Is Natural Gas a Deflation Catalyst?


"While a conversion to natural gas has been difficult in the past, we may have the perfect storm of price, technology and politics to propel this initiative to wide adoption."

We have a ton of it sitting in the ground waiting to be consumed, the price is right (super cheap) and even T Boone Pickens loves it. So why aren't we using more natural gas?

Over the last two years or so I have been examining alternative energy scenarios that would help solve our thirst for crude oil and gasoline, which not only drives both of those prices higher, but makes the U.S. dependent on foreign countries, who in turn capitalize and grow stronger on our weakness. Many of these oil-producing nations do have our best interests in mind.

About 70% of our crude oil consumption is driven (pun intended) by our transportation needs; ground transport accounts for a large part of that.

What's interesting to me is that even though diesel is "less refined" than traditional gasoline, it is more expensive. What's worse is that the average tractor trailer gets about 5 miles per gallon (mpg) (That's one-third the mpg of a 12-cylinder Lamborghini).

Our interstates and the trucks that travel along its twists and turns are the primary circulatory system for getting goods and services to North Americans. But since the average tractor trailer gets 5 mpg and with diesel averaging over $4.15 per gallon, much of that cost is added into many of our consumables—everything from food and drink to clothing and even trash.

According to the Wall Street Journal, Waste Management (WM) passed $170 million (M) in fuel costs back to the customer in 2011 alone. To keep costs down, 80% of the vehicles they purchase over the next 5 years will be powered by natural gas.

The biggest issue with natural gas is not the engines or conversions, it’s the infrastructure. When was the last time you saw a "natural gas station? while driving up and down America’s highways?

But if large transport companies were to use their advanced logistical prowess to setup key refueling stations where needed and plot out truck routes so that minimal infrastructure was needed, we could be there sooner than later and perhaps see more stable, if not cheaper goods at our stores. (This is already underway to an extent.)

Waste management says that nat gas vehicles may cost $30,000 (30K) more, but will save at least $27JK per year. My thinking is that if a truck has a 10-year life span, the company would save a minimum of $270K per truck. Waste Management currently operates 1,400 compressed natural gas (CNG) trucks in North America, which equates to a savings of $378M over 10 years on those trucks alone. There are thousands of trucks in the total fleet.

Scott Perry, a vice president at Ryder noted that "The economics favoring natural gas are overwhelming" and Frito-Lay is also moving to nat gas transport.

While a conversion to nat gas has been difficult in the past, we may have the perfect storm of price, technology and politics to propel this initiative to wide adoption.

So my question is: If there was a major shift to natural gas, do you think we would see a favorable price change in our products and services? Or is that a pipe dream?

Alternatively, will all this new demand send prices higher and negate the anticipated savings?

Even if prices do rally to parity with traditional fuels, we still are moving in the right direction as natural gas engines emit only a fraction of the pollutants compared to diesel or gasoline.

Jared Levy
Zacks Investment Research

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