Two Challenges Holding Back Natural Gas Vehicles

More than two-thirds of the oil consumed in America goes toward transportation and accounts for roughly a third of total greenhouse gases produced. With currently high oil prices, cheaper, cleaner-burning natural gas seems to be the most obvious solution to this problem.

Just a decade ago, natural gas and oil traded at a similar price on an energy equivalent basis. But now - courtesy of the shale gas boom - oil is about seven times as expensive as natural gas on a dollar-per-BTU basis.

Given this historically unprecedented disparity between the two energy sources, large-scale production of natural gas vehicles, or NGVs, would appear to be the next logical step.

Natural gas making inroads in trucking
Already, natural gas as a transportation fuel has gained considerable traction in the market for commercial trucks. Waste management and delivery companies, as well as others that have large fleets, are switching over to natural-gas-fueled vehicles to lower costs.

For instance, Waste Management expects that, over the next five years, four-fifths of the trucks it purchases will run on natural gas. By 2017, the company projects that its trucks will burn more natural gas than diesel. While these new trucks will run about $30,000 more than comparable diesel trucks, they should save the company $27,000 or more each year in fuel costs.

Other companies are also seeing tremendous opportunities in converting trucks and larger commercial vehicles to run on natural gas. Within a couple of years, truck manufacturer Navistar expects that a third of the trucks it sells will run on natural gas.

Yet despite these positive developments in the market for trucks and larger vehicles, overall usage of natural gas vehicles in the U.S. remains minimal. Currently, only about 0.1% of American vehicles use the cleaner-burning hydrocarbon as a fuel source. Adoption for natural gas passenger vehicles has been ever slower.

The biggest challenge has been in creating the right incentives for consumers and companies to make the transition. There are two main issues here: Natural gas vehicles are expensive and there is a dearth of refueling stations across the country.

High upfront costs
While natural gas and gasoline engines are quite similar, natural gas vehicles require more expensive fuel tanks. This is because natural gas has to be stored under high pressure, which requires fuel tanks that are heavier, larger, and sturdier than gasoline fuel tanks.

Since these are more expensive to build, the costs get passed on to the consumer. For instance, Honda's Civic GX, which is currently the only natural-gas-powered passenger vehicle available in the U.S. market, is about $5,200 more expensive than a comparable vehicle that runs on gasoline.

Still, private companies are working hard and investing heavily in research and development efforts aimed at reducing the costs of natural gas vehicles.

For instance, 3M and Chesapeake Energy joined forces last year to develop lighter and better natural gas fuel tanks. The tanks will have linings wrapped in ultra-light, carbon-composite materials, which could make them as much as 20% lighter than currently available tanks.

Limited refueling capacity
The paucity of refueling stations across the country reflects a fundamental problem that has to do with incentives. Why should consumers go out and buy NGVs if there are hardly any refueling stations? And why should companies invest millions of dollars in building these stations if nobody owns NGVs? It's a tricky dilemma.

Currently, there exist just over 1,000 natural gas stations in the U.S., as compared to nearly 160,000 gasoline stations. Of these natural gas stations, the vast majority are equipped for CNG-powered vehicles. But fewer than half of them are available to the public and more than a fifth are located in California.

Limited refueling capacity is also a bigger issue for some types of vehicles than others because of the physical properties of natural gas. One of the major drawbacks of using natural gas as a transportation fuel is that it's not very dense.

For instance, CNG is only about a quarter as dense as diesel and liquified natural gas, or LNG, is about 60% as dense. Hence, trucks need more storage space for natural gas in either form, which requires either more tanks or bigger ones. Otherwise, they have to refuel quite often.

For delivery trucks or city buses, this doesn't pose much of a challenge, since most of them usually return to home base - where there are refueling stations - at the end of each day. But for long-haul truckers that often have erratic routes, the lack of refueling stations remains a major issue.

Clean Energy Fuels is aiming to change this, though. The largest provider of natural gas as a transportation fuel in the U.S., it already boasts more than 300 natural gas refueling stations across the country. Roughly 80% of these stations are equipped to refuel passenger cars and light-duty trucks that run on CNG.

And recently, the company announced its plans to develop a network of 150 LNG stations at Flying J truck stops throughout the country by the end of this year. In doing so, the company's goal is to allow long-haul trucks to get to any major city in the country on LNG alone. Given that long-haul trucks already have major financial incentives to switch to natural gas, the addition of new refueling stations should provide an additional boost to demand.

With the movement toward alternative energy gaining momentum, Clean Energy Fuels stands out as one of the biggest and potentially most lucrative opportunities. It's a first mover that's poised to make a big impact on an essential industry. Read all about Clean Energy Fuels in our brand-new report. Just click here to get started.

The article Two Challenges Holding Back Natural Gas Vehicles originally appeared on Fool.com.

Fool contributor Arjun Sreekumar has no position in any stocks mentioned. The Motley Fool recommends 3M, Clean Energy Fuels, and Waste Management. The Motley Fool owns shares of Waste Management and has the following options: Long Jan 2014 $20 Calls on Chesapeake Energy, Long Jan 2014 $30 Calls on Chesapeake Energy, and Short Jan 2014 $15 Puts on Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.