Ed Dolan's Econ Blog

What is Holding Back Natural Gas as the Transportation Fuel of the Future?

The natural gas revolution has brought big changes to the U.S. energy scene. Natural gas prices, which used to move closely together with oil prices, have plunged in the last five years, as the following chart shows. One result has been the rapid displacement of coal by natural gas in electric power generation. According to a recent report from the Union of Concerned Scientists, some 100 gigawatts of coal-fired electric plants, representing more than a quarter of coal capacity and nearly a tenth of total U.S. electric capacity, have either been closed or are likely soon to be closed because they have become uncompetitive with natural gas. Natural gas has also been displacing oil at a rapid rate as a home heating fuel. In transportation, however, the use of natural gas is spreading more slowly.

Transportation ranks second only to electric power generation in total energy use. There are at least three ways to use natural gas to power transportation. One is to generate electricity with natural gas, which can then power electric cars or electrified rail lines. Another is to convert natural gas to liquids like methanol or synthetic gasoline. However, as I discussed in this post two years ago, the biggest potential lies in the direct use of compressed natural gas (CNG) or liquid natural gas (LNG) as a fuel for natural gas vehicles (NGVs).

As the next chart shows, there is nothing new about NGVs, which are in widespread use in many countries. Some governments have promoted them to reduce urban pollution and others to achieve greater energy independence. In many of these countries, gas is widely used for light vehicles like taxis and private cars. In the United States, on the other hand, the small number of NGVs now in service are mostly city busses, garbage trucks, delivery vans, and other fleet vehicles.

What is holding back the wider use of CNG in the U.S. transportation system? Not technology.  Unlike hydrogen, cellulosic ethanol, algae diesel, and other futuristic alternatives, NGVs use simple, off-the-shelf technology. That is part of the reason they are popular in Pakistan, Bangladesh, Armenia, and other developing and emerging market countries.  Instead, the slow spread of CNG as a transportation fuel in the United States is largely attributable to economic and political factors.

The network problem

As James Hamilton notes in a recent post, the spread of natural gas as a motor fuel, especially in its early stages, encounters a network problem. There is no point in owning an NGV if you have no place to refuel it, and no point in building refueling stations if no one owns NGVs. That explains why early adopters of CNG have mostly been fleet operators whose vehicles refuel when they return to base at the end of their shift. However, two factors are now breaking down the barrier posed by the network problem.

First, natural gas is particularly attractive as a replacement for diesel fuel in heavy trucks. Compared with light vehicles like passenger cars and pickups, heavy trucks drive more miles per year and consume more fuel per mile. Long-haul trucks further gain if they use LNG instead of CNG. LNG vehicles have greater initial costs but have more compact fuel tanks and greater driving range. All of these factors increase the payoff to the use of natural gas for long-haul vehicles, and  they also increase the payoff to investments in fueling stations.

Not surprisingly, then, truck stops have been the pioneers in building fueling stations. Pilot-Flying J, a leader in the field, already has a network of natural gas filling stations that extends from coast to coast. By the end of 2013, the company’s natural gas highway will run from the Canadian to the Mexican border, as well. (Click here for a map.) These stations will at first offer LNG for long-haul trucks, but once they are in place, adding CNG will be a natural extension of service. A spokesperson says the company will do so on a station-by-station basis as local and regional demand develops.

Second, it is possible to build dual-fuel vehicles, which can run on either gasoline or CNG at the flip of a switch. In 2012, Ford, GM, and Chrysler all started offering dual-fuel versions of popular pickup models. True, dual-fuel vehicles cost a bit more than pure NGVs, and they require room for two sets of fuel tanks. The current offerings run $40,000 and up. Still, any three-quarter ton pickup is going to use a lot of fuel, and if used for business, is likely to run up a lot of miles. Dual-fuel pickups will appeal to farmers, building contractors, and others who may sometimes be within range of a CNG filling station, and sometimes not. As more such vehicles go on the road, they will create the necessary incentive to add more stations to the network.

Policy issues

Even if we assume that the network problem will gradually take care of itself, certain aspects of energy and environmental policy still retard the spread of NGVs  in the United States. NGV advocates urge three kinds of changes.

