CNG Still Decades From Shrinking Oil Demand

7/30/2019 CNG Still Decades From Shrinking Oil Demand

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Copyright 2012, Bloomberg L.P. www.bgov.com

Bloomberg Government Study

Compressed Natural Gas:America's Alternative to Gasoline?CNG Still Decades From Shrinking Oil Demand

Part 2 of 2

BY ROB BARNETTEnergy Analyst

Editor

SANFORD REBACKDirector, Energy

DEC. 7, 2012

To contact the author, e-mail:[email protected]


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2 BGOV Study Compressed Natural Gas: Impact on Gasoline Demand

FOREWORD

Oil's grip on the transportation sector is apparent; it accounts for more than 90 percentof the fuel consumed by cars, trucks and airplanes. This near-monopoly, combined with oil

prices that are about five times higher than the average price recorded during the 1990s,

has generated interest in finding alternative ways to fuel transportation.

Transportation Energy Use Within the U.S.

Supply Demand

* Includes freight trucking, rail, air, etc.

Source: Energy Information Administration and Bloomberg Government

Bloomberg Government has explored the role that passenger compressed natural gas

(CNG) vehicles could play in displacing oil as a transportation fuel. Light-duty vehicles,

essentially passenger cars, sport utility vehicles, pickup trucks and vans, consume about

60 percent of the energy used for transportation. A growing chorus of industry officials andmembers of Congress has been advocating the use of CNG for passenger vehicles (and

liquefied natural gas for trucking) as an alternative to oil. This is a two-part series:

Hurdles to Adoption (Part 1) This report assesses the economics ofCNG cars and light trucks compared with conventional gasoline vehicles. It

also explores the infrastructure requirements of CNG adoption.

Impact on Gasoline Demand (Part 2) The report examines thepotential market size for passenger CNG vehicles and assesses the impact

that CNG vehicles could have on gasoline demand.

Oil93%

NaturalGas3%

Biomass4%

Electricity0.2%

All Other Transport42%

Light Duty Vehicles58%


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TABLE OF CONTENTS

Section Page

Foreword ................................................................................................................ 2

Executive Summary ............................................................................................... 4

Section 1: Lessons Learned from Hybrid Vehicles ............................................. 5

Section 2: What If CNG Vehicles Were Twice as Successful as Hybrids? ........ 7

Section 3: CNG Vehicle Impact on Gasoline Demand ......................................... 8

Thinking About Transportation in Generational Terms ...................................... 9

Conclusion ........................................................................................................... 11

About the Analyst ................................................................................................ 11

Appendix: Light-Duty Vehicle Fleet Model Documentation .............................. 12

Endnotes .............................................................................................................. 23


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EXECUTIVE SUMMARY

Compressed natural gas (CNG) vehicles probably won'tsignificantly decrease U.S. oil demand for decades. Even if

CNG vehicles prove more popular than hybrids, there are

almost 250 million cars and light trucks on the road in the U.S.,and it takes many years to turn over the existing vehicle stock.

This Bloomberg Government Study finds:

If CNG vehicles were to climb to 5 percent of newcar sales by 2025an optimistic scenariogasoline

demand would be reduced only by about 1.5 percent in

2025 compared with what it otherwise would have been.

Impact of CNG on Gasoline Demand

Million Barrels per Day

* BGOV "Bullish CNG Scenario" includes meeting CAFE and RFS requirements

Source: Bloomberg Government and EIA

After 2025, CNG's impact could be morepronounced; petroleum-based gasoline demand could fallby almost 775,000 barrels per day by 2035, a reduction of

about 10 percent compared with current demand.

A long-term commitment to CNG vehicles from policymakers and consumers would be required to significantly

reduce U.S. dependence on gasoline and diesel fuel.

This study, the second of two parts, assesses the market

for CNG vehicles and estimates the potential impact ongasoline demand. To conduct this analysis, BloombergGovernment developed a consumer automobile fleet model

that forecasts fuel demand based on a variety of assumptions.

