Gas as vehicle fuel

June 4, 2012
Should natural gas displace gasoline and diesel as vehicle fuels in the US? Many gas producers think so. They might be right.

Should natural gas displace gasoline and diesel as vehicle fuels in the US? Many gas producers think so. They might be right.

Producers have powerful motivation to see transport markets embrace gas. Their innovation and investment have flipped the overall gas market from shortage to surplus. For their transformational achievement they have been rewarded with punishingly low gas prices. Relief requires short-term restraint on supply and longer-term growth of consumption. Supply restraint is under way. Although gas production is rising, much is shut in because of price distress. If new demand emerges, supply will meet it. The faster it happens, whether by expansion of existing markets or development of new ones, the better for producers.

Visible prospect

Transportation represents a large and visible prospect for market development. But vehicles must be able to burn gas. They also need refueling stations equipped to receive gas and dispense it. Converting a large part of the transport market to gas requires large capital expenditure.

Is conversion of much of the vehicle-fuel market to gas worth the investment? If private investors put their capital at risk, the answer is maybe. If taxpayers must underwrite the investment, the answer is no.

Gas offers benefits as a transport fuel, to be sure. It's less carbon-intensive than oil products. It comes from domestic sources. At present, it's cheaper on an energy-equivalent basis than gasoline or diesel.

Like any form of energy, however, gas has its disadvantages. Requiring constant containment and pressurization, it lacks the portability of liquid fuels. For mobile end uses, that's no minor inconvenience. Distribution facilities sometimes need to move, too.

Furthermore, the reduced carbon emissions associated with gas combustion must be weighed against the relatively elevated potency of methane as a greenhouse gas. As producers know from the Environmental Protection Agency's crackdown on methane leaks from field equipment, the benefits of gas as an antidote to climate change come with heavy qualification.

If the recently wide price advantage of gas relative to oil products remained in place, the balance of attributes still might favor gas in transport uses. But the gas discount will shrink. With oil prices now dropping, it already is. As the gas price disadvantage shrinks, the form advantages of liquids become hard for gas to overcome. Maybe it can. But the durable route to transport market penetration is through competition, not the government.

With politicians threatening tax mechanisms peculiar to oil and gas as subsidies, producers might feel tempted to claim a sliver of the fiscal pie to push gas into the transport market. Detractors accuse it of gorging on public money no matter what it does.

But producers shouldn't yield. They should keep the government out of the business, including as an investor in new-market infrastructure. They shouldn't be party to another increment of spending the government can't afford. And they shouldn't expect to receive anything in politics without giving something in return. A tax increase, perhaps? Or the loss of tax preferences?

Market will grow

While the wait is difficult, the overall gas market will grow. Already, the abundance of low-cost gas is expanding markets. Power generation is a growth market for gas. US petrochemical producers are building plants to absorb new supplies of ethane and other gas liquids. Manufacturers in other industries will gain confidence in gas as a plant fuel—a role that can make gas central to American economic recovery.

Some observers will say markets like those can't grow enough to absorb the gas now available in the US at meaningful rates. Yet only a few years ago, nearly all observers said the US had a chronic need to import gas.

Markets are like that—full of surprises. It would be no surprise if the market channeled gas in now-unpredictable amounts into vehicles. For the long-term sake of gas and the producers who supply it, though, the process should unfold without the distortions and tradeoffs inherent in participation by the government.

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