First, they advocate changes in the taxation of motor fuel. For example, the LNG used by heavy trucks is now taxed at the same rate of $.243 per gallon as diesel fuel, despite the fact that it takes 1.7 gallons of LNG to supply the same energy as a gallon of diesel. NGVAmerica, an industry group, recommends equalizing the tax on an energy-equivalent basis. A more radical proposal would be to tax motor fuels on a carbon-equivalent basis. Because natural gas is less carbon intensive per unit of energy than diesel fuel, a carbon tax would further increase the attractiveness of LNG and CNG fuels. (Note: Some fracking opponents have disputed the premise that natural gas is less carbon-intensive, on a life-cycle basis, than diesel or gasoline. I discussed the complex economics of fracking in this earlier post.)

Second, advocates say that federal regulations should be at least as friendly toward NGVs as they are toward other clean and fuel-efficient vehicles. That has not always been the case. For example, up until 2011, the EPA maintained an onerous set of regulations for approving after-market CNG conversion kits for passenger cars and light trucks. Fortunately, those regulations have now been streamlined, which may increase the rate of after-market conversions. Even so, in some respects, tax incentives, fuel economy standards, and other regulations are tilted toward more fashionable technologies like hybrid-electric and all-electric vehicles, ignoring CNG.

Third, and more controversially, NGV advocates have pushed for subsidies and tax credits targeted directly at natural gas fuels, expansion of the fueling network, and purchase of NGVs. Legislation known as the NAT GAS Act, introduced in both the House and Senate during 2011, would have boosted NGVs in a number of ways. However, the legislation did not pass, in part because of opposition from conservative organizations like the Heritage Foundation, which objected to the NAT GAS Act as a market distorting subsidy. There is probably some truth to that, in the sense that under a national energy policy that required users of every kind of fuel to pay full costs, including environmental and national security costs, NGVs would be able to make it on their own merits without a need for specially targeted tax credits or subsidies. Adding subsidies for natural gas to a system that already underprices more carbon-intensive fuels seems like the wrong approach.

The bottom line

When all is said and done, CNG is a decidedly unfashionable entry in the fuel-of-the-future sweepstakes, yet it may be the dark horse that wins the race. If your goal is to flaunt your green credentials, then go ahead and trade in your hybrid Prius for an all-electric Leaf. Meanwhile, the contractor down the block will buy a new dual-fuel F-250, or buy an aftermarket conversion kit for the beat-up model already in service. Which vehicle will make the greater contribution to energy independence, national security, and a healthy planet? You guessed it. The NGV, hands down.

Thanks to Šarūnas Merkliopas, who contributed to this post as a research associate.

36 Responses to “What is Holding Back Natural Gas as the Transportation Fuel of the Future?”

Study War No MoreJanuary 7th, 2013 at 5:00 am

As an ex user of a duel fuel converted CNG vehicle I can confirm that the system works. Funnily enough I had a 1973 Ford Torino V8, The CNG kit gave the motor a new lease of life and economy in my wallet. From an enviro perspective, it is a no brainer as you avoid the carbon emissions of a new car (which is build into the manufacture etc) and convert a higher polluting car into a less poluting one.
I do agree that infrastructure is key, at that time I was living in Argentina who does have a reasonalbe (not perfect) infrastructure to support this fuel. I could make inter city journeys of about 400 miles with very few spots where I ran out of CNG. As the car was dual fuel, the gasoline would supplement any periods where CNG was not available.
Only downside is that the tanks can be a bit bulky and the range as ever depends on the size of the tanks. the tanks where not exactly light and therefore they added to the vehicles weight.

Geoff WillisJanuary 7th, 2013 at 8:07 am

You miss the obvious, conversion price. In the UK you every town has a garage that convert your car to dual fuel for a few hundred pounds. In the US the equivalent cost is thousands of dollars, driven by onerous legislation (I never heard of a UK dual fuel car blowing up). With dual fuel, the network issues don't make sense, you only convert if ng is locally available, and you use petrol/diesel on long journeys.

Ed Dolan EdDolanJanuary 7th, 2013 at 9:18 am

Yes, the regulatory burden on aftermarket conversion has been a big issue in the US. Actually, in the past, the EPA's worry was not so much cars blowing up as their perception that conversion to CNG constituted a form of tampering with the vehicles emission control system. I talked about that in the earlier post I linked to. More recently, the EPA has streamlined its standards for certifying conversion kits. NGVAmerica, an industry group, seems to think these revisions will help. Here is a link to their discussion of the new standards:

I am not sure conversions will be the main driver of greater CNG use in the US, though. It would help if more companies offered the CNG vehicles in the US that they offer in other countries. Now only Honda sells one, and it is CNG only, not dual fuel. Perhaps there are regulatory barriers to getting the new vehicles certified here, I have not read about that.

