Opinion: Nat-Gas Vehicles and Low Oil Prices

By Oliver Saunders

Founder

 FC Gas Intelligence

For light- and heavy-duty truck operators evaluating a switch to natural gas from diesel, the recent oil-price collapse represents the most significant “bump in the road” in several years.

We have had five years of sustained growth in the U.S. market for natural-gas vehicles. However, the perceived wisdom is that the low oil prices — and their subsequent effect on prices at the pump — will cause a market slowdown in the best case, or complete market stagnation in the worst case.

Whether this surface judgment is true remains to be seen, but for a better understanding of the implications, it is important to delve deeper.

First and foremost, we must examine why a drop in oil prices has such a significant effect on the uptake of natural-gas fuel. On the face of it, the answer is that cheap diesel diminishes the business case for natural-gas fuel, as the economics

for natural gas are no longer favorable. But the truth is more complex.

Natural gas is still very competitive with petroleum-based fuels at the pump. Put simply, low oil prices do not have a direct correlation with fuel prices. In other words, a 50% drop in oil prices does not lead to a 50% drop in prices at the pump.

In real terms, natural gas still compares pretty favorably in a cost comparison with diesel. Why then, are fleets ostensibly holding fire on their conversion to natural-gas vehicles? The answer lies in infrastructure.

When switching to natural gas, the associated costs are more extensive than simply the purchase of new vehicles. Fleets also must consider what fueling infrastructure is available and assess whether they need to invest in their own. Furthermore, drivers and maintenance technicians must be trained to handle the fuel, resulting in a time cost as well as a financial cost.

Another financial issue is that these investments must be made upfront. Given the volatility of oil prices, fleets are finding any kind of financial modeling of a return on investment very difficult. When the goal posts are moving so frequently, making a considered decision is increasingly difficult.

In the medium to long term, no one expects oil prices to stay low; indeed, the oil industry globally would be on the brink of collapse if they did. History shows us that whenever oil prices sink to hitherto unimaginable lows, a price spike follows fairly soon afterward, often accelerating past the previous high point. Furthermore, for many oil-producing economies, they simply cannot sustain a crude price below $80 per barrel. Both Citi Research and Standard & Poor’s believe Iran, Venezuela and Russia would face civil unrest if the price doesn’t get back toward $100 in the near future.

Indeed, the financial pain already can be seen acutely in Russia. Even huge oil producers such as Saudi Arabia do not want a long-term low price. Oil is the bedrock of the Saudi economy, and pumping its most precious resource out at half the value is surely bad business in the long term — even if it may represent the achievement of some short-term political objectives.

Therefore, the perception that the oil price would stay at $50 per barrel beyond 2015 is not realistic, simply because it is in no one’s interest, apart from the consumer.

In terms of the NGV market in the United States and how it is affected by the low oil price, an examination of the facts is essential. To date, news stories about fleets canceling NGV orders or pulling out of the market completely are conspicuous by their absence. The expectation across the NGV industry is that orders for new vehicles will be slower this year. However, no one is expecting the market to grind to a halt.

Fleets seem to be adopting a “wait and see approach,” which should come as no surprise. Logistics and transportation are conservative industries that operate with a longer-term frame of reference. Consequently, it follows that a drastic change in oil prices would cause a hiatus in the switch to natural gas. Fleets want a greater degree of certainty before they make such a significant change to their operations.

But that should not be construed as, or confused with, a broken NGV market. Rather, the most consistently used epithet to describe this situation is consolidation. This is the year when fleets already using NGVs probably will continue to do so and expand their operations, while some fleets new to the idea of NGVs watch and wait and others with strong balance sheets take a gamble and make a few new orders.

Ultimately, the underlying factors that make NGVs an attractive proposition are still relevant: low emissions, low prices and considerably more stability. In the long term, the NGV revolution is likely to continue, even if 2015 becomes a slightly slower year. The NGV market is here to stay and, for those operating within it, 2016 is likely to be the year when it really accelerates.

FC Gas Intelligence has headquarters in Hoboken, New Jersey, and London.