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First Thoughts
  By Dan Gilmore - Editor-in-Chief  
     
   
  Feb. 24 , 2012  
     
 

Supply Chain News: Higher Oil and Diesel Prices - the Answer is Here

 
 

So, here we go again: Rising oil prices and especially rising gasoline prices (which appear to have risen more rapidly than the oil late) are now headline news in the general media again. We are feeling (again) some real pain at the pump, whether your filling up with regular gas or diesel.

Gilmore Says:

Right now, there is a House bill in progress, known as the Natural Gas Act (H.R. 1380), that would offer subsidies to both nat gas truck purchasers and filling station developers to take the plunge.


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Reader Feedback

Oil prices are on the rise again, at the end of Thursday reaching over $108 for West Texas Intermediate and more than $124 for Brent Crude. Those are the highest levels since April 2011 (then $117 or so for WTI), which in turn were the highest levels since the surge to almost $150 per barrel for WTI in July 2008 (see chart below).

 

 

View Full Size Chart

As I wrote in April, we have simply become used to the once greatly feared $100 per barrel level. The mental shock for business and consumers is long gone, and both groups have reduced consumption where they can and are more prepared for this cost higher structure.


So, the question now is whether we'll settle here for awhile, then pull back a bit, keeping everything sane. Or whether this time, as in 2008, we just keep going higher. Some are predicting $5 gasoline by summer, but that seems crazy to me, barring an Israeli attack on Iran nuclear capabilities, which is certainly within the realm of the possible.


But regardless, we can bet with certainty that if oil and gas/diesel prices spike like that, it won't last long, because the hit to the economy will soon drive demand way back down, and prices will tumble again. That said, this $90-100.00 range seems like the new "higher low."


But here is the real thing: After some minor initial doubts, I am absolutely now convinced we can get out of this mess for good with a fairly simple and absolutely doable solution: Rapid adoption of natural gas-based trucks, and likely after that nat gas-based cars.

The idea of focusing on using natural gas to power freight trucks was by no means originated by famous oil man T. Boone Pickens, but his "Pickens Plan" for dramatically changing the US energy situation first released in 2008 brought the potential to the forefront. That plan called for sort of equal measures of government subsidies to spur a change from diesel fuel powered Class 8 tractors (and others) to new ones that use natural gas, and programs to drive electricity production from massive wind turbine farms from Texas through the upper Midwest.


I am still quite dubious on the windmills part of this solution, but am now totally sold on the nat gas trucks. Let's look at some facts:


-- The US has a lot of natural gas. An already abundant supply has been dramatically increased of late and moving higher from new development techniques (i.e., fracking) and the related opening of huge new potential shale-based fields, such as the huge Marcellus shale deposits in New York, Pennsylvania and Ohio.

In 2010, analysts from the respected IHS research organization said that "new natural gas plays[shale] have increased the resource base by more than 1,100 trillion cubic feet. This is an order of magnitude larger than the proved reserves recognized by the US Energy Information Administration (EIA) only two years ago."

And these reserves keep coming. We have enough natural gas to last for hundreds of years.

-- There are only two real issues with converting the nation's trucking fleet to natural gas usage: (1) the additional cost truck manufacturers (and hence carriers and private fleets) would bear to buy engines that run on natural gas; (2) A chicken and egg thing between the rollout of nat gas trucks and filling stations that can provide the fuel they need to keep moving.

When Pickens rolled out his plan in 2008, the difference in tractor costs between diesel and nat gas was about $65,000,which he wanted to return to companies buying natural gas tractors as a tax credit.

Today, the premium for a nat gas truck is just $35,000 - and falling. It probably can't get below $10-15,000 or so due to some differences in the fuel delivery system, but at that delta it becomes almost irrelevant given the benefits.

