Thursday, May 24, 2012

Slow But Steady Wins the Race

The Dream: The government can either compel through regulation or incentivize through subsidy consumers and businesses to make the transition to “cleaner” and “greener” sources of energy.

The Reality: Unless there is an underlying market drive to push to such a transition, government efforts are almost guaranteed to fail to deliver as promised.

Case in point is natural gas powered vehicles in the United States. After years of various plans being tossed around, some actually enacted, to encourage the conversion of vehicles to natural gas, it’s now actually starting to happen. But the transition is not occurring because of any government subsidy. It’s being driven by the simple fact that it now makes sense based on the current market cost differences between diesel and natural gas as fuel options. Will Truckers Ditch Diesel for Natural Gas? (WSJ-sub req):

Rising diesel costs last year forced Waste Management Inc. WM to charge customers an extra $169 million, just to keep its garbage trucks fueled. This year, the nation's biggest trash hauler has a new defensive strategy: it is buying trucks that will run on cheaper natural gas.

In fact, the company says 80% of the trucks it purchases during the next five years will be fueled by natural gas. Though the vehicles cost about $30,000 more than conventional diesel models, each will save $27,000-a-year or more in fuel, says Eric Woods, head of fleet logistics for Waste Management. By 2017, the company expects to burn more natural gas than diesel.

"The economics favoring natural gas are overwhelming," says Scott Perry, a vice president at Ryder Systems Inc.,one of the nation's largest truck-leasing companies and a transporter for the grocery, automotive, electronics and retail industries.
The shale gas revolution, which cut the price of natural gas by about 45% over the past year, already has triggered a shift by the utility industry to natural gas from coal. Vast amounts of natural gas in shale rock formations have been unlocked by improved drilling techniques, making the fuel cheap and plentiful across the U.S.

Now the shale-gas boom is rippling through transportation. Never before has the price gap between natural gas and diesel been so large, suddenly making natural-gas-powered trucks an alluring option for company fleets, rather than an impractical idea pushed mainly by natural-gas boosters like T. Boone Pickens, the Texas oilman. Railroad operators also are being affected as coal shipments decline.

Pickens’ vision of making the most of America’s natural gas resources was a good one (except for the whole wind power component). But the type of transformational change he was envisioning can’t be forced. The market may not move fast enough for everyone, but when it does move it leads to the lasting type of change that is real and meaningful.