Natural Gas Changing Transportation Industry

Natural Gas Changing Transportation Industry

In the current season of the AMC hit series “Mad Men,” protagonist Don Draper heads to a Rolling Stones concert in an attempt to use one of their songs in a commercial. While Draper’s fictional foray to license “Time Is on My Side” is unsuccessful, hits from the Stones’ repertoire have indeed successfully made their way into famous ads. The standout might be Microsoft using “Start Me Up” to introduce Windows 95. With the world’s increased focus on natural gas, we may soon see the likes of Boone Pickens embracing the refrain of “Jumping Jack Flash” (It’s a gas, gas, gas!).

The world economy and the transportation industry have grown together through cheap and plentiful oil. After World War II, the U.S. transportation system was built around cars, truck and airplanes. Infrastructure and population trends changed accordingly.

The ascendance of the truck was complete in the early 1980s when deregulation enabled advanced truckload companies to become the preferred transportation mode in a just-in-time logistics model. At the same time, railroads developed sophisticated operating and commercial methodologies to handle ever-increasing amounts of coal for export and utilities.

Globalization was the other driver. Distance wasn’t a barrier, as low-cost labor and raw materials were utilized wherever manufactured goods could be produced at the lowest cost. Ocean shipping and air cargo networks developed to support these trends. As the cost of oil increased, however, many modes came under severe profitability pressure. Not only was oil a major cost of production, but the economic impact of “oil shocks” also depressed underlying consumer (and overall transportation) demand.

Participants throughout the supply chain responded. Retailers changed packaging and loading configurations to load more product in fewer vehicles. Delta Air Lines purchased an oil refinery to obviate the need for expensive strategies such as hedging.

Not only oil is under pressure. Coal, traditionally our nation’s most abundant resource, also is encountering economic and environmental pressures. The Environmental Protection Agency’s regulatory initiatives determine whether electric utilities generate power with coal. Now the abundance of domestic natural gas has provided a lower-cost hydrocarbon without most of the environmental degradation.

Although a large embedded base of electric utilities is burning coal, some experts believe they could be displaced quickly. A 2010 study by PFC Energy maintains there is sufficient latent generating capacity in existing gas-fired power plants to replace almost all coal-fired output.

Ironically, the coal industry may need the help of its traditional environmentalist enemies to survive. Should hydraulic fracturing (“fracking”) prove as harmful as some fear, the rosy forward-looking projections may go unrealized. Should cap and trade be resuscitated, coal also might become economically viable again.

Natural gas is more than just an electricity source. It’s also rapidly changing the transportation industry. Many trucking companies hope to replace diesel-powered tractors with natural gas. Historically, the two biggest obstacles have been the lack of a widespread fueling network and limited engine size. Both problems, however, are being overcome by the increasing demand created by the immense, available savings.

Future changes might be even more far-reaching. Whereas port facilities’ efforts to import LNG were held off by outbreaks of NIMBY-ism, there appears to be much less resistance to terminals being built for export. Ocean transportation of LNG is a profitable niche for a handful of carriers; with high barriers to entry, the financial benefits are more sustainable than other trades. (Many observers believe the three Japanese container lines have managed to stay in business the past 15 years solely because of LNG imports from Qatar. Non-Japanese lines have been excluded from this business.)

If railroad coal traffic continues to diminish, the landscape may change markedly. While other traffic segments are available, the billions of dollars invested to support Powder River coal aren’t redeployed easily. Some railroads are “doubling down” on carrying oil from the Bakken shale, but a tank car is a 20- to 40-year asset, and the demand for rail transportation is expected to diminish in five to 10 years as pipelines reach this new source.

Perhaps the biggest impact of natural gas may be accelerated on-shoring. As energy costs exceed labor costs in the manufacturing process, low-cost energy from natural gas may help resuscitate U.S. manufacturing. Even Mexico — with its high fuel costs — could be adversely affected.

Natural gas may indeed be our nation’s energy game-changer for this century. One thing is for certain: It’s already transforming what — and how — we move.

Ted Prince is principal, T. Prince & Associates. Contact him at