What's Holding Back Natural Gas Vehicles?

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Over the past few years, natural gas production in the U.S. has soared as new technologies have made it possible to extract huge quantities of gas from previously inaccessible reserves. The resultant glut drove down natural gas prices to a decade low last year, though they have since crept gradually higher.

One way of putting all that natural gas to use is by using it as a fuel for vehicles, like trucks and passenger cars. The concept isn't a novel one. In fact, natural gas vehicles, or NGVs, have been used extensively around the world for decades, especially in developing countries.

But their adoption in the U.S. has been much slower. With gasoline and diesel prices rising, why aren't American consumers and companies rushing out to buy natural gas vehicles?

The chicken-and-egg problem
While high upfront costs for NGVs can partially explain sluggish demand, many experts attribute slower adoption to the presence of what economists call "network externalities."

Despite the intimidating terminology, the concept is surprisingly straightforward. Basically, consumers and corporations have little incentive to own an NGV if there are hardly any places to refuel, and companies have little incentive to build refueling stations if hardly anybody drives NGVs. In other words, it's the classic chicken-and-egg problem.

A discussion paper published last year by Christopher Knittel, professor of energy economics at MIT, delves into greater detail. He writes:

Large-scale adoption of natural gas vehicles requires coordination between vehicle manufacturers, consumers, and refueling stations -- either existing gasoline stations or replacements. This creates a chicken-and-egg problem, or a network externality issue. Consumers are unwilling to purchase natural gas vehicles before a refueling infrastructure is built, but businesses will not invest in natural gas refueling stations until there is consumer demand. Each side would be better off if the other side acted first, but neither is willing to move without the other. Left alone, network externalities continue the dominance of the status quo technology when, from society's perspective, it should be replaced with a new technology.

However, while changes in energy and environmental policies can probably provide the biggest catalysts to surmount the chicken-and-egg problem, market forces are already finding ways to mitigate it.

Dual fuel vehicles
One way to get around the problem of limited refueling infrastructure is to offer vehicles that can run on either natural gas or gasoline. Some American automakers have already introduced dual fuel versions of some of their popular pickup trucks, which can run on either gasoline or compressed natural gas.

For instance, Chrysler Group made its CNG-powered Ram pickup available to retail buyers last October. The Ram 2500 Heavy Duty CNG truck, which features both a regular gasoline fuel tank and CNG storage tanks, starts at around $47,500 and can go about 255 miles on the CNG tank alone.

And GM (NYSE: GM  ) announced last November that it had commenced production of dual fuel versions of its 2013 Chevrolet Silverado 2500 HD and GMC Sierra 2500 HD. The company says these new models will offer seamless switching between regular gas and CNG, all for an $11,000 premium over the standard models.

Finally, Ford (NYSE: F  ) is also offering dual fuel versions of several of its pickup trucks. But unlike Chrysler and GM, Ford allows its retail customers much greater flexibility in modifying these vehicles. As part of its Qualified Vehicle Modified program, customers can pick which of Ford's partner companies installs the additional CNG components on their cars.  

These new dual fuel vehicles should offer an enticing alternative to Honda's Civic GX, which was the first natural gas-powered passenger vehicle available in the U.S. market, but currently doesn't offer the option to run on gasoline.

Natural gas-powered trucks
While it will probably be a little while longer until consumers start buying a lot more natural gas cars, the network problem is less of an issue for heavier vehicles, like long-haul trucks. Many of these trucks drive incredibly long distances, logging more miles and consuming more fuel per year than light vehicles like passenger cars.

They also tend to use LNG, which offers some additional advantages. LNG vehicles tend to have more compact fuel tanks and better driving ranges, which allows them to realize much greater savings over a long period of time despite higher upfront costs.

While there are only about 80 LNG fueling stations across the country right now, companies that see the tremendous potential in this market are working hard and investing heavily to build more.

For instance, Clean Energy Fuels (NASDAQ: CLNE  ) is in the process of constructing a network of LNG fueling stations along the Interstate highway system and in key metropolitan areas. The company recently announced that it will buy two LNG plants from General Electric to expand this network. And Royal Dutch Shell (NYSE: RDS-A  ) is planning to invest more than $300 million to construct some 200 LNG pumps at the Travel Centers of America chain of truck stops.

Going forward, the market for trucks running on some form of natural gas is projected to grow substantially. Pike Research forecasts that sales of LNG and CNG trucks will grow at annual rates of 17% and 14%, respectively, over the next six years. That amounts to sales of nearly a million new trucks running on natural gas between now and 2019.

While barriers still remain, it looks highly likely that natural gas will emerge as one of the fastest-growing transportation fuels over the next several years. One potential way to profit from this trend is through Clean Energy Fuels, which focuses its natural gas efforts primarily on trucking and fleets. It's poised to make a big impact on an essential industry. Read all about Clean Energy Fuels in our brand-new report. Just click here to get started.

Read/Post Comments (2) | Recommend This Article (8)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 27, 2013, at 10:20 PM, autoinsider wrote:

    The U.S. could once again become the engine of growth and a powerhouse economy with a trade and budget surplus if natgas were used instead of liquids. Big oil's standing in the way. They've got too much invested in liquid recovery.

  • Report this Comment On February 28, 2013, at 5:33 PM, rico53a wrote:

    A large percentage of people, especially in urban area already have natural gas supplying their homes. Residential fill ups could be a great start to overcome the chicken and egg issue.

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