Any way you cut it, though, you are right on the basic point that the regulatory structure in the US has not been especially hospitable to CNG. Seems it is singing from a different hymnbook as much of the rest of the US energy policy establishment, which is gushing with enthusiasm about natural gas.

jack strawJanuary 19th, 2013 at 12:00 pm

a "corrupt" hymn book that is. big oil had flare offs for a reason…and it wasn't "energy conservation." the bottom line is these clowns exist to protect their big trading operations on Wall Street and not for the benefit of the American people in time of war or humanity itself. they big spenders and big wasters of all capital at every level…just about useless actually…and were it not for the fact that the totality of banking interests were beholden to their "goo" then i think we'd actually have a rational energy policy not only in the USA but the world. the irony that Exxon Mobil is now the world's largest natural gas company should be lost on no one….least of all those in the extraction business. Obviously their only goal is to drive the price back up to 15 buck a bcf "so that the economy is a winner." love nat gas…first person to bring it up as a "uber bullish call on the US economy going forward"…has worked BEYOND all expectations when the price crashed to around 2 bucks…but Dr. Evil is back to work screwing over the American War Effort yet again just like they told Congress they would…so i'll hold out hope for ethanol and solar powered direct drive engines. the big banks on Wall Street are dead…they still don't know they're never coming back. the days of the Great Regional Players is under way. i'm sure Exxon Mobil will find a way to keep its share price from collapsing…but doing so at the expense of the American people i think is a thing of the past.

Ed Dolan EdDolanJanuary 7th, 2013 at 11:39 pm

I fully agree that GHG emissions from natural gas extraction are a serious issue. As I have argued repeatedly in this blog an elsewhere, all energy sources should be charged for their full environmental impacts including GHG emissions. As I wrote in the cited post on the economics of fracking, "Accurate scoring of fossil fuels needs to take a lifecycle approach, including emissions in extraction, storage, processing, and transportation as well as in final use." That, of course, includes methane emissions associated with fracking.

With regard to the Nature article you cite, the question is whether the 9 percent is typical or exceptional, and if typical, whether it can be reduced to an acceptable level by following best practices. The Nature article notes that "In April, the EPA issued standards intended to reduce air pollution from hydraulic-fracturing operations — now standard within the oil and gas industry — and advocates say that more can be done, at the state and national levels, to reduce methane emissions." It further quotes Steven Hamburg, chief scientist at the Environmental Defense Fund, as saying "There are clearly opportunities to reduce leakage.” Obviously this issue requires continued attention.

japanandeconomicsJanuary 8th, 2013 at 8:59 am

In Brazil, tri-fuel vehicles are mandatory (at least in some places): ethanol, gasoline, CNG. Magneti Marelli won an Automotive News PACE Supplier of the Year award in 2008 for inexpensive technology to seamlessly transfer between CNG and gas/ethanol (eg, under heavy acceleration, not just when the CNG tank runs out); MM had already developed a software-based solution for judging what the gas/ethanol mix was in the fuel tank and adjusting air intake etc accordingly. Of course in Brazil sugarcane bagasse is a cheap source of ethanol, but it varies by time of year and region so the price at the pump varies as well. The bottom line is that in Brazil a driver can pull into a refueling station and put whatever is cheapest into their tank without worrying about what's in there already. [Mea culpa: I'm a judge for the PACE competition but other judges got to make the trips to Brazil so I didn't sit through the engineering presentations, only the final discussion of potential winners.]

Since the adaptation is done at the assembly plant, it is low in cost relative to converting in the aftermarket. For the ethanol/gasoline part, the incremental cost is essentially zero, no hardware is needed, and the seals and lines are designed from the start to be robust to ethanol, perhaps at a slight cost for the different plastics. For the CNG part, there's the tank and fuel line, and a separate set of fuel injectors, plus (I think as hardware) an anti-knock sensor. The rest is software that goes into the ECU (engine control unit). The engine itself needs no modification. As noted, CNG works with diesel engines, too.

