_

Natural gas is getting cheaper, but diesel and gasoline are not. That holds major implications for businesses that burn a lot of fuel, and also a lesson for other enterprises.

The natural gas price decline is a result of two factors: tremendous success by natural gas exploration and development companies, and the difficulty of transporting natural gas over oceans. When the price of energy rose, oil and gas companies stepped up their exploration efforts and developed new technology. They were very successful at finding natural gas in North America. However, natural gas has a problem: you cannot carry it in a bucket. The high cost of sea-going transportation makes natural gas a continental market. So natural gas has become cheap here, while oil is expensive all over the world. Oil is a global market because intercontinental transportation is fairly cheap.

If you run a fleet of local delivery trucks, or other equipment burning diesel or gasoline, consider switching to compressed natural gas (CNG). This doesn’t work well for over-the-road trucks, because of the lack of refueling stations. If your cars, trucks or forklifts come home every night, then CNG may be for you. One farmer has even converted his tractor to run on natural gas—because he’s got a gas well on his property. It probably would not make sense to pay for construction of a new pipeline to your business. (Other issues to consider include how much space on the vehicle can be allocated to fuel storage—it will take more space to get the same range as you now get with diesel or gasoline.)

Before spending money upfront on the conversion, you need to consider the forecast for liquid fuel prices versus natural gas. My own outlook is for natural gas to stay cheap for at least this decade. Only if we develop extensive export facilities will we see natural gas priced comparably to diesel and gasoline.

For businesses that do not burn a lot of fuel, here’s the lesson from this article: when relative prices change, best business practices change. We economists talk about inflation when most prices are moving up and down together. We say “relative price change” when the ratio of one price to another moves up or down. Whenever there is a relative price change, look for ways to use more of the cheaper good and less of the more expensive good. That sounds obvious, but it’s easy to think that the way you’ve been doing business is the only way. Considering relative price changes should be on every company’s annual planning checklist.

original article

_

Royal Dutch Shell RDSA -1.38% PLC is considering building a giant plant in Louisiana that would convert natural gas into diesel fuel, several people familiar with the company’s plans said.

The plant, which could cost more than $10 billion, would be similar in size to Shell’s Pearl gas-to-liquids facility in the Mideast nation of Qatar, the people said. Pearl, which went into operation last June, turns natural gas into enough diesel to fill more than 160,000 cars a day.

Petrol and diesel fuel pump nozzles showl last year at a Royal Dutch Shell gas station in south London.

Shell declined to comment on its plans. The Anglo-Dutch company is expected to take up to two years to develop detailed engineering plans to determine if the plant is economically viable before submitting the project for approval by the company’s board.

Shell’s plans are the latest sign that companies are seeking new ways to exploit extensive natural-gas discoveries in the U.S. The boom in gas production from shale has sent natural-gas prices down 50% over the past year to slightly over $2 per million British thermal units, the lowest level in a decade. Diesel prices are near a record, up 4% from a year ago.

In September, South Africa’s Sasol Ltd. SSL -3.64% said it was undertaking an 18-month feasibility study for a $10 billion gas-to-liquids facility adjacent to its existing chemical plant in Calcasieu Parish, La.

The technology to turn natural gas into a clean, low-sulfur diesel fuel was developed in Nazi Germany. But the high costs of building GTL plants generally have kept the technique from being commercially viable.

The first large-scale plants were built in Qatar because the nation has an abundance of low-cost natural gas. The cost of Shell’s the plant in Qatar escalated to about $18 billion, but the company hopes the knowledge gained there will help keep costs in check in Louisiana, one of the people said. The diesel produced in the state could be exported to Europe and Latin America.

The U.S. last year was a net exporter of petroleum products, such as diesel, for the first time in 62 years. Shell considered locating the facility in Texas and Louisiana but opted for the latter because the state offered better incentives, a person familiar with the matter said.

original article