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1970 1980 1990 2000 2010 2020 2030

History CAFE Only

CAFE + RFS BGOV "Bullish" CNG*

BACKGROUND Compressed natural gas(CNG) vehicles have the

potential to reduce U.S.gasoline demand andgreenhouse gasemissions.

MARKET SHARE

It will probably takedecades for CNG vehiclesto gain even a modestfoothold in the U.S. Hybridvehicles, the best-sellingalternative vehicle to date,have been on the marketsince 2000. Theyconstituted only 2.3percent of new cars andtrucks sold in 2011.

IMPACT Even if CNG vehicleswere 5 percent of vehiclessales by 2025, demandfor gasoline would be only

about 1.5 percent lowerthat year than it otherwisewould have been. Severalyears after 2025, theimpact of CNG vehiclescould be more substantial.CNG could displace up to12 billion gallons ofpetroleum-based gasolinea year by 2035, assumingvery optimistic salesprojections.


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SECTION 1: LESSONS LEARNED FROM HYBRIDVEHICLES

Almost all vehicles sold in the U.S. are based on the same basic technology: the gasoline-

powered internal combustion engine. With the exception of hybrid vehicles, new technologies

and alternative fuels have had difficulty making inroads into the U.S. vehicle market.

Hybrid vehicles have had an impressive run. From 2000 through 2011, hybrid vehiclesales grew by a compound annual growth rate of 36 percent.

1(See Figure 1.) The dip starting

in 2008 corresponds to a drop in overall vehicle sales resulting from the great recession.2

Toyota has dominated the hybrid market. Including its Lexus luxury brand,Toyota

cars and trucks accounted for 71 percent of the hybrids sold in the U.S. between 2000

and 2011.3

With more than a million sold during the past decade, the Toyota Prius hasbeen the most successful hybrid vehicle.

4HondaandFordfinished a distant second and

third in U.S. hybrid market share.5

Figure 1: U.S. Hybrid Vehicle Sales

Source: Bloomberg Government and Department of Energy's Alternative Fuels Data Center

Despite having a phenomenal growth rate, hybrid vehicle sales peaked at only 2.8 percent

of all cars and light trucks sold in 2009; they made up 2.3 percent of vehicles sales in 2011.6

Figure 2 displays the percentage of hybrid car sales and illustrates the difficulty of

transforming the U.S. automotive sector. It can take years to scale new vehicle technology.Because hybrids, unlike CNG vehicles, take advantage of existing U.S. oil and gasoline refueling

infrastructure, it seems unlikely that CNG vehicles could replicate hybrids' adoption rate.

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Other Hybrids Toyota Prius
http://www.bgov.com/companies/115114http://www.bgov.com/companies/115114http://www.bgov.com/companies/115114http://www.bgov.com/companies/100747http://www.bgov.com/companies/100747http://www.bgov.com/companies/100747http://www.bgov.com/companies/100602http://www.bgov.com/companies/100602http://www.bgov.com/companies/100602http://www.bgov.com/companies/100602http://www.bgov.com/companies/100747http://www.bgov.com/companies/115114


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Figure 2: U.S. Hybrid Vehicle Sales as a Percentage of Total Sales

Source: Bloomberg Government and Department of Energy's Alternative Fuels Data Center

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011


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SECTION 2: WHAT IF CNG VEHICLES WERE TWICEAS SUCCESSFUL AS HYBRIDS?

Whether consumers will be tempted by CNG vehicles is far from certain. Even so,

several manufacturers, includingHondaandChrysler, have placed bets that there will be

consumer demand for CNG vehicles.7

Through September, Honda had sold only about1,600 CNG-fueled Civics in 2012.

8Chrysler's 2013 CNG Ram pickup truck began

rolling off the assembly line on October 30, 2012.9

The rate at which CNG vehicles

have been purchased is similar to the adoption rate of hybrid vehicles in their early days.

To estimate the degree to which the adoption of CNG vehicles could reduce U.S.gasoline demand, Bloomberg Government developed a "Bullish CNG Scenario" (Figure 3).

