Every once in awhile, The Pink Flamingo features a guest commentary. This was forwarded to me from Sally Vee, friend, confidant, partner in crime. I think it is so important, I asked, and received permission to reproduce it in full. The letter links to a David Brooks commentary.
November 15, 2011
The Honorable John Mica
The Honorable Reid Ribble
Dear Congressmen Mica and Ribble,
As a homeowner in both of your districts—at a time of low economic growth and high fuel prices—I am writing to direct your attention to the Natural Gas Act (HR 1380), which was introduced by Rep. John Sullivan and is supported by 181 cosponsors. Neither of you is listed as a cosponsor of the bill. I have some suggestions on how to change the bill and make it passable. But at the outset, one wonders why a bill with supporters ranging from Rep. Ron Paul to Rep. Charles Rangel hasn’t passed already.
The Natural Gas Act essentially promotes the purchase and use of vehicles fueled by natural gas with an emphasis on heavy-duty truck and fleet vehicles. The conversion from oil to natural gas would provide significant economic, environmental, employment, and national security benefits to our country. To make this energy conversion, HR 1380 relies on tax credits for the purchase of natural gas vehicles, the construction of refueling stations, and for vehicle manufacturers. Given concern over the deficit and our nation’s growing debt, it appears that the tax credits are the sticking points in passage.
My goal in writing is to suggest that the various tax credits be stripped out of HR 1380. Instead the bill should be written to incent capital investments in natural gas usage by accelerating federal tax depreciation schedules and requiring the Department of Energy/EPA to implement a fast-track approval process for these projects. The truth is that the use of natural gas for heavy duty vehicles is such an attractive business model, tax credits should not be necessary.
To make my point, I call your attention to the fact that buses in Los Angeles and Denver already run on natural gas. Corporations such as Waste Management, Republic Services, and UPS already have trucks running on natural gas. Recently Clean Energy CEO Andrew Littlefair announced that his company is building an additional 90 natural gas fueling stations in 2012, and 150 truck stops in 2013. All of these actions are taking place without tax credits.
• Republicans should love this idea because it’s a new business opportunity for energy and manufacturing companies.
• Democrats should love this idea because tax credits for businesses aren’t needed.
• Unemployed workers looking for jobs in construction and vehicle manufacturing should love the newly created high-paying jobs.
• All politicians should love it because it increases employment without adding to the deficit and converts those without jobs into taxpayers.
• Environmentalists should love this idea because it reduces pollution. Trucks using CNG emit 40% less pollutants than trucks using diesel.
• All consumers should love this idea because an increased domestic energy supply lowers fuel prices, and that would feel like an across-the-board tax cut.
• The Saudis will hate it because it would reduce dependence on foreign OPEC oil; but you can’t win them all.
Surely if 183 representatives support the bill with tax credits, 435 should be for the bill without the tax credits! In the Senate, Senators Reid and Hatch are cosponsors. Surely if an ultra liberal and an ultra conservative can support the bill with tax credits, 100 senators should be able to support it without tax credits!
May I suggest that the following be added to the bill to speed up what already has started to
• A provision to accelerate depreciation for all capital investments. For example, if the current IRS code allows pipeline companies to depreciate a new pipeline over 20 years, change it to 10 years. If a trucking company can depreciate a tractor over 4 years, change it to 2 years.
• A provision with mandatory timelines for the approval process on new projects. For example, make it mandatory for the DOE/EPA to make a decision on a new pipeline no longer than 180 days from the date of submission; on a new filling station, no more than 90 days from the date of submission. We can no longer afford another fiasco like the State Department’s 3-year approval process of the Keystone XL Pipeline, which would bring 830,000 barrels of Canadian oil to Texas. President
Obama just postponed a decision on the pipeline for another 18 months. This $13 billion project, which would create 20,000 high-paying jobs, has been under study for 3 years! As a result of our foot dragging, Canada is now considering an alternate pipeline to Vancouver to export this oil to China. Just how crazy is that?
• A deadline. Last but not least, put a provision in the bill that all actions taken as a result of this bill must be completed no longer than 5 years from the date the president signs the bill.
Now let’s get to some of the short-term and long-term economic benefits from passage of a modified HR 1380, and how this can be accomplished without the need for tax credits.
The Business Model That Works: Fuel Prices
Let’s review current prices:
• Spot price for crude oil is approximately $99 per barrel.
• A reasonable average retail price of gasoline is $3.50 per gallon at the pump.
• A reasonable average retail price for diesel fuel is higher at $3.85 per gallon.
• The current spot price for natural gas is approximately $3.50 per 1,000 cubic feet (Mcf).
When used at the pump for fueling vehicles, natural gas must be compressed to high pressure for storing enough gas in the vehicle’s fuel tank to achieve acceptable mileage. This highly pressurized natural gas is referred to as Compressed Natural Gas (CNG). The price of CNG varies across the country. But currently the average price for CNG at the pump would be approximately $2.50 per Gasoline Gallon Equivalent (GGE). The effective cost of CNG for trucks compared to diesel would be approximately $2.85 per Diesel Gallon Equivalent (DGE). The bottom line is that CNG is $1.00 per gallon lower in cost for both gasoline fueled vehicles ($3.50-$2.50=$1.00 GGE) and diesel fueled vehicles ($3.85-$2.85=$1.00 DGE).