-- Right now, natural gas is very cheap. In November, the estimate was that the equivalent difference for operating a Class 8 truck on natural gas versus diesel fuel was a savings of at least $1.50 per equivalent gallon. That conveniently enough would deliver about a one year payback for the extra $35,000 cost for the natural gas engines ($1.50 per gallon times the 20,000 gallons the average truck uses per year). Since then, nat gas prices are about the same, while diesel prices have obviously risen.

-- Natural gas reduces equivalent greenhouse gas emissions by about 30%.

-- About one-third of oil use in the US is for diesel used in freight movement.

The delivery system issue is being addressed. A company called Clean Energy Holdings, for example, is rapidly building out a filling station infrastructure, planning to build a 150 new filling stations in 2012 - almost one every other day. That total will be roughly split between "highway" stations and others going into airports, trash truck companies, and other private fleet niches. That's on top of the 70 stations the company said it had at the end of 2011.

Some of those highway stations are or will be built to support trucking firms or private fleets. For example, if a manufacturer runs its trucks between a plant and various DCs, Clean Energy might provide filling stations to support that milk run. This is how these programs could start. Chicken and egg. When you start to reach some level of critical mass, it really takes off.


Right now, there is a House bill in progress, known as the Natural Gas Act (H.R. 1380), that would offer subsidies to both nat gas truck purchasers and filling station developers to take the plunge. It's just this simple: if this bill makes it into law, we will seeing an explosion of investments in trucks and stations.


To me, it's clear. The solution is here. And it is going to happen, I am absolutely convinced, barring some near suicidal barriers put on the move to natural gas trucks based on totally misplaced environmental concerns or some tsunami of oil industry money and pressure. The only question is how fast. Why not now?


Shippers, get behind the Natural Gas Act. We will reduce logistics costs, wild oil prices swings, the level of US (and Europe) oil imports and trade deficits, and realize many other benefits.


Is this not a no brainer?

Do you agree a rapid move to natural gas trucks could benefit the supply chain, the economy, and more? What are reasons you see for not making this move right now? Let us know your thoughts at the Feedback button below.

 
 
     

Recent Feedback

I suppose it's always easy to raise niggling objections to great ideas, but the key issue I recall from my days working in automotive air, fuel and emissions was the significant lack of consistency of natural gas as a product.  This meant basically that vehicles had to be calibrated for their local supply; not a big problem for local buses or the private fleets mentioned in the article, but problematic for interstate commerce.  My colleagues in the gas turbine business tell me that their turbines have to be set up for the particular flavor of gas that they will run on.  Maybe this problem has been solved or maybe it's not as big an issue as I remember, but I suspect that so far it is just flying below the radar because the numbers are small.  I'm pretty sure that if NG had to be refined and harmonized to the extent that gasoline or diesel must be today for emission controls to work properly, it would lose a great deal of its attractiveness.


John D. Hanson, Ph.D.
Associate Professor
Supply Chain Management Institute
Feb, 24 2012

I absolutely agree to going to natural gas engines.  You’re right….it is a no-brainer.

The only reason I can think of that it wouldn’t happen is the same reason a lot of other things don’t get done.  The big companies making the big money don’t want to see the big profits go away.  Greed will choke us all, literally, because of the gas omissions.


Robin Almond

SSI Schaefer Systems International Inc., - Automated Systems Division
Feb, 24 2012

Completely agree.


David Thorpe


Feb, 24 2012

Editor Feedback:

Yes, as I said, the chicken/egg thing is hard.


But that is where you are seeing Clean Energy starting to work directly with shippers/carriers to place them in specific routes where they can get guarantees on the right consumption. Walmart, for example, might be able to do its DC runs and get back on one tank, given its  DC and store network densities.


I really think it is going to happen.


Dan Gilmore
Editor
Supply Chain Digest
Feb, 25 2012

Nat Gas Pricing is low now and diesel very high – opposite ends of the spectrum.

Nat Gas use has been mostly for local applications – city buses, local fleets or for routes like bakery trucks, not over the road.

