Move Over Ethanol, Market Forces Favor CNG as a Gasoline Replacement

Author: Ed Dolan  ·  March 17th, 2011  ·  39http%3A%2F%2Fwww.economonitor.com%2Fdolanecon%2F2011%2F03%2F17%2Fmove-over-ethanol-market-forces-favor-cng-as-a-gasoline-replacement%2FMove+Over+Ethanol%2C+Market+Forces+Favor+CNG+as+a+Gasoline+Replacement2011-03-17+15%3A15%3A02Ed+Dolanhttp%3A%2F%2Fwww.economonitor.com%2Fdolanecon%2F2011%2F03%2Fmove-over-ethanol-market-forces-favor-cng-as-a-gasoline-replacement%2F › Share This Print

Ethanol is finally getting the bad press (1) (2) it richly deserves. Cracks are even beginning to appear in its once-solid support on Capitol Hill. In April, the Senate Environment and Public Works Committee plans to hold hearings that are expected to skewer ethanol. The Committee is led by Democratic Chair Barbara Boxer and ranking Republican James Inhofe, both committed foes of burning food to run our cars.

However, whether or not Congress has the courage to cut ethanol subsidies, corn-based fuel faces a more fundamental challenge, this one from market forces. Although it has not been widely noticed, the one-two punch of the latest oil price spike and wider development of unconventional natural gas, including shales, tight sands, and coal-bed methane, have pushed the gap between the prices of oil and gas to a record high. Click through to this nice little graphic from The New York Times, and you will see that on an energy-equivalent basis, oil now costs four times more than gas. As recently as 2005, gas was actually the more expensive of the two fuels.

But run your car on natural gas? Isn’t that one of those loony ideas from the inside back cover of Popular Science? No, not at all. Compressed natural gas (CNG) is a fully proven, off-the-shelf technology in wide use around the world. Perhaps only its very simplicity and low-tech reliability have kept it from catching the public imagination in the United States.

I first encountered CNG as an automotive fuel several years ago when I was teaching in Bulgaria. You may associate Bulgarian transportation technology with horse-drawn carts and Soviet-era sidecar motorcycles, but in fact, Bulgaria is way ahead of us when it comes to inexpensive, low-emission automotive fuel. My wife and I rented a car from a neighbor to make a weekend getaway to nearby Greece. Very ordinary on the outside and far from new, the car turned out to have two fuel tanks, one for CNG and one for gasoline. In Bulgaria, all the filling stations had CNG pumps, self-service just like those for gasoline, distinguished only by funny-shaped nozzles. CNG was less widely available in Greece, so before the weekend was over, we finally filled up the gasoline tank (at more than twice the price). After doing so, we threw a switch under the dashboard and kept right on driving without noticing the difference.

So why don’t we use CNG in the United States? Well, some people do. Fleets of buses and delivery trucks, including many UPS vehicles, are some of the biggest users. Honda sells a CNG-powered version of the Civic, the Honda GX, in the United States. Many major manufacturers sell CNG cars elsewhere in the world. Presumably, they could enter the US market quickly if there were a demand. In addition, several small companies make kits that will convert a variety of gas and diesel cars and trucks to CNG or dual fuel use. NGV America, an umbrella organization for promoting natural gas vehicles, maintains a useful business directory for anyone wanting to jump on the bandwagon.

Of course, there must be a downside to CNG. Otherwise, with a potential fuel price advantage of 2:1 or better and cleaner operation, everyone would be using it. 

Limited range is one disadvantage. CNG tanks are bulkier than gasoline tanks. The Honda GX has a range of about 200-250 miles, half that of the gasoline model, and the fuel tank takes up room in the trunk. Still, 200 miles is better than the range of all-electric vehicles like the Nissan Leaf. 

Some consumers are also concerned about the safety of CNG, but the industry claims it is safer than gasoline. Gasoline, after all, is incredibly dangerous stuff. The only reason we are crazy enough to drive around every day with enough gasoline in our tanks to blow us to smithereens is that we are used to it. Anyone who is really safety conscious should stick to diesel.

Another barrier to wider use of CNG is a lack of filling stations. There are more than 1,000 CNG filling stations in the United States, but only about half of them are open to the public. There are clusters of public stations in California and New York, but elsewhere they can be few and far between. If you don’t have a CNG station nearby, a company called FuelMaker sells a home fueling kit, which connects to the natural gas main in your home. However, unlike commercial filling stations, the home device takes several hours to fill your tank, and the device costs several thousand dollars to purchase and install. Of course, the scarcity of filling stations is much less of a problem for dual-fuel vehicles like the one I drove in Bulgaria. Unfortunately, although dual-fuel is a realistic option for converted vehicles, the Honda GX is CNG only. No one sells a road-ready dual-fuel vehicle in the United States. 

Probably the biggest barrier to wider use of CNG in private cars is the high cost, up to $20,000 or more, of converting existing vehicles. At that rate, you might hope to pay off the conversion of a fuel-hungry pickup or SUV, if you drive a lot, but the cost can be prohibitive for a small passenger car.  

It turns out that the high cost of conversion is one of the hottest controversies on CNG web sites and chat boards. Evidently, the biggest component of the cost of CNG conversion is compliance with strict EPA regulations and even stricter state regulations in California. Conversion kit makers must go through a complex certification process that costs $200,000 or more, and each certification applies only to a single engine type. Furthermore, you can’t just buy a kit and install it yourself. Installers also have to be certified, adding another layer of cost. If you look around on the web, you can find a gray market in uncertified kits made elsewhere in the world. You can install one in your own driveway for as little as $1,000, but that is clearly a buyer-beware proposition. Considering how inherently clean CNG is, it is ironic that the EPA bans uncertified conversions on the grounds that they constitute tampering with an approved emission control system.

In the last Congress, Sen. Jim Inhofe and Rep. Dan Boren, both of Oklahoma, introduced legislation that would have promoted CNG use by streamlining the certification process. Unfortunately, despite attracting several co-sponsors and the support of Senate Majority Leader Harry Reid, the legislation failed to make it through the Congressional gridlock. Meanwhile, those wanting to pay the high up-front price for an approved conversion can get part of the cost back through the same clean-energy tax credit used to promote electric vehicles. However, first making it unnecessarily costly to convert to CNG and then partially subsidizing those same high conversion costs hardly seems like a shining example of optimal public policy.

That brings us back to market forces. The price gap between CNG and gasoline is now higher than it has ever been. Although the gap will always vary a little, depending on geopolitics and on the number of gas and oil wells drilled each year, it seems likely that a substantial cost advantage for CNG is here to stay. Given that reality, rather waiting for top-down legislation to open the door for wider use of CNG on the highway, a bottom up scenario seems more plausible. Continued low CNG prices will help spread use of that fuel for fleet vehicles and, at the same time, should steadily increase the user base of converted private cars and trucks. It is a classic case where the long-run supply and demand elasticities are greater than short-run elasticities. CNG users, kit manufacturers, installers, and fuel sellers will gradually become stronger as a political force. As they do so, the legislative and regulatory climate for CNG should become more favorable. 

After all, our government can’t be that inept, can it? Surely, it cannot go on spending billions on fuel-of-the-future pipe dreams like hydrogen fuel cells and budget-busting ethanol subsidies when a cheap, clean, made-in-America alternative is available right off the shelf, right now. Please, tell me it can’t.