So the technical side is well known and done on a production basis. So in the US there's infrastructure, regulation (in California everything has to be CARB — Cal Air Resources Board — certified, and the cost of getting certified is a real barrier to aftermarket conversion. Then in Arizona there was a scandal with a subsidy for converting vehicles to CNG. I'll try to locate the details but as I understand it the legislation was poorly researched — written by lobbyists for a couple would-be converters — and the subsidy was greater than the cost of conversion; the state was soon out many millions of dollars even though there was no intent to actually use CNG in those vehicles (get the conversion done, then throw away the tank to get back your trunk space). Memories of that linger.

Anyway, thanks for highlighting the potential for CNG in transport!

Ed Dolan EdDolanJanuary 8th, 2013 at 9:34 am

Very useful information, thanks! I agree, it is ironic that one of the main barriers to use of CNG as a clean fuel is the clean air bureaucracy.

japanandeconomicsJanuary 8th, 2013 at 12:01 pm

I dug up details, Arizona burned through somewhere between $500 million and $800 million on CNG conversion subsidies, something slipped in during a late-night conference committee at the end of a legislative session. The New York Times reported on it 2 Nov 2000 ("Costly Plan…" by Ross Milloy) but I've heard additional (sordid) details through a friend who worked for the father of one of the principles; investigations stopped when the politician who inserted the program into the legislation died of a heart attack. The numbers, though, were big enough to make politicians there reluctant to touch anything related to CNG. I'm told memories of the corruption angle also linger in AZ politics.

Of course the need for infrastructue means that to be effective policy must be national. The Arizona case suggests that a bottom-up approach to get to a national policy may not work (and that independent of ideology, there will be Congressmen from the Southwest leery of having their name associated with CNG).

jack strawJanuary 19th, 2013 at 12:07 pm

let alone having a heart attack. the bottom line is a ZERO fuel vehicle is now on the horizon. I will be looking forward to the new Cadillac EEV ….which basically runs on a motorcycle engine. If that becomes standardized the way the Chevy 350 V8 did (probably 50 million of those engines made actually) then "look out." easy to work on, easy to maintain. forget a 100k warranty…how about a million miles instead?

Christian MillerJanuary 12th, 2013 at 11:57 pm

STOP BUYING OIL FROM OPEC. We cannot bring peace to the Middle East. We cannot force Afghanistan to be a democracy. Let us do something we can do. Stop buying oil from OPEC. We can do it now. Compressed natural gas (CNG) cars. Iran does it. So can we.

We still import 4 million barrels per day from OPEC. But now, we have the capability to stop all oil imports from OPEC within 60 months. We have low cost natural gas and low cost technology for converting cars to operate on CNG. This program would convert 65 million vehicles (23% of our fleet) to (CNG). Cost $98 billion. The other part of the program is to build 10,000 CNG refueling stations. Cost $20 billion. Total $118 billion. All the costs will be money spent on U.S. labor and material. Use of low cost natural gas will save us about $80 billion per year.

The program can start immediately by presidential order to convert the 600,000 federal non-military vehicles to CNG. Theses are shovel/wrench ready projects. Total cost: less than $5 billion.

This CNG program is not like the Manhattan Project that involved large technical uncertainties and risk. CNG technology is commercially available in the United States. Iran now has 2.9 million vehicles (23% of its fleet) operating on CNG.

The collateral benefits are manifold: cost savings; reduction in trade deficit; employment for 100,000 Americans; reduced CO2 emissions; low technical, commercial and environmental risks; progress that can be accurately measured; plus no political party would find it objectionable.

JimNeelyFebruary 14th, 2013 at 12:28 pm

I've read NG prices are so ow because of over production. The profit margins are very low for companies to get the gas to market, so they produced a lot of it to cover their losses. Once supply and price normalize I think NG prices will rise steadily, which is a good thing because it will mean more CNG Cars and refueling stations and jobs for Americans. It's not a perfect technology, but it's a step in the right direction.

Ed Dolan EdDolanFebruary 14th, 2013 at 12:48 pm

I agree that gas prices are currently so low that they barely cover the costs of drilling, if at all. I think it is likely, as you suggest, that they will rebound to a equilibrium that gives a decent profit to gas producers, but still leaves the price of CNG attractive relative to gasoline. However, I should probably have listed the uncertainty about where the natural gas price will end up as an additional factor that encourages a wait-and-see attitude among people who are contemplating investments both in vehicles and fueling infrastructure.

