Natural Gas vs Diesel
- Posted by Jeff Carter
- on April 27th, 2011
The Original Post is below this one. Today is October 7, 2012, and I am updating this post. According to the comments below, which I have left up, some of my facts were incorrect in the original post, so therefore I reached a bad conclusion. I make mistakes. Since this post is the number one search result on Google, I decided to redo the post-but leave the original post up so you can see where I made my errors in either research or logic. Instead of stubbornly digging my heels in, let’s arrive at the most economically efficient outcome using positive economics.
With almost $6/gal gas in California, a lot of people will begin searching for this sort of information and I want to make sure I did it correctly. Since this post was published, T. Boone Pickens has stopped his quest for government subsidies to change truck fleets from diesel to natural gas. Fracking has opened up millions of acres to energy development causing natural gas prices to stay low.
Natural gas is being pushed as an alternative to fuels like diesel to power truck fleets. Diesel is synthesized from refining crude oil. Diesel prices fluctuate throughout the year not only because of crude oil prices, but because in winter, refiners make a trade off between diesel and heating oil. In a perfect world, diesel would always be cheaper than gasoline because it costs less to produce. Natural gas costs less to produce than diesel.
Let’s compare two fuels as the relate to 18 wheel over the road trucks; diesel and natural gas.
The first problem that we have is the cost to build, or changeover fuel stations across the US. The cost to build one is not cheap, but will come down as the country builds more. Currently it costs $350,000 to $1M for the mechanical systems alone. New diesel stations are cheap, $150K at the high end.
The next problem is the truck itself. Engines and tanks have to be modified. My pal Rick Santelli recently modified his pick up truck in one day on CNBC. That isn’t an 18 wheeler. Trucks burn 20,000 gallons of diesel per year on average. If you buy a new truck, it’s significantly more expensive to buy a natural gas enabled truck than a standard diesel truck. $195K vs $95K. Diesels save the company $100k at the outset. The cost to manufacture them will go down with higher volume. But, natural gas vehicles don’t get as good of mileage as diesels. Diesel has more energy density than natural gas, by a lot- 129btu vs 37btu. You’ll have to fill up more with CNG. Efficiency of diesel is about 40% better from any source I can find. A Ford F250 diesel will get 40% better gas mileage than a comparably equipped CNG.
If that holds true for 18 wheelers, a CNG 18 Wheeler would burn 28,000 gallons of gas. At $2.14/gal, that’s $59,920~$60k/yr. A diesel would cost around $80k to operate. That’s a five year payback, if you don’t include the operators time loss in refueling.
Advantage: Diesel (depending on prices of fuel)
Cost to convert a truck. Most 18 wheelers have turbochargers to boost power and mileage. The cost to convert them is $8000-$12,000 dollars. That’s cheaper than the extra $100k cost for a CNG truck.
You are payed back in the first year to convert because of the difference in gas-excluding labor costs of stopping more often. Remember, even though the cost of CNG is roughly half the cost of diesel, it gets less gas mileage per gallon. It also takes time to fill the tank.
There are basically two types of fueling equipment for CNG vehicles – fast-fill and time-fill. In fast-fill, the combination of a large compressor coupled with a high-pressure storage tank system, called a cascade, fills the tank in about the same amount of time it takes to fuel a comparable petroleum vehicle.
A time-fill system does not have a storage system and has a much smaller –and less expensive– compressor. It typically refuels CNG vehicles overnight at a rate of about one gallon per hour. Time fill works for vehicles that remain idle overnight, such as refuse trucks and school buses
Advantage: Draw depending on how you will use the vehicle. For buses or local fleet vehicles that can be filled overnight, natural gas looks better. Over the road trucks, diesel-because of the costs to convert delivery points.
Each side will argue the merits of their case. I don’t have a dog in the fight, and want to arrive at the best economic solution. The lower our costs of transportation, the better. There are additional normative arguments that are made. For example, greenies will tout CNG’s less greenhouse gas emission. That’s true, except greenies also won’t let us frack for CNG. Any global warming arguments are specious at best. So far, the data for global warming is so biased it shouldn’t enter into the argument.
There are national security issues. But before we total up those, wouldn’t it be better to end all government subsidies to oil companies for exploration, and drop most of the restrictions on drilling and refining oil to see what the price really is? The current headline price you see at the gas pump is not the most economically efficient price because of all the subsidies, tax breaks, bottlenecks of production and poor government regulation we have.
For both natural gas and crude oil, wouldn’t it be better to have a free market and let it decide rather than some omnibus entity decide?
My initial frustration in my original post was that T. Boone Pickens was arguing for subsidies. We already have too many subsidies. What we ought to do is eliminate subsidies, and eliminate tax loopholes and see how the market causes us to respond. Each individual entity acting in it’s own self interest will create the best solution for the country.
The greenies have distorted gas prices in California so much that there is rationing. People can’t get gas. The cost to transport goods and services will go up. High transportation costs will trickle down and eat up consumer paychecks. High prices will cause businesses to go out of business. You can’t ride your bike everywhere.
Also, it pays to look at our car fleet as well. We should be changing cars from gasoline to diesel. We would save a lot of money, and the newer bluetec diesel engines don’t pollute. I am biased in this opinion because I have a 2009 BMW X5 diesel. It has over 70K miles on it and I average around 21 mpg. I live in a dense city, but the lion’s share of my miles are highway.
