Oil Prices Are Plummeting. What Does That Mean For CNG?

Oil prices are in free fall, bringing U.S. gasoline prices down to levels not seen in more than a decade. It’s easy to think that with cheaper gas prices, CNG vehicle adoption will suffer. After all, part of the reason for choosing alternative fuel vehicles is for cost savings. But a closer comparison of oil and natural gas shows that it’s not that simple.

The basic reason for the falling oil prices is supply and demand. New drilling technologies reinvigorated a U.S. petroleum industry to the point where America could surpass Saudi Arabia as the world’s largest oil producer, notes Ben Casselman at FiveThirtyEight. Meanwhile, global demand in a sluggish economy just has not kept pace with the growing oil production. Even so, producers across the world have been reluctant to cut production. Saudi Arabia’s preference to maintain its oil production levels in the face of falling demand, for the sole reason of maintaining its own market share, has drawn the scorn of many of its fellow petroleum-producing countries.

As with oil, natural gas also benefits from technological advances that boost natural gas production, but unlike oil producers, natural gas producers have taken steps that have not undercut price. Casselman notes that the United States is drilling half as many gas wells today as it did five years ago, yet it is producing a third more natural gas. In short, producers are getting more from less through technology, however, producers have not produced so much fuel that they create an oversupply of natural gas.

While both oil and natural gas are fuels, they are different commodities responding to different market forces. Oil prices function according to supply and demand. Natural gas prices also fluctuate according to supply and demand, but natural gas prices are much more susceptible to weather. Natural gas prices tend to be higher in winter because of the fuel’s use in heating.  During particularly cold period, such as those seen in the eastern United States recently, natural gas prices spike.

Even though we are in the thick of the heating fuel season, natural gas prices are holding relatively stable. The truth is that natural gas has been  a bargain for quite some time. In a commentary at CNBC, BMO Private Bank’s Jack Ablin notes that the natural gas equivalent to a barrel of oil is just $23. That low price has driven an expansion of CNG facilities for both public and private fleets. He adds that the energy-output equivalent natural gas traded in parity with oil prices from the mid-1990s through 2007. When the economic downturn hit in 2008, oil reached $147 a barrel, but the equivalent in natural gas rose to just $85.

The important thing to note is not so much the price of the natural gas, but rather its relative price stability. Oil, and in turn, gasoline, has shown itself to be a volatile fuel subject to wildly fluctuating prices. Natural gas, and in turn, CNG, has emerged as fuel source that is both viable and relatively stable in price. Oil prices may rise and fall but the natural gas infrastructure in place means that CNG is here to stay. To learn more about CNG fuel options, contact us.

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