Bloomberg Government's "Bullish CNG Scenario" assumes that CNG vehicles are about

twice as successful in the next 10 years as hybrids have been during the past decade. The

scenario assumes that by 2025 CNG vehicles constitute 5 percent of new car and light trucksales. This would mean about 800,000 CNG vehicles sold in 2025, or almost 3 times more

than the number of hybrids sold in 2011. These figures are based on a variety of assumptionsthat were fed into Bloomberg Governments light-duty vehicle fleet model. (See Appendix onPage 12 for more details on model assumptions.)

Figure 3: BGOV "Bullish CNG Scenario"

Source: Bloomberg Government

0%

1%

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5%

6%

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
http://www.bgov.com/companies/100747http://www.bgov.com/companies/100747http://www.bgov.com/companies/100747http://www.bgov.com/companies/16434494http://www.bgov.com/companies/16434494http://www.bgov.com/companies/16434494http://www.bgov.com/companies/16434494http://www.bgov.com/companies/100747


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SECTION 3: CNG VEHICLE IMPACT ON GASOLINEDEMAND

U.S. petroleum-based gasoline demand probably peaked in 2005.10

Corporate

average fuel economy (CAFE) requirements, the renewable fuel standard (RFS) and the

possibility of alternatives such as CNG and electric vehicles point toward a long-termtrend of declining petroleum-based gasoline demand.

As illustrated in Figure 4, Bloomberg Government's light-duty vehicle fleet model

projects that petroleum-based gasoline demand would decline by about 22 percent in

2025 compared with 2011 levels under the "Bullish CNG Scenario." The scenario alsoassumes that CAFE and RFS requirements are met. A previous Bloomberg Government

Study,Fuel Economy Standards: Impact on Gasoline Demand, includes a more in-depth

discussion of CAFE and RFS requirements.

Figure 4: Impact on Petroleum-based Gasoline Demand Through 2025

Million Barrels per Day

* BGOV "Bullish CNG Scenario" Includes Meeting CAFE and RFS Requirements

Note: About 10 percent of U.S. "gasoline" is currently composed of ethanol; the charts and figures shown in this sectionspecifically show the petroleum-based component of gasoline.

Source: Bloomberg Government (Projection) and Energy Information Administration (History)

According to the model, CAFE and RFS are much bigger drivers of the decline in

gasoline demand than the adoption of CNG vehicles is. The assumption that CNG

vehicle sales reach 5 percent of total light-duty vehicles sales by 2025 only reducespetroleum-demand about 1.5 percent more than simply meeting fuel economy and

biofuel requirements.

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1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025

History CAFE Only CAFE + RFS BGOV "Bullish CNG Scneario"*"
http://www.bgov.com/media/news/BHDUf98wGpxtOYGpCZUOuwhttp://www.bgov.com/media/news/BHDUf98wGpxtOYGpCZUOuwhttp://www.bgov.com/media/news/BHDUf98wGpxtOYGpCZUOuw


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These estimates assume that both the 2017-2025 CAFE requirements and the 36 billion

gallon RFS are fully met, which at this time seems unlikely to occur. Falling short on either

of these targets means that the adoption of CNG vehicles would have a larger proportionalimpact on gasoline demand.

The limited impact of CNG vehicle adoption is primarily related to how long it takes totransform the U.S. vehicle stock. There are about 250 million cars and light trucks on the

road today. Even with CNG vehicles reaching 5 percent of sales, or about 800,000 vehicles,

in 2025, it still would take a long time for CNG vehicles to make up an appreciable share ofthe overall U.S. automobile fleet. (See Figure 5.) Under the "Bullish CNG Scenario," CNG

vehicles would constitute only about 1.5 percent of light-duty vehicles on the road in 2025.

Figure 5: CNG Vehicles vs. Cars and Light Trucks

Million Cars on the Road

Source: Bloomberg Government (Projection) and Department of Energy (History)

Thinking About Transportation in Generational Terms

Adoption of CNG vehicles would have to occur over a long period and at anunprecedented rate to have an appreciable impact on the use of petroleum-based fuels.

Even if CNG vehicles reach 5 percent of sales in 2025, which would be a much greater

commercial success than hybrid vehicles, the impact on the overall fleet and gasoline

demand would be small.