Argan OilApril 11th, 2013 at 7:43 am

With dual fuel, the network issues don't make sense, you only convert if ng is locally available, and you use petrol/diesel on long journeys.

Jennifer M. LawsonApril 16th, 2013 at 9:15 pm

Back in 2008, our logistic company outfitted trucks from gasoline to natural gas. Except of purchasing trucks that were traditional diesel or gas trucks. Saved us a bit according to our ledger. In Russia, they are not even close to a paradigm shift for truck usage.

Shane MiliusMay 10th, 2013 at 4:30 am

What's holding back natural gas is a combination of factors actually. First, there's the obvious lack of facilities such as refueling stations. Secondly, I think gas companies are a little reluctant to sacrifice some profits and invest on restructuring their business models to accommodate natural gas. Lastly, car owners will need to spend to have their cars modified to efficiently burn the new fuel source.

Orlando ContractorsMay 14th, 2013 at 10:18 am

We certainly cannot ignore the fact the technology is there and being used. I think it's going to be a slow process but eventually we will see most of our vehicles running on NG in the future. Not only would business owners like to save money but advocating green technology will go far with customers.

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Ricki MartinMay 18th, 2013 at 6:27 am

Now a days the use of fuel vehicles very much high in large cities and also in the rural areas. People wants to travel by their personal vehicles. The number of petrol and diesel vehicles in the cities and other areas increasing day by day. Mostly the diesel vehicles are quite responsible for the environmental pollution. It is because the emission of carbon dioxide is much more in diesel vehicles. Again the price of diesel and petrol also increasing day after day rapidly. So to get out of the situation we have to use the electricity or the natural gas as the fuel of vehicles. Since we use electricity for other necessary works. So the use natural gas will be a better option for the future. <a href ="">audi repair newport beach

CamaroMay 20th, 2013 at 3:03 pm

Natural gas is way cheaper and actually car gets some extra boost power, because natural gas has a higher temperature and that produces more power in the engine. Now when the price for the gasoline jumped so high (at least in my country that is really high), natural gas become very popular and so many people now are using this. Personally me, i still stick to the gasoline, but if gasoline prices goes still higher, i probably have to use natural gas as well or try a diesel car.

Builders cleanMay 22nd, 2013 at 7:55 am

Natural gas looks cheaper as compare to petrol that's why mostly countries use this gas for their automobiles. Pakistan i in top of its use that's why its prices rises higher and higher day by day.

homeheatingoilpricesJune 24th, 2013 at 9:22 am

big governments don't want to lose out on the hefty tax revenues from petrol or diesel. Isn't it a well bandied about theory that the larger car manufacturers are easily capable of creating an electric engine to power the biggest of vehicles for hundreds of miles without needing to recharge but these manufacturers, oil companies and governments are much too unwilling to admit this as they will lose out on their billions of revenues from fuel.

Phen375July 3rd, 2013 at 8:54 am

@Christian Miller

"We still import 4 million barrels per day from OPEC. But now, we have the capability to stop all oil imports from OPEC within 60 months. We have low cost natural gas and low cost technology for converting cars to operate on CNG. This program would convert 65 million vehicles (23% of our fleet) to (CNG). Cost $98 billion. The other part of the program is to build 10,000 CNG refueling stations. Cost $20 billion. Total $118 billion. All the costs will be money spent on U.S. labor and material. Use of low cost natural gas will save us about $80 billion per year. – See more at:

It's all about money and greedy Governments. If the price of fuel was the same as water it would all be solved quicker than 60 months my friend. It's a sad truth that we will go to war and see blood shed over the black gold!

David BAugust 13th, 2013 at 2:05 pm

A few months ago, I came across a post on which talked about India's success in curbing smog and pollution by forcing small and medium size commercial vehichles to CNG. When first introduced 4-5 years ago, it ran into serious opposition from the transportation industry and taxi associations but the local governments didn't budge and apparently it has proven to be a big success.

Several big metro's such as Mumbai and Delhi have already shown this can be done successfully and that the environmental gains are significant. Now the program is being tried out in tier-2 cities.

A previous comment talked bout how this was done in Brazil too. I don't think we'll ever see anything like this in the US because our "leaders" lack the political motivation to drive this issue!

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