How Can America Create Incentives For Large Truck Operators To Switch To Natural Gas Vehicles? Tax Subsidies, And An “American Natural Gas Highway”, A network of Refueling Stations – Chesapeake Energy Is Leading With a $ 150 Million Investment in Clean Energy Fuels

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By Paolo von Schirach

August 21, 2011

WASHINGTON – America’s imported oil bill is about $ 400 billion a year. This amount will fluctuate with the price of oil but it is astonishingly high. This affects our balance of payments, while it creates a huge strategic vulnerability. America is exposed to the consequences on price and actual oil availability caused by even minor supply disruptions. (Just think of the conflict in Libya this year and oil jumping to $ 100 a barrel). One way of cutting imports is to produce more oil domestically, and we are doing some of that. US domestic oil production is up. But, even the most optimistic projections indicate that production increases in America will never replace imported oil. America cannot possibly become self-sufficient. While more domestic oil is welcome, it will never be enough.

Alternatives to oil: electric vehicles

As far as alternatives go, industry is moving its first but deliberate steps towards electric vehicles, EVs. For the first time major volume producers like GM, Ford and Nissan are offering EVs. Overtime, assuming success for this new segment of the auto industry, EVs will displace a large number of gasoline burning cars and trucks.

Natural gas is cheap

But if we really want to replace imported oil, we have now a powerful additional alternative represented by cheap and abundant US natural gas. America is now a major natural gas producer. In recent years, technological breakthroughs, (hydraulic fracturing to get gas trapped in rock formations), have allowed massive production expansion. Natural gas has been traditionally used for electric power generation and as an ingredient for chemical industry processes and products. But now, with all this additional natural gas supply, it becomes possible and economically attractive to start powering vehicles with either Liquefied Natural Gas, LNG, mostly suitable for heavy trucks, or Compressed Natural Gas, CNG, used by cars.

And the reason for switching to LNG or CNG is cost. At current prices, we are talking about savings up to $ 1.50 to $ 2.00 per gallon. Natural gas is cheap. Assuming large scale conversion of just heavy trucks, it is estimated that the US could reduce its oil imports from OPEC countries by about 50%. Besides, unlike electric vehicle technology that is still relatively new territory, there are no mysteries about how to make natural gas fired vehicles. This is old stuff.

Large scale industrial conversion is a daunting task

That said, large scale conversion from gasoline to natural gas powered vehicles represents a daunting economic proposition, given the scope of up front investments necessary to create factories to make natural gas powered vehicles, to purchase the vehicles themselves, (trucks would be a priority), and to create a national network of refueling stations. Besides, how do you even start this process? Many things need to happen almost at the same time.

How to convince buyers and producers to make the move?

First of all, you have to convince end users –and these would be companies operating large numbers of heavy trucks to begin with– that it is a good idea to buy natural gas powered vehicles, given the significantly lower fuel costs that would reduce their large operating costs. However, in order to make conversion possible, someone has to make the trucks, and this would require up front investments in plant and equipment. But, in order to convince buyers to demand the products and manufacturers to produce them, you also need a national network of filling stations that will provide the fuel.

Incentives: legislation and refueling stations

All this is pretty complicated, even though the incentive of low fuel prices should get corporate America motivated. Still, in order to get this process moving, someone has to create incentives. T. Boone Pickens has been pushing for federal legislation that would provide incentives for corporations to switch over to natural gas vehicles.

But what about refueling stations? Chesapeake Energy, America’s second largest natural gas company, has a clear interest in expanding the market for its product. The large gas group invested $ 150 million to support a broad effort to create an “American Natural Gas Highway”. This will be the first major effort to build a number of natural gas refueling stations across the US, so that trucking companies will know that their vehicles will get the natural gas they need along their routes. The stations will be built by Clean Energy Fuels, a company fully dedicated to natural gas. Chesapeake Energy expectation is that, once it is proven that natural gas is truly viable as transportation fuel, most heavy trucks fleet operators will jump on board, therefore creating demand for more vehicles.

In the end, the incentive to switch over is low price

In the end, notwithstanding the number and the magnitude of the hurdles involved in creating –essentially from scratch– a natural gas vehicle industry with all the necessary supporting elements, from specialised maintenance to filling stations, the reason for doing this is very simple: the low cost of this domestic fuel compared with oil derived gasoline.

A boost to the US economy is an extra bonus

That said, the fact that gas is extracted and processed in America, by Americans and that it will allow fuel cost savings for US businesses and ultimately for the general public is an added bonus to a battered US economy. Instead of sending abroad $ 400 billion a year to pay for the fuel to power American cars and trucks, we shall spend our money on our own domestic resources, with considerable savings. Not a bad plan.

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