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CNG Cars and Light Trucks Light Trucks Cars


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If Bloomberg Government extends the scenario to 2035, things start to look somewhat

different. (See Figure 6.) By 2035, CNG vehicles could help to displace about 775,000

barrels per day, or about 12 billion gallons per year, of petroleum-based gasolineadecline of about 10 percent compared with current levels. This assumes that CNG vehicle

sales continue to grow through 2030; the estimate shown in Figure 6 has CNG vehicles

reaching 30 percent of total light-duty vehicle sales in 2030 and then holding steady at30 percent from 2031 to 2035.

Figure 6: Impact on Gasoline Demand

Million barrels per day

* BGOV "Bullish CNG Scenario" Includes Meeting CAFE and RFS Requirements

Source: Bloomberg Government (Projections) and Energy Information Administration (History)

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1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035

History CAFE Only CAFE + RFS BGOV "Bullish" CNG*


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CONCLUSION

Natural gas has many benefits: it is a plentiful domestic resource, it is cheap relative togasoline, and it has lower emissions than gasoline or diesel fuel. Yet natural gas is unlikely

to be a panacea for reducing U.S. reliance on oil and gasoline.

The scenario in this studya very optimistic one in terms of CNG vehicle adoption

concludes that U.S. petroleum-based gasoline demand doesn't dip below 1970 levelsuntil 2035. A long-term commitment to alternative transportation options would be

required to transform the U.S. automobile fleet and have a real impact on fuel demand.

Policy makers have to think in generational terms if they want to move the needle on U.S.

oil and gasoline reliance.

Natural gas has the potential to be more transformative in the trucking sector. Long-

haul trucks are driven many more miles each year and consequentially are upgraded andreplaced more often than consumer vehicles. In this context, there may be greater potential

for natural gas to displace demand for diesel fuel.

ABOUT THE ANALYSTRob Barnett, an energy analyst at Bloomberg Government, specializes inenergy sector economics, environmental policy and strategy, and

emissions markets. Before joining Bloomberg, he was an associate director

of Climate Change and Clean Energy at IHS Cambridge Energy Research

Associates. At IHS CERA he led the environmental and energy analysisfor various studies, including Growth in the Canadian Oil Sands: Finding

the New Balance, and Crossing the Divide: The Future of Clean Energy.

Before that, Barnett worked for Clemsons Power Quality and IndustrialApplications Laboratory, where he modeled electric power systems to

assess the impact of distributed generation. Barnett holds a masters degree

in economics from Boston University and undergraduate and masters

degrees in electrical engineering from Clemson University.


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APPENDIX: LIGHT-DUTY VEHICLE FLEET MODELDOCUMENTATION

Model Overview

Bloomberg Government developed a light duty vehicle fleet model to assess theimplications of CAFE regulations, biofuel policies, and alternative fuels such as CNG. Themodel forecasts fuel demand from automobiles based on a variety of assumptions related to

demographics, macroeconomics, consumer preferences and policy (see Figure 7). Each step

and the assumptions that were made are described in more detail below.

Figure 7: Bloomberg Governments Consumer Automobile Fleet Model


Consumer PreferencesSales Split Between Cars /

Light Trucks / CNGMiles Traveled per Vehicle

Policy AssumptionsMPG of New Vehicles / RFS

Demographic AssumptionsPopulation Growth RateVehicle Ownership Rate

Macroeconomic AssumptionsNew Vehicle Sales

Light DutyVehicle

Fleet Model

OutputFuel Demand


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Step 1: Population Forecast

The first step in the consumer automobile fleet model is to determine the size of the

U.S. population. Combined with assumptions regarding per capita vehicle-ownership rates

(next section), these two variables feed into an estimation of the overall size of the U.S.

vehicle stock. Bloomberg Government assumed that the growth rate of the U.S. populationwould slow from about 1 percent per year in 2010 to about 0.8 percent per year in 2025

(see Figure 8). This closely aligns with recent U.S. census projections.11

Figure 8: U.S. Population Forecast

U.S. population in millions


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History Forecast


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Step 2: Vehicles per Capita Forecast

In 2010, there were about 0.8 cars and light trucks per person in the U.S. (see Figure 9).

