More Slides from Ed Dolan’s
Econ Blog http://dolanecon.blogspot.com/ Move Over Ethanol, Market Forces Favor CNG Posted March 16, 2011 Terms of Use: These slides are made available under Creative Commons License Attribution—Share Alike 3.0 . You are free to use these slides as a resource for your economics classes together with whatever textbook you are using. If you like the slides, you may also want to take a look at my textbook, Introduction to Economics , from BVT Publishers.

The Search for the Fuel
of the Future <ul><li>The US government has spent billions in the search for the elusive “fuel of the future” that will be clean, cheap, and made in America </li></ul><ul><ul><li>Ethanol </li></ul></ul><ul><ul><li>Hydrogen fuel cells </li></ul></ul><ul><ul><li>Nuclear fusion </li></ul></ul><ul><li>Meanwhile, few have noticed a humble, off-the-shelf technology that is all of these things, and is available right now: compressed natural gas (CNG) </li></ul>Posted March 16, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com A Hydrogen Fuel Pump Hydrogen has been touted as the “fuel of the future” but it is decades away from widespread use. Photo source: EERE http://commons.wikimedia.org/wiki/File:Hydrogen_fueling_nozzle.jpg

CNG: The Fuel of Now
<ul><li>More than 100,000 buses and delivery vehicles in the United States run on CNG </li></ul><ul><li>CNG emits less carbon than any other fossil fuel and fewer of the gases that cause local air pollution and smog </li></ul><ul><li>Many individual consumers have converted cars, pickups, and SUVs to CNG or use of dual fuels </li></ul><ul><li>Honda is the only manufacturer that sells a street-ready CNG vehicle in the US (the Honda GX) </li></ul>Posted March 16, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com A CNG Powered Bus in Arlington, VA Photo source: Mario Roberto Duran Ortiz, http://commons.wikimedia.org/wiki/File:CNG_buses_Arlington_Transit_ART_07_2010_9541.JPG

CNG Around the World <ul><li>Although
the United States is one of the world’s largest producers of natural gas, it lags behind in use of CNG as a transportation fuel </li></ul><ul><li>According to industry source NGV Global , the United States ranks 14 th in use of this reliable and proven technology </li></ul>Posted March 16, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com

Barriers to CNG: Filling Stations
<ul><li>CNG suffers from a “chicken and egg” problem—demand for vehicles is low until there are more filling stations, but supply of filling stations is low until there are more vehicles on the road </li></ul><ul><li>There are about 1,000 CNG filling stations in the US now, but only about half of them are open to the public </li></ul><ul><li>The biggest number of stations are in California. Other clusters are found in New York, New Jersey, and the Washington, D.C. area </li></ul>Posted March 16, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com Picture source: http://commons.wikimedia.org/wiki/File:CNG_pump_DCA_07_2010_9833.JPG

Barriers to CNG: Conversion Cost
<ul><li>Almost any vehicle can be converted to CNG or dual fuel use, but strict EPA regulations keep the cost of conversion extremely high, up to $20,000 or more per vehicle </li></ul><ul><li>Non-certified kits cost as little as $1,000 but installing them is considered to constitute illegal tampering with a vehicle’s emission system </li></ul><ul><li>Legislation has been introduced to simplify the certification process, but it has not yet passed </li></ul><ul><li>Clean energy tax credits offset only part of the high cost of regulatory barriers </li></ul>Posted March 16, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com Almost any vehicle can be converted to CNG. NGV America maintains a business directory of conversion kits and installers http://www.ngvc.org/buz_dir/index.html Photo source: http://commons.wikimedia.org/wiki/File:Carroagas.jpg

Market Forces Now Favor CNG
<ul><li>New discoveries of unconventional natural gas (shale, tight sands, coal-bed methane) have increased supply </li></ul><ul><li>Growth of demand and political disturbances in the Middle East have sent oil prices upward </li></ul><ul><li>Result: The gap between natural gas and oil prices is now the greatest on record </li></ul>Posted March 16, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com Follow this link to view a more detailed graph showing trends in oil and natural gas prices

Short-Run Market Reaction <ul><li>The figure
shows how the market for CNG vehicles (CNGVs) reacts in the short run to a lower price for natural gas </li></ul><ul><li>CNG fuel is a complement to CNGVs, so the demand curve shifts to the right </li></ul><ul><li>The market moves up and to the right along the supply curve to a new equilibrium at E 1 where more CNGVs are sold and the price of CNGVs rises </li></ul>Posted March 16, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com

Long-Run Market Reaction <ul><li>In the
long run, supply is more elastic, because there is time for regulatory barriers to be overcome and for new suppliers to enter the market </li></ul><ul><li>Long-run demand is also more elastic, because more CNGVs on the road will make fuel more widely available </li></ul><ul><li>As a result, the long-run market equilibrium will look more like E 2 than E 1 , and the total quantity of CNGVs sold will increase more strongly </li></ul>Posted March 16, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com

The Best Hope for CNG
<ul><li>The best hope for CNG is probably a market-driven, bottom-up approach rather than a top-down legislative breakthrough </li></ul><ul><li>Low CNG prices will gradually lead to more fleet vehicles and private conversions </li></ul><ul><li>More vehicles on the road will bring more CNG filling stations </li></ul><ul><li>More vehicles plus the price advantage will create pressure for more favorable regulation </li></ul><ul><li>Eventually, the US may catch up with Bangladesh in use of this fuel of the future </li></ul>Posted March 16, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com