In a perfect world, we would find some solution to the calculus problem of the mix between natural gas/diesel/gasoline powered vehicles. In a perfect world, we would eliminate all government incentives and taxes and let the market decide. My bet would be diesel would be the powerplant, and fuel of choice.
T. Boone Pickens is back on television lobbying for natural gas. Last time oil prices were over $100/barrel, he was on television lobbying for wind. No doubt, he is “talking his book” like every other high powered executive that appears on television.
But, let’s examine it closer. Natural gas is abundant in the US. As Pickens says, “We are the Saudi Arabia of natural gas.” Unlike tar sands or shale oil, it’s easy to get at and produce. That makes the cost cheaper. But is it really cheaper?
How advantageous it is to switch depends a lot on how you set up the problem and input the costs. You also have to include or exclude certain opportunity costs. For example, the air will be cleaner with natural gas. That is a positive externality from switching. How you account for that in your analysis is a big deal. Predictably, greenies would give a lot more weight to that externality than hard boiled accountants.
What is the basic cost to switch a diesel truck to natural gas? It varies. One company, Omnitek says it can be as little as $6000 up to $12,000. They also say their company can do 5-7 trucks a week. There are at least 15.5 million trucks in the US. Cost to switch, $124 million. (8k x 15.5) Getting companies ramped up to switch them will take time.
But there are other costs. Setting up the network of fuel delivery is expensive. It can take up to 8 hours to fill a tank with compressed gas depending on a lot of factors. Converting an entire nation of truck stops and fleet fuel yards will be expensive.
Even looking at these costs might be moot. Thom Hartman says there is no way the Pickens plan can work.
The 18 wheelers have 300 to 500 gallon tanks on each side (600 to a 1000 total gallons) and burn 3 gallons per mile. There is NO WAY you could put that equivalent of compressed liquid Natural gas on these trucks, plus, you’d need 30% more of it to get enough fuel to do the same work as a diesel engine can do. ALSO, ask ANY knowledgeable engine mechanic about the maintenance requirements for a Diesel, gasoline and natural gas powered engine (no Spark plugs on a diesel, 500,000 to 1,000,000 miles life, compared to 100,000 to 200,000 miles on spark plug engine).
Mr. Hartman advocates for conversion from gasoline to diesel. But is diesel the way forward?
There is some evidence that newer truck diesels are better than old ones because they can get 7-8 MPG. This is double the MPG of older engines. That makes diesel even more efficient.
But the real savings should be in passenger cars because there are more of them. The US has 136 million passenger vehicles. A VW Jetta gasoline engine gets 24 MPG in the city, and a diesel gets 30 MPG. An SUV VW Toureg has a 3 MPG difference. In addition, the newer diesel engines burn cleaner and pollute less. Converting a third of the passenger cars would save 270 million gallons of gasoline(136x.33=45×6=270/15=18m). Since you get roughly 15 gallons of gas from each barrel of sweet crude, we could stop importing 18 million barrels of oil each year simply by converting to diesel. That’s only about one day of imported oil.
On a more micro level, the average cost of diesel in the US is $4.14. For premium gas it’s the same, $4.14. Regular is $3.88. If you burn premium gas, you easily can switch to diesel and save big money. If we assume that you will drive 12,000 miles per year, you will save $284 per year using diesel over regular gas. (12000/24=500 x 3.88= $1,940..12000/30=400 x $4.14=$1,656…1940-1656=$284 in savings)
There seems to be an economic incentive for everyone to switch to clean diesel when they buy a new car right? Except that incentive gets chewed up when you consider the cost of a car. If you keep your Jetta five years, it will cost you $320 bucks extra to own the diesel because the purchase price is roughly $1600 more! Keep your car one year longer, and the balance tips to a diesel.
The answer is not as easy as switching to alternative fuels. The answer is much more complex than that. Virtually every President since Nixon has articulated the need for a comprehensive energy strategy. Virtually every President has failed.
Since for the last 40 years the government has failed miserably, perhaps the answer is to get government entirely out of the energy process and let the market decide. Toss out all the rules and regulations, end the Department of Energy and simply let supply/demand market forces with price as the determinant dictate where our money is spent on energy.
My guess is that we will have an optimal equation of some mix of diesel, gasoline, natural gas and hybrid. In large power generation we will have clean coal and nuclear. As far as the Pickens plan is concerned, it’s definitely more expensive. But, the amount of expense all depends on the value you place over controlling your domestic fuel, natural gas, versus importing fuel from OPEC. That’s exactly why we need to get the government out of it. They’ll make a value judgement. A heartless, faceless marketplace will not.
Conflict of Interest note
For the record, I drive a diesel. Love it. Tremendous gas mileage. Especially on the highway. Only thing killing me is that gas taxes are higher on diesel than gasoline.
Read this post on energy. My views on natural gas are evolving. I still don’t believe we need subsidies for them. But it would make sense to try and figure out a way to get truck fleets on natural gas over time.
Mark Perry tweeted this conversion/comparison chart.
The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.
Jeffrey Carter is an angel investor and independent trader. He specializes in turning concepts into profits. He co-founded Hyde Park Angels one of the most active angel groups in the United States in April of 2007. He previously served on the Chicago Mercantile Exchange Board of Directors. He has done market commentary for (More...)