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Will Cheap Oil Dethrone Natural Gas?

From heating homes to fueling vehicles, natural gas has been making strong inroads over the past decade.

In fact, when oil prices were high, the cost of operating a truck on diesel fuel was as much as 60% more than the cost of operating the same vehicle on natural gas!

Clean Energy Fuels (CLNE) jumped on the opportunity provided by the gap and built a plethora of dry and liquid natural gas facilities across the country.

Now that oil is cheap, however, the difference has narrowed substantially, to around 30%.

The effect on CLNE’s shares has been quite pronounced. Shares were down more than 60% since December 2013.

But don’t sell your natural gas shares just yet. The fuel’s inherent qualities are standing up to the “Black Beast.”

In Your House and on the Road

The movement towards natural gas is most evident when it comes to heating and transportation.

When oil prices were at $100 and heating oil prices were above $4.50 per gallon, it cost twice as much to warm an oil-heated home than one using natural gas. With the record-breaking winter we had last year, oil-heat homeowners were looking at their natural gas neighbors with envy. That gap has narrowed as oil prices have plunged, but natural gas-powered heat is still cheaper.

There are other benefits besides price, too. Unlike heating oil, which is delivered, natural gas is always “on.” And oil furnaces tend to leave a less-than-desired smell wherever a furnace is located.

Ultimately, though, it’s the cost/benefit that counts. Oil prices might be lower today, but history shows that natural gas tends to be consistently cheaper over time and less subject to shocks, outside of short-term issues related to weather.

Oil, on the other hand, is impacted by everything from weather to politics 8,000 miles away.

On the transportation side, as oil prices continue to drop, truck engine manufacturers may pull back on their production of natural gas engines. However, they won’t simply stop production.

That’s because the current fleets of natural gas-powered vehicles – such as those used by Waste Management (WM), UPS (UPS), and Federal Express (FDX) – can’t just switch back to gasoline or diesel.

The natural gas revolution isn’t restricted to households or trucking, either…

Moving to the Big City

Con Ed (ED), the giant utility that provides energy for a good chunk of New York City, has noted that more large buildings are switching to natural gas. Through October 2014, more than 1,249 large buildings made the switch.

In all of 2013, they reported 1,293 switches. Over the past two years, the amount of buildings converting to gas has increased from 108 per month to 125.

New systems are extremely expensive to install, but from a financial point of view, the payback is much shorter. We’re talking as short as five to seven years at $100-per-barrel oil and $4-per-thousand cubic feet (mcf) gas.

At current levels, the payback period may extend out to 10 years. But from a long-term perspective, that’s still a heck of a return, as most large facilities consider outlooks in the decades, not just a few years.

For consumers, the savings can be enhanced further as federal and state programs in many states offer rebates and no-cost financing for equipment to switch to natural gas.

Oil prices may put a dent into the conversions in the short term, but the trend towards switching to natural gas remains intact, and that bodes well for the industry as a whole.

Bottom line: Natural gas prices have plunged in 2014, down to around $3.1 per mcf (they stayed around $4 per mcf for most of the year), but not as much as oil prices. And just like lower oil prices, lower natural gas prices will stimulate demand – which, in turn, will raise prices.

Plus, the equation for converting natural gas infrastructure for use with oil is much too complicated, even with oil prices down more than 50% in 2014.

And “the chase” continues,

Karim Rahemtulla