What Will Power America's Future? The Case for Natural Gas

For years, natural gas been in competition with coal for the second largest energy source in the US. Today, though, thanks to abundance and price, natural gas is starting to make its case as the US's fuel of the future. What does natural gas bring to the table that the others don't? Let's take a look at the pros and cons of natural gas and see if natural gas has the staying power to be on top of America's energy throne. 

Pro: It's abundant and it's cheap
When exploration and production companies combined the use of horizontal drilling and hydraulic fracturing, it built a tool that has allowed the US tap huge amounts of natural gas we didn't think previously accessible. These new technologies have increased the amount of gas we can economically access by 50% in a period of 10 years, and it's quite possible that number could increase as we access more gas in places like the Marcellus and Utica shale plays. 

Source: BP statistical review of world energy, authors calculations

Also, unlike many places around the world where the price of gas is indexed to oil based on energy equivalency, natural gas prices here are dictated by a market spot price. The way our market is structured and the boom in production have combined to make natural gas a much cheaper alternative to oil. Just to give perspective, if natural gas was priced based on an energy equivalency to oil, then gas would be at about $17.42 per thousand cubic feet, which is not even close to the current spot price of $3.62. 

This shift in natural gas has actually developed into a major competitive advantage for the United States. Chemical manufacturers have plans to build new facilities for the first time in years, industrial manufacturers are moving facilities back to the US thanks to cheap energy, and the US is gearing up to be a major exporter of LNG

Pro: Cheap gas means more ways to use it
For many years, the ways we were able to use natural gas were much more limited than its biggest rival oil. We could heat our homes, manufacture chemicals, and generate electricity, but the idea of using for transportation just wasn't in the cards. It has always been a possibility. Natural gas engines have been around just as long as gasoline engines, but the logistics, storage, and infrastructure for gasoline has always had a distinct advantage. 

But that price advantage for natural gas is becoming so great, it makes the possibility of using it as a transportation fuel much more viable. Based on current prices, a gallon equivalent of natural gas is approxamitely $1.50 less than diesel. This is making long haul trucking look very hard at natural gas engines. Westport Innovations (NASDAQ: WPRT  ) , through its joint venture with Cummins (NYSE: CMI  ) , have just released its newest 400 horsepower engine, which is specifically geared for the long haul trucking market. The US Energy Information Administration estimates that sales of natural gas heavy-duty vehicles will increase by 300 fold between 2010 and 2035.

Con: We need to build out lots of infrastructure to take advantage of it
The savings for fuel may even be compelling for everyday consumers, and some companies are starting to offer bi-fuel options. But there is a reason that these vehicles will be able to use both natural gas and gasoline; because finding a fueling natural gas fueling station can be tough. Today there are about 1,200 compressed natural gas stations in the US, compared to 121,000 gasoline stations. Clean Energy Fuels (NASDAQ: CLNE  ) , the largest fueling station operator with 30% of all US stations, estimates it will open at least 80 this year. While the company may be ambitious with these plans, it will take a much faster pace to make it viable for everyday consumers.  Analysts at Morgan Stanley estimate that it we will need to build 53,000 stations to make natural gas vehicles viable, and at our current pace it will take a very long time to get there. 

Con: Environmental Pressure
For the most part, the consensus is that even though natural gas is a hydrocarbon source that emits carbon, it does so at a rate lower than other fossil fuels. So it could be a more attractive fuel going forward. The greater concerns with natural gas lie with how its extracted. Hydraulic fracturing has raised many environmental questions ranging from how to treat and handle the fluids used in the drilling process to the potential for methane releases from the fracturing of the shale bed.

There are companies out there looking to clean up the image of shale drilling. Halliburton (NYSE: HAL  ) just introduced CleanStim, a set of additives to create hydraulic fracturing fluid that only uses ingredients sourced from the food industry. It has also teamed up with several other companies in the industry to improve recycling and treatment processes for fracking fluids. For every good thing happening, though, there is an event like Exxon's getting charged with illegally dumping hydraulic fracturing fluid at a drilling pad in Pennsylvania that drastically erodes the public's already thin trust in oil and gas companies.

What a Fool Believes
The recent boom in natural gas production means that it will increasingly be a larger and larger part of the energy equation in the US. It will require a major build out of infrastructure for natural gas to over take oil, but public opinion regarding carbon emissions could help push natural gas over other hydrocarbon sources. Ultimately, it will all come down to if natural gas can maintain its competitive price against the other energy sources to remain viable. 

The Drivers of the Future
Oil and natural gas production is booming in the United States, but not every oil and gas company will ride the wave. For this reason we have put together a comprehensive look at three energy companies set to soar during this transformation in the energy industry. Let us help you discover the which three companies are spreading their wings by checking out our special report, "3 Stocks for the American Energy Bonanza." Simply click here and we'll give you free access to this valuable report. 


Read/Post Comments (4) | Recommend This Article (1)

Comments from our Foolish Readers

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 September 22, 2013, at 10:02 AM, oak5146 wrote:

    Thailand has been using natural gas for transportation for years, so what is the problem?

    Most trucks there have 8 gas cylinders behind the cab, and the infrastructure is there to fill them. Why not in US?

  • Report this Comment On September 22, 2013, at 10:02 AM, pebear wrote:

    The problem is that there is no one pushing the gas companies to pipe up all of the suburbs so everyone in the burbs are left with heating with oil, wood or coal. If you really wanted to do something that would benefit the air and many people's pocket books then have a concerted effort to pipe up all of America with gas and get everyone off of oil heat and that would save untold amounts of oil.

  • Report this Comment On September 22, 2013, at 12:20 PM, 2smartforlibs wrote:

    WOW!! Some of the comments the cost to put every house4 in America on Gas is not even thinkable. Part of the reason we don't use gas like smaller in area countries is you loss 10% or your power when you go to gas. There are a lot of problems that need worked out before this temporary "end all" solution is even feasible by than we will by UN dictate been forced to something else

  • Report this Comment On September 22, 2013, at 8:11 PM, howardlangeveld wrote:

    I think the best thing we could do for the environment would (and save money as well) would be change all the coal plants in the US to natural gas. Dirty coal soot and carbon pollution is at least twice as bad as gas/diesel and while natural gas is cheap and clean. This is the time to do the changeover.

    Note: There is no such thing as clean coal.

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