Bloomberg Government assumed that this would remain essentially unchanged over the next

15 years.

Figure 9: U.S. Vehicles per Capita Forecast

Vehicles per person


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History Forecast


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Step 3: Vehicle Stock Forecast

The overall size of the U.S. vehicle stock is based on the U.S. population forecast and

per capita vehicle-ownership rates (see Figure 10). The outlook calls for the total number

of U.S. automobiles to increase from about 243 million in 2010 to about 282 million in

2025. (Note: The exact composition of the vehicle stock is subsequently determined basedon Bloomberg Governments estimate of car and light truck sales.)

Figure 10: U.S. Vehicle Stock Forecast

Million vehicles


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Cars Light Trucks Forecast (Total)


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Step 4: Ratio of Cars to Light Truck Sales Forecast

Because cars and light trucks each have to satisfy a separate set of fuel economy

requirements, the sales split between cars and light trucks is an important variable.

Since 1990, increased sales of sport utility vehicles and other light trucks have gained

market share. In recent years, the ratio between cars and light trucks has hovered around1:1. Bloomberg Government assumed this ratio would remain the same (see Figure 11).

Figure 11: Cars as a Percent of New Vehicle Sales


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History Forecast


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Step 5: Vehicle Sales Forecast

The number of light duty vehicles sold each year can vary greatly depending on

economic conditions. For example, between 2007 and 2009, annual U.S. automobile sales

fell from about 16 million vehicles to about 10 million vehicles (see Figure 12). One key

question is: how will automobile sales fare after the recession? Bloomberg Governmentassumed that sales would recover to 15 million vehicles per year by 2015 and then would

grow at the same pace as the U.S. population. Combining the total new vehicle sales with

the split between cars and light trucks (discussed in the previous section) yields theprojected composition of the vehicle stock (see Figure 13).

Figure 12: New Vehicle Sales

Million vehicles


Figure 13: Vehicle Stock Composition

Million cars on the road


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Step 6: New Vehicle Fuel-Economy Requirements

Fuel-economy requirements for cars and light trucks are a key input to the model.

Bloomberg Government assumed that the auto industry would meet the targets specified in

the 2017-2025 CAFE requirements (see Figure 14). Consistent with history and

government estimates, Bloomberg Government assumed that on-road fuel economy wouldbe about 20 percent below the values shown in Figure 14.

Figure 14: Fuel Economy of New Cars and Light Trucks

Miles per gallon


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History: Cars Forecast: Cars History: Light Trucks Forecast: Light Trucks


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Step 7: Average On-Road Fuel Economy of Vehicle Stock

Combining vehicle sales with the fuel-economy requirements allowed Bloomberg

Government to estimate how the average fuel economy of vehicles would change over time

(see Figure 15). In 2011, the average U.S. vehicle achieved about 20.7 mpg; in 2025, the

model projects the average vehicle will achieve about 26.2 mpgan increase of about25 percent. This estimate is based on projections of the size of total vehicle stock and new

vehicle sales, and considers the average fuel economy of new cars and light trucks sold.

Figure 15: On-Road Fuel Economy of U.S. Vehicle Stock

Miles per gallon


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Step 8: Miles Traveled per Vehicle Forecast

The average number of miles traveled each year by cars and light trucks has a significant

impact on gasoline demand and greenhouse-gas emissions. The number of miles driven per

vehicle has increased since 1970. Bloomberg Government assumed that the number of miles

driven each year would remain stable at levels slightly above current ones (see Figure 16). Thisis based on the assumption that people will drive slightly more as the economy improves. It

also reflects the assumption that there are limits to the degree that people will keep increasing

the number of miles they drive (that is, there are only so many miles people are willing to driveto commute to work or go on vacation).

Figure 16: Miles Traveled per Vehicle Forecast

Miles per year


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Step 9: Miles Traveled by All Vehicles

The total number of miles driven by all vehicles was estimated using the size of the

U.S. vehicle stock combined with Bloomberg Governments forecast of the average

number of miles driven per vehicle each year (see Figure 17).

