Westport Innovations (NASDAQ:WPRT) has simply been an awful investment over the past year. The stock is down an atrocious 81% in 2014 as we see in the following chart.

WPRT Chart

WPRT data by YCharts

While the company had been having a tough year from the get go, things really unraveled beginning in August. That's because the unexpected happen and oil prices absolutely tanked.

Brent Crude Oil Spot Price Chart

Brent Crude Oil Spot Price data by YCharts

The fall in oil prices took down gasoline and diesel prices too. That's a big problem for Westport Innovations because its business is built around being a cheaper (and cleaner) replacement for gasoline and diesel. It was the risk the company never really expected as the general consensus was that higher oil and gas prices were simply here to stay. The concern here is that if oil prices don't pick up it could really make it tough for Westport Innovations to grow in the future as the incentive to switch is severely weakened.

Incentives and switching costs
On the company's third-quarter conference call, CEO David Demers noted the unsettling correlation between his company's business and oil prices. He said:

Now, obviously we've been affected by oil prices and we don't know where oil prices are going. Consensus today seems to be flat to slightly down through next year, although the differential between natural gas and oil prices remains intact in most markets. Since gas prices are down, the overall incentive to migrate to a new fuel is weakened in markets where there are no incentives.

The issue he points out is that high oil prices had incentivized customers to switch to natural gas. With gasoline prices now falling alongside oil, it's weakening the incentive to switch.

This is one reason why the company saw a meaningful drop off in sales. Later on in that same conference call, CFO Ashoka Achuthan pointed out that its sales in the U.S. to a major automaker are "visibly affected by the decline in gasoline prices to the lowest level in four years. Although it is true that there is still a big gap between gasoline and CNG prices, the incentive to aggressively shift to CNG is simply not as strong."

The reason this is an issue is because there are fairly high switching costs to move from gasoline or diesel to CNG. For example, equipping a large pickup truck with Westport's WiNG Power System costs up to $18,000. However, that switching cost can be recouped by the savings coming from the difference between the prices of gasoline and natural gas. That said, the issue these days is that the payback period is being stretched out due to the drop in gas prices. For example, Westport's payback calculator shows that the payback period on this system balloons from 46 months at $3.50 gas to 83 months when gas prices drop by a dollar to $2.50. Meanwhile, the five-year return on investment shrinks from 132% to 72%. While the return is still fairly compelling, it's not as good as it once was, which is causing potential customers to wait things out, causing a drop in sales for Westport.

Investor takeaway
Westport Innovations really needs higher oil prices to convince heavy consumers of gasoline and diesel to switch to natural gas. Now, with the incentive to switch weakening, the company will have a harder time convincing customers that it's worth it to make the switch. It's a big problem that the company never saw coming as no one actually expected oil prices to plummet.

Matt DiLallo owns shares of Westport Innovations. The Motley Fool recommends Westport Innovations. The Motley Fool owns shares of Westport Innovations. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.