Fuel consumption has been reported to be less than for diesel powered trucks.

For today’s application payback period would be much longer than 1 year.

If the Nat Gas truck could be used for high mileage over the road applications the numbers make sense (100,000 miles plus).

Challenges: Over the road use not practical until there is a solid network of refueling locations in place across the country; fueling & storage of Nat gas has its complexities.  It will take much more than a few hundred filling stations so the major truckstop chains will need to have Nat Gas refueling capabilities.

Putting the above aside I am all for Nat Gas as an alternative fuel but we need to realize that significant conversion will take years.  I agree with the benefits and the nation should get behind this.

Likely will require significant Federal government support which may not be popular.  It will be interesting to see how things develop.


Edward Blickstein

TranSolutions Consulting LLC
Feb, 25 2012

I don't understand how we got unto the correlation between futures prices
for crude oil and the price of gasoline at the pump.  All of the oil
companies have tied up crude oil for their use under long term contracts and
barring a catastrophe the number of barrels of oil produced is pretty flat.
It seems to me that we are being "manipulated" again just like in 2008.
Natural gas seems like a good way to go but then we will have similar
"manipulation" in natural gas futures.  How about legislation ending the
futures "manipulation" which obviously did not end with the demise of Enron.


Glenn Scott
Allied Systems Mgr.
Scott Lift Truck Corp.
Feb, 25 2012

Dan –

I think it is a no-brainer… for companies to invest in technology that yields a relatively quick ROI. That being said, the ROI itself should alleviate the need for the tax credits/subsidies. This is especially important if H.R.1380 doesn’t have any provisions to increase revenue to offset the tax breaks/subsidies spent. With all the federal budget issues, supporting a revenue-negative act is not responsible unless coupled with improvements in other areas.

I think the market is going to move this way much faster once the technology leaders in both supply (NG filling stations) and consumption (NG engine suppliers) lay more groundwork. As you stated in your article, this is already starting to happen.

In my opinion, the best test market would be regional/local shipping companies; those that deliver in a limited radius. I think it would be easier and more cost effective to have the NG suppliers set up several local NG filling stations so that the NG trucks can stay within a safe range of places to ‘tank up’. It would be much more difficult for large shipping companies to smartly invest in NG with the current state of the CNG distribution network. Plus, the lessons learned from a more open, small scale system (rather than say bus companies/internal shipping operations whose fleet may fill up at the same place/places all the time provided by the company or a partner) would help to further decrease the cost of a larger regional/national network. Though I’m sure this is already happening to some extent.


As an engineer (and a gearhead) I’m excited to see the proliferation of new technology and I look forward to seeing NG filling stations as something more than an oddity. But I also think that the fiscal motivation for its implementation should be that of honest ROI and IRR coupled with a desire to be on the leading edge of technology – being willing to spend the money if necessary even if it means seeking financial help elsewhere.

An interesting side note – on a lot of the oil wells in Northwest North Dakota, they are burning off the NG created by the drilling/fracking process because they just don’t have the means/time/resources to add hardware to capture it! Talk about burning money…

Also, please note the improper use of the word “your” in the last line of the first paragraph. The text should read “…whether you’re filling up…”       


Chris Bratten
Sales Consultant
Bastian Software Solutions
Feb, 25 2012

Dan,

Difficult to disagree with you here. A few thoughts…

The glut of natural gas has been made possible by fracking, and the environmental impact has some clouds hanging over this technology.

Natural Gas may have a better carbon footprint (not sure how easy it is to deliver to the filling stations). It is unclear if the fuel tank provides the same range as diesel, or if the volatile nature of the fuel presents a higher fire risk in case of accident.

Natural Gas is still consuming a non-renewable resource.

So it seems like an excellent alternative to today’s choices, but it is not a long term solution.

Maybe that is where the wind farms come in.


Nick Seiersen
Founder
Seiersen Enterprises Inc.
Feb, 25 2012


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