Figure 17: Miles Traveled by All Vehicles

Million miles


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Step 10: Gasoline Demand Estimate

Using the estimates described above, the final step of estimating U.S. gasoline demand

is calculated using the following formula:

The inclusion of biofuels somewhat complicates the estimate of gasoline demand.Today, ethanol accounts for about 10 percent of the motor gasoline sold in the U.S. with

the remaining 90 percent derived from petroleum. Bloomberg Government chose to make

two separate estimates: one in which blended ethanol accounts for 10 percent of gasoline

and one in which the RFS212

is met (see Figure 18). Meeting the RFS2 makes a big

difference in terms of the petroleum-based component of gasoline demand.

Figure 18: Gasoline Demand Forecast with 10 Percent Ethanol Blend

Million barrels per day


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ENDNOTES

1U.S. Department of Energy, Alternative Fuels Data Center, U.S. Hybrid Electric Vehicle Sales by Model:

www.afdc.energy.gov/data/tab/vehicles/data_set/10301(retrieved Oct. 23, 2012).

2Bureau of Economic Analysis, Light-Duty Vehicles Sold in the U.S. (See Table 6):www.bea.gov/national/xls/gap_hist.xls

(retrieved October 23, 2012).

3Ibid.

4Between 2002 and 2011, 1.07 million Prius automobiles were sold in the U.S. U.S. Department of Energy, Alternative

Fuels Data Center, U.S. Hybrid Electric Vehicle Sales by Model:www.afdc.energy.gov/data/tab/vehicles/data_set/10301(retrieved Oct. 23, 2012).

5Ibid.

6U.S. Department of Energy, Alternative Fuels Data Center, U.S. Hybrid Electric Vehicle Sales by Model:

www.afdc.energy.gov/data/tab/vehicles/data_set/10301(retrieved Oct. 23, 2012). Bureau of Economic Analysis, Light-DutyVehicles Sold in the U.S. (See Table 6):www.bea.gov/national/xls/gap_hist.xls(retrieved Oct. 23, 2012).

7Honda Civic, Compressed Natural Gas Product Page:http://automobiles.honda.com/civic-natural-gas/(retrieved Oct. 23, 2012).

"Ram to Build North Americas Only OEM Compressed Natural Gas-powered Pickup," Chrysler press release, March 6, 2012.http://media.chrysler.com/newsrelease.do?id=12067&mid=71(retrieved Oct. 23, 2012).

8"Honda has sold nearly 1,600 natural gas-powered Civics this year, more than 20 percent above 2011 levels. "Honda

Offers Free Natural Gas to Spur Civic Natural Gas Car Sales, The Detroit News, Oct. 9, 2012:www.detroitnews.com/article/20121009/AUTO0104/210090427(retrieved Oct. 23, 2012).

9"Production Begins for Ram 2500 Compressed Natural Gas Truck; Availability Expanded to Retail Customers." Chrysler Press

Release, October 30, 2012:http://media.chrysler.com/newsrelease.do?id=13411&mid=69(retrieved November 30, 2012).

10When considering gasoline and blended ethanol, as opposed to petroleum-based gasoline, peak demand occurred in 2007 as

opposed to 2005. Energy Information Administration, Annual Energy Review, Petroleum Consumption Estimates: TransportationSector, 1949-2011 (Table 5.13c).www.eia.gov/totalenergy/data/annual/showtext.cfm?t=ptb0513c(retrieved Oct. 23, 2012).

11Projections of the Population and Components of Change for the United States: 2010 to 2050 Low Net International Migration

Series (NP2009-T1-L), US Census.www.census.gov/population/www/projections/files/nation/summary/NP2009-T1-L.csv(retrieved Oct. 23, 2012).

12"RFS2" refers to the expanded 36 billion gallon per year transportation biofuel requirement included in the Energy

Independence and Security Act of 2007. Information on the requirement can be found on EPA's website:www.epa.gov/otaq/fuels/renewablefuels/index.htm(retrieved Oct. 23, 2012).
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