Natural gas is the future fuel

Is oil demand near its peak because the world doesn’t need as much as much as was, until recently, expected? It is a critical question for Canada since our governments are betting so heavily on oilsands development as a key source of future wealth and jobs.

Is oil demand near its peak because the world doesn’t need as much as much as was, until recently, expected? It is a critical question for Canada since our governments are betting so heavily on oilsands development as a key source of future wealth and jobs.

If global oil demand will peak soon, then oil prices will decline and tax and royalty revenues for public treasuries will be poorer than expected, creating budget challenges.

Seth Kleinman, global head of energy strategy at New York-based Citigroup, is one of those who believes we are in a major energy transition point where the combination of a fast-developing substitution of natural gas for oil in transportation and industry, along with major improvements in the fuel efficiency of vehicles, means that earlier forecasts of steadily rising demand and prices for oil are wrong.

“The prospect of oil demand hitting a plateau this decade is much more feasible than the market seems to think,” he wrote in a recent commentary for Financial Times.

In fact, starting with the trucking industry and fleets, such as municipal buses and garbage trucks, the transition to natural gas from gasoline or diesel fuel is already well underway in the United States and China in particular. But this switch is starting to spread to ships and railways as well.

Natural gas offers three attractions:

• with fracking there appears to be a huge potential supply around the world;

• it is much cheaper than oil;

• it is cleaner than oil and important in addressing climate change, although it still generates greenhouse gas emissions.

Natural gas can also be substituted for oil in the petrochemicals industry.

Economics and the environment are now in sync; according to the U.S. Energy Information Administration, diesel fuel emits 161.3 pounds of greenhouse gases per million British Thermal Units while gasoline emits 157.2 pounds, propane 139 pounds and natural gas 117 pounds.

Moreover, on a well-to-wheels basis, oilsands oil is estimated to generate 22 per cent more greenhouse gases than conventional oil.

In the United States, President Barack Obama has made the transition to natural gas in trucking and other forms of transportation a priority in his energy strategy. China is doing much the same.

In Canada, the federal government is failing to lead.

But British Columbia, in addition to a carbon tax, is providing incentives for municipalities to switch buses to natural gas and in Alberta, a number of natural gas fuelling stations for the trucking industry are under construction.

At the same time, the stage is being set for a transition to natural gas in Ontario and Quebec if their provincial governments act. Pipelines are bringing natural gas from the Marcellus shale deposit in Pennsylvania or are being built to bring gas from Pennsylvania and Ohio.

At the same time, Royal Dutch Shell is to build a gas liquefaction plant near Sarnia for heavy trucks and Great Lakes shipping. And Canadian National Railway is experimenting with the use of natural gas rather than diesel for rail locomotives.

In Canada, it is estimated that liquefied natural gas, on a per-litre equivalent basis, may be as much as 40 per cent cheaper than diesel.

As Kleinman says, “the prospect for oil demand hitting a plateau this decade is much more feasible than the market seems to think.”

He argues that improvements in fuel efficiency in vehicles will in themselves make for a significant cut in oil demand. But “when you add in the shift from oil to natural gas, it should be enough to stop the forecasters of another boom in oil prices in their tracks.”

And this, of course, could mean much lower oil prices.

Interestingly, economics may be leading the way in what environmentalists have urged from some time — reducing our dependence on coal and oil.

In the U.S., more electricity is now generated from natural gas than coal.

At the same time, the campaigning by environmentalists for energy efficiency is also changing the energy map — efficiency standards for lighting and household appliances are curbing the growth of electricity demand and will do so even more in the future as new equipment replaces older equipment.

Our challenge in Canada is to be a player in the transition to a cleaner and more efficient energy system, which is more compatible with the need for environmental sustainability.

If Canada is to have an energy strategy, this has to be its focus.

Economist David Crane is a syndicated Toronto Star columnist. He can be reached at crane@interlog.com.