1. More Slides from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/ Move Over Ethanol, Market Forces Favor CNG Posted March 16, 2011 http://dolanecon.blogspot.com/ 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.Attribution— Share Alike 3.0 Introduction to Economics

2. Posted March 16, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com http://dolanecon.blogspot.com The Search for the Fuel of the Future  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  Ethanol  Hydrogen fuel cells  Nuclear fusion  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) 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

3. Posted March 16, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com http://dolanecon.blogspot.com CNG: The Fuel of Now  More than 100,000 buses and delivery vehicles in the United States run on CNG  CNG emits less carbon than any other fossil fuel and fewer of the gases that cause local air pollution and smog  Many individual consumers have converted cars, pickups, and SUVs to CNG or use of dual fuels  Honda is the only manufacturer that sells a street-ready CNG vehicle in the US (the Honda GX) 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_95 41.JPG

4. Posted March 16, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com http://dolanecon.blogspot.com CNG Around the World  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  According to industry source NGV Global, the United States ranks 14 th in use of this reliable and proven technologyNGV Global

5. Posted March 16, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com http://dolanecon.blogspot.com Barriers to CNG: Filling Stations  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  There are about 1,000 CNG filling stations in the US now, but only about half of them are open to the public  The biggest number of stations are in California. Other clusters are found in New York, New Jersey, and the Washington, D.C. area Picture source: http://commons.wikimedia.org/wiki/File:CNG_pump_DCA_07_2010_ 9833.JPG

6. Posted March 16, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com http://dolanecon.blogspot.com Barriers to CNG: Conversion Cost  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  Non-certified kits cost as little as $1,000 but installing them is considered to constitute illegal tampering with a vehicle’s emission system  Legislation has been introduced to simplify the certification process, but it has not yet passed  Clean energy tax credits offset only part of the high cost of regulatory barriers 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

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

8. Posted March 16, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com http://dolanecon.blogspot.com Short-Run Market Reaction  The figure shows how the market for CNG vehicles (CNGVs) reacts in the short run to a lower price for natural gas  CNG fuel is a complement to CNGVs, so the demand curve shifts to the right  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

9. Posted March 16, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com http://dolanecon.blogspot.com Long-Run Market Reaction  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  Long-run demand is also more elastic, because more CNGVs on the road will make fuel more widely available  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

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