Boone Pickens vs. Charles Koch: Subsidies for Natural-Gas Fueled Trucks

When it comes to subsidies to competing industries Charles Koch advocates limited government. “We do not believe government should be picking ‘winners and losers’ in the marketplace” wrote Phillip Ellender in a letter to Congress. Ellender is Charles Koch’s top PR person, the president and chief operating officer for government and public affairs at Koch Companies Public Sector LLC. Bloomberg also reports that in an emailed response to Boone Pickens, Ellender said the following:

BP CAPITAL

“We oppose all government mandates and subsidies because they artificially skew economic signals about price and demand, thereby creating inefficiencies that divert resources from productive activities to politically favored ones”

Boone Pickens, who is a life-long Republican, doesn’t think Koch is sincere. Koch’s company imports crude oil, gains from ethanol subsidies and is in the fertilizer business, which benefits when natural gas is inexpensive, Pickens said to Bloomberg TV’s Margaret Brennan.

So why are these two hardcore Republicans fighting for? Boone Pickens wants the government subsidize natural-gas fueled trucks. Why? Because Pickens is concerned about our dependence on imported oil. But there are other reasons as well. Pickens has been buying shale acreage. “I’m in two big shale plays and one of them is the Marcellus,” Pickens said in a recent interview. Here is an excerpt from a Reuters article:

Companies are also shifting drilling efforts into shale fields that hold oil or natural gas liquids, since those fuels are fetching far higher prices than natural gas.

That boom has seen property prices in some gas basins such as the Marcellus surge above $10,000 an acre, while prices in the liquids-rich areas of Texas’s Eagle Ford shale have topped $20,000 an acre.

“I got in under what I’ve seen some of them sell for, $5,000 or $10,000 an acre, and I didn’t pay anything like that. But I haven’t sold anything,” he said.

Pickens said there appear to be at least two companies interested in setting up joint ventures with shale acreage owners, but has not made any moves so far.

 

This isn’t the only reason though. Pickens is also the biggest shareholder in Clean Energy Fuels Corp (CLNE), which is in the business of making natural-gas fueling stations.

So there you have it. Pickens is lobbying for himself, Koch is lobbying for himself. Is there really a need to subsidize trucks? Will it solve our dependence on imported oil?

There are about 8 Million “real” trucks in the U.S. and they consume 2 Million barrels of oil a day. U.S. imports around 11 Million barrels of oil a day. Pickens is asking for $64 K subsidy for natural-gas fueled trucks that cost $100 K more than traditional trucks. Assuming that these trucks save 25% in fuel costs, the average saving per truck per year is about 90 barrels of oil, or about $9000 per year. This means natural-gas fueled trucks aren’t currently a very attractive investments. However, a subsidy which covers two thirds of the cost will make it extremely attractive to switch to natural-gas fueled trucks. The subsidy can cost taxpayers at most $500 Billion if all of the trucks are converted. In exchange, the U.S. won’t be spending $70 Billion per year on imported oil. Instead it will spend $50-55 Billion on domestic natural gas (assuming entire truck fleet is converted). So should we subsidize natural-gas fueled trucks?

Unfortunately natural gas prices won’t stay low if there is an increase in demand for natural gas. As gas prices increase we have to pay more for the natural gas that fuels these trucks. That’s one problem. The bigger problem is that we have to pay much more for heating and electricity and all the other goods that use natural gas as an input. So, Pickens wants the taxpayer to shoulder the cost of the subsidy as well as the enormous increase in heating and electricity costs. That’s why we agree with Charles Koch that the government shouldn’t subsidize natural-gas fueled trucks. We also agree with Pickens that Koch isn’t sincere and the subsidies for ethanol, corn and all other agricultural products should be eliminated and tax loopholes for oil companies should be closed.

Natural gas producers know that they will benefit significantly if the demand for natural gas increases. That’s why Aubrey K. McClendon’s Chesapeake Energy (CHK) is investing $150 Million in CLNE, the maker of natural-gas fueling stations, over three years. CLNE increased 30% in the past couple of days because of that decision.

We believe the right decision for U.S. is removing subsidies instead of granting new ones. We also expect that the Congress will do the wrong thing and provide subsidies for the natural-gas fueled trucks.

Disclosure: Long CHK.

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