If we focus on trucks currently using diesel fuel, I submit to you that most trucking companies would convert to CNG immediately if they could save $1.00 per gallon on their fuel costs. My guess is that if you were to call any trucking company in your district (for example, Schneider Trucking in Green Bay, WI), and ask the managers if they would purchase new CNG trucks that would save them $1.00 per gallon in fuel costs, and they could depreciate the new trucks in say 24 months—they would place an order! And they wouldn’t have to be encouraged by a government subsidy to do so.
[Note: For more information on CNG prices, go to cngprices.com, and find a U.S. map showing current compressed natural gas (CNG) stations in operation and the current prices, which vary based on availability. The competition created by establishing more CNG stations would provide more consistent and lower prices.]
The Business Model That Works: Capital Investment in Distribution
Let’s talk a little bit about the pipeline companies. Their job is to build the pipeline infrastructure that includes fuel station outlets. Most pipeline companies have a capital structure of 40% equity/60% debt. With 30-year bonds now at 3%, there will never be a better time to do this. Accelerated depreciation and low interest rates make this a no-brainer.
Additional Benefits from the passage of a modified H.R. 1380:
1. Employment—It’s been estimated that HR 1380 would increase direct employment by 100,000 and indirect employment by 300,000. Even if these estimates are remotely close, wouldn’t it be great to add these jobs at no cost to taxpayers?
2. Pollution—CNG emits 40% less pollution than diesel. Despite the Sierra Club’s best efforts, it’s unlikely we’ll have battery powered 18-wheelers in our lifetime. CNG is realistically the next best solution.
3. Reducing dependence on OPEC oil—In total, 18-wheelers burn 4 million barrels of oil per day in the U.S. By reducing our need for foreign oil by that amount, we could break the back of OPEC, something every American president since Carter has been trying to do. Now is the moment because domestic production is increasing for the first time in 10 years and Canada is in a position to increase exports to the U.S. (if the Keystone XL Pipeline gets approved) by another 1 million barrels per day by 2015. Also it’s reasonable to anticipate another 1 million barrels per day of domestic shale oil production. In total, we could anticipate a 6-million-barrel reduction in our need for OPEC oil. World oil prices will fall to the marginal cost of production. No speculation premium. No monopoly pricing. No worry about kings, sheiks, and uprisings in the Middle East!
4. Trade deficit reduction and increased value of the dollar—A 5-million barrel per day reduction in imported $99 oil (4 million from CNG usage and 1 million from domestic oil production) would reduce our annual balance of payments deficit by $180.7 billion and strengthen the value of the dollar.
5. Lowering fuel costs for all Americans—Best of all, with CNG at $2.50 or lower, gas, diesel, jet fuel, and fuel oil will drop to at least that price, setting off what will feel like one of the largest tax cuts American consumers have ever had. Consumer spending (demand) will increase and we can get out of this recession, once and for all.
6. Airlines—Profits will soar and/or fares will drop. Wouldn’t American Airlines, which is struggling mightily, enjoy the benefit of lower fuel prices?
7. Control of our energy destiny—Countries surrounding the globe from Europe to Libya to the Central Asian republics to Russia, China, India, and Brazil are all in pursuit of natural gas for the obvious reasons. The U.S. likely has more than 100 years of natural gas in the lower 48 states, not counting Alaska or Canada. And it’s ours! We are the Saudi Arabia of natural gas. What a shame it will be if we do not take advantage of this windfall.
8. Additional economic stimulus—Last but not least, think about the farmers and land owners who have natural gas under their properties. They will receive millions of dollars in royalty payments, which will further stimulate the economy.
So one must ask the question: “What will happen to this gas if the Natural Gas Act is not passed?” Good question because the bill already has been delayed and the consequences are starting to add up:
First and foremost, Americans are paying more at the pump than they should have to, which decreases consumer discretionary spending and prolongs the recession.
Second, with the huge surplus of natural gas we have, companies are already looking at ways to sell it. If not in the domestic market, then they’ll export it. In May, one company, Cheniere Energy, received a DOE permit to export half a billion cubic feet per day starting in 2015. Fast forward to Oct. 26, 2011: Cheniere announced an $8 billion/20-year contract to the BG Group, which is based in the U.K.
If the Natural Gas Act does not pass, I predict that more companies will start exporting natural gas. Consider this calculation: On an energy basis, one barrel of imported oil costs $99 and the natural gas equivalent is $21. That difference is $78 per barrel, and 18-wheelers burn 4 million barrels of oil a day. That adds up to an extra $312 million a day in fuel costs—primarily spent on OPEC oil. Another way of looking at the problem is that if we start exporting our surplus natural gas, we will in fact be exporting $21 oil while at the same time importing $99 OPEC oil!
This is economic stupidity of the first magnitude. The solution is crystal clear. Pass a simplified
version of HR 1380 NOW!
Even the New York Times—albeit its more conservative columnist–recognizes the “blessing” of
natural gas. Enclosed please find a copy of a recent column by David Brooks. See link above)
If you think any of my ideas and facts have merit, I would be glad to discuss them with you. In the meantime, I hope you will share these thoughts with Rep. Sullivan and other House members and senators. I have great respect for Senators Johnson, Thune, and Rubio and Rep. Paul Ryan. I am sending them copies of this email with the hope that they can stir up additional support.
John A. Sturm