 80,000-lb, long-haul truck racking up 100,000+ miles/year. And it is definitely the latter vehicle that stands to benefit or suffer most from fuel optimization or misapplication in spite of the political class's obsession with passenger vehicles.

An emerging challenge and at the same time the enabler for the use of gas in transportation will be the transportation of the natural gas itself. Today, more than 2.6 quadrillion cu ft of natural gas reserves outside of North America are considered stranded—not connected to production systems. This figure is essentially equal to the 2.8 quadrillion cu ft currently connected to infrastructure. Total world reserves, including North America, are around 7 quadrillion cu ft. Confusing the situation and impeding smooth development, in contrast to oil, is the enormous disparity among natural gas prices in various parts of the world: $1/MMbtu in Russia, $2.50/MMbtu in the US, $8/MMbtu in Europe, $16/MMbtu in the Far East. Lack of adequate and diversified transportation is the reason.

It has been repeated often that oil is easier than natural gas to transport with pipelines and tankers. Natural gas can be transported with onshore pipelines but it gets rather expensive with offshore pipelines. Traditionally, the cost per length of offshore pipelines has been considered 10 times the onshore cost. The main alternative has been LNG, but other options have been offered, such as CNG and the chemical conversion of gas to transportable fuels, collectively called gas-to-liquids (GTL). The latter has changed over the years, with alcohols getting new prominence.4

Transportation questions will receive much attention in the next 10 years with regard to LPG, CNG, LNG, and fuel alcohols and ethers synthesized from natural gas—and with natural gas itself applied directly to heavy-duty vehicles.

References

1. "Renewable Fuel Standard: Potential Economic and Environmental Effects of US Biofuel Policy," National Academy of Sciences, 2012.

2. Casten, S., "How wind power fits into our energy diet," http://grist.org/wind-power/how-wind-power-fits-into-our-energy-diet/(2012).

3. Grist, P., "Electric Vehicles Revisited—Costs, Subsidies and Prospects," International Transport Forum, Leipzig, 2012.

4. Economides, M.J., Wang, X., Colafemmina, F., Tomaselli, V.N., "Optimization of Natural Gas Transportation," Paper SPE 161583, 2012.

The authors

Lewis

Philip E. Lewis is a petroleum engineer and consultant.

Economides

Michael Economides is editor-in-chief of the Energy Tribune and a professor at the Cullen College of Engineering at the University of Houston. He holds a PhD in petroleum engineering from Stanford University.

Ajao

Omobola Ajao is a petroleum production engineer and a consultant. She holds a masters degree in petroleum engineering from the University of Houston and BS in chemical engineering from Texas A&M University.