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November 8, 2016

Boone Pickens on How to Defeat OPEC

By Wolf Richter, Wolf Street

He put his money where his mouth is.

Wolf here: The use of natural gas for power generation in the US has been soaring for two decades. But its use as transportation fuel, while growing, hasn’t seen a similar surge. Some municipalities have been using buses, garbage trucks, and the like that are powered by Compressed Natural Gas (CNG). Ford has been selling CNG/propane powered vehicles for years as well, including its new F-series trucks. Anyone can buy them. In 2009, the Port of Los Angeles began a program to replace trucks that run on diesel with trucks that run on Liquefied Natural Gas (LNG) or CNG. And so on.

Natural gas is relatively cheap and clean, yet in the US it just hasn’t fully caught on as a transportation fuel. So here is T. Boone Pickens. As always when he talks, he is talking his book. But he also makes a lot of sense.

By Lincoln Brown, Oilprice.com

One way or the other, the world will eventually be forced on to cleaner fuels for its vehicles, so says Bruce Pile, who runs the Marketocracy fund, and so hopes T. Boone Pickens, one of the world’s extraordinary investors who is banking on America’s trucking fleet shifting to natural gas sooner rather than later.

Is it realistic? Pile’s theory says yes, and so may Pickens’ money.

According to Pile, in the long run, evolving fracking techniques will eventually drive up oil prices, allowing natural gas to move ahead in terms of fuel usage. In fact, Pile predicts that by 2020, natural gas will outpace oil as a fuel source for vehicles.

Pile notes that while there is some interest in natural gas today, people still have plenty of concerns, including safety and logistics.

But in the state of California, whose policies often serve as harbingers for the rest of the nation, busses in the city of Los Angeles are already running on natural gas, which burns cleaner than oil.

So the question is: Is T. Boone Pickens a natural gas hopeful, or a prophet? Are his investment choices ideological or strictly financial?

Pickens, according to Pile, is a proponent of natural gas, in part because he holds to the theory of climate change, but moreover because Pickens wants to see U.S. trucking fleets weaned off foreign oil. As far back as 1991, Pickens chaired the Natural Gas Coalition, and prior to that, he had a 1993 presidential appointment to the Natural Gas Task Force.

Also in 1993, his company Mesa Petroleum, created Mesa Environmental, which would subsequently become Pickens Fuel Corp, began operating natural gas stations. In 2001, Pickens sold a 75 percent stake in the company to BC Gas, and then repurchased that stake in 2006—renaming it Clean Energy Fuels. By then the company had purchased even more stations, and had made a substantial profit in natural gas. In 2007, the company went public as CLNE, and now owns approximately one-third of the country’s natural gas fueling stations.

CLNE is one of the few successful companies in the market, and so Pickens’ stake in natural gas has so far paid off. One might call him a realist who had the foresight to see natural gas for what it was—a stepping stone to a cleaner tomorrow.

Tomorrow, as always, is extremely relative. While Pickens may have the patience for this tomorrow, others will not. At the end of the day, Pickens’ stepping stone is likely covered in the moss of foresight—but it’s a very large stone.

Pile cites data from the Hubbert projection indicating that natural gas will peak somewhere around the year 2040, and that the country needs to get moving on non-fossil fuel sources. But for now, natural gas is a logical choice.

According to Future Market Insights marketing intelligence, the global NGV market by volume is expected to expand at a compound annual growth rate (CAGR) of around 5 percent to 7 percent during the forecast period of 2015 to 2025 due to stringent government emission regulations and growing demand for fuel-efficient vehicles.

The public interest isn’t quite there yet, but this isn’t really what Pickens is banking on. His focus seems to be on the commercial trucking fleets.

A Class 8 commercial semi-truck can burn a lot of diesel fuel, placing them high up on the hit list for environmental advocates and government regulators. But this diesel guzzling is also a problem for fleet operators themselves. It’s expensive. And while natural gas commercial trucks are around twice the price of their predecessors, the savings in the end makes sense for fleet operators.

While Pickens may be anxious to see U.S. trucking fleets make the switch to natural gas, it is worth noting that Class 8 natural gas truck sales in the US and Canada saw a dip in year-to-date sales through August—a drop of 29 percent behind last year’s level. The bulk of natural gas vehicles seem to be the purview of mass-transit entities and garbage trucks, according to ACT Research.

But the dip in sales may not suggest something fundamentally wrong with the natural gas truck market. As ACT’s Steve Tam notes, other market factors may have been involved. Heavy trucking companies are competing for the same freight, and as it happened, operators moved to increase their fleet sizes just as freight growth began to slow, thus leading to an overall slump in truck sales.

Meanwhile, the National Park Service, the cities of Ogden, Utah; Long Island, New York; and Norman, Oklahoma; along with Leon County, Florida, are among the entities to make the first switch to natural gas vehicles. Recently however, the city of San Diego made the choice to switch its fuel supply to “renewable diesel,” which is comprised of vegetable oil, animal fats and agricultural waste. That city chose renewable diesel over natural gas, which had been its original choice.

Natural gas commercial fleets are likely to move forward precisely because the government wants them to, and fleet operators are increasingly on board. In fact, a new bipartisan bill in Congress offers to help this segment along. The bill would cut federal excise taxes on trucks that run on compressed natural gas (CNG), liquefied natural gas (LNG) or renewable natural gas (RNG).

Ultimately, legislation of this nature this will help to ease the tax burden for fleet operators who want to get in on the natural gas trucks.

This will please T. Boone Pickens to no end. After all, for him, converting the US commercial fleet to natural gas is not just about an investment he hopes to make a few bucks on: it’s about geopolitics. It’s about trumping OPEC.

Transportation, Pickens has famously noted, accounts for more than two-thirds of all the oil we use—and as such, a huge chunk of our dependence on foreign oil is oil from the Middle East, and as such, has become a national security issue. “As long as we keep buying oil from the Middle East, our enemies can continue to fund terrorism,” he wrote for Time magazine.

So Pickens is very serious about lobbying to make the shift to natural gas for America’s heavy-duty trucks because it “will introduce the first real competition into our fuel supply. It will improve our balance of trade, it will improve our environment, and it will remove the last marked card from OPEC’s poker hand over our national security.” 

Courtesy of Lincoln Brown, Oilprice.com via Wolf Street

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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