Two Challenges Holding Back Natural Gas Vehicles: Waste Management, Inc. (WM), Navistar International Corp (NAV)

More than two-thirds of the oil consumed in America goes toward transportation and accounts for roughly a third of total greenhouse gases produced. With currently high oil prices, cheaper, cleaner-burning natural gas seems to be the most obvious solution to this problem.

Just a decade ago, natural gas and oil traded at a similar price on an energy equivalent basis. But now – courtesy of the shale gas boom – oil is about seven times as expensive as natural gas on a dollar-per-BTU basis.

Given this historically unprecedented disparity between the two energy sources, large-scale production of natural gas vehicles, or NGVs, would appear to be the next logical step.

Natural gas making inroads in trucking
Already, natural gas as a transportation fuel has gained considerable traction in the market for commercial trucks. Waste management and delivery companies, as well as others that have large fleets, are switching over to natural-gas-fueled vehicles to lower costs.

For instance, Waste Management, Inc. (NYSE:WM) expects that, over the next five years, four-fifths of the trucks it purchases will run on natural gas. By 2017, the company projects that its trucks will burn more natural gas than diesel. While these new trucks will run about $30,000 more than comparable diesel trucks, they should save the company $27,000 or more each year in fuel costs.

Other companies are also seeing tremendous opportunities in converting trucks and larger commercial vehicles to run on natural gas. Within a couple of years, truck manufacturer Navistar International Corp (NYSE:NAV) expects that a third of the trucks it sells will run on natural gas.

Yet despite these positive developments in the market for trucks and larger vehicles, overall usage of natural gas vehicles in the U.S. remains minimal. Currently, only about 0.1% of American vehicles use the cleaner-burning hydrocarbon as a fuel source. Adoption for natural gas passenger vehicles has been ever slower.

The biggest challenge has been in creating the right incentives for consumers and companies to make the transition. There are two main issues here: Natural gas vehicles are expensive and there is a dearth of refueling stations across the country.

High upfront costs
While natural gas and gasoline engines are quite similar, natural gas vehicles require more expensive fuel tanks. This is because natural gas has to be stored under high pressure, which requires fuel tanks that are heavier, larger, and sturdier than gasoline fuel tanks.

Since these are more expensive to build, the costs get passed on to the consumer. For instance, Honda Motor Co Ltd (ADR)‘s Civic GX, which is currently the only natural-gas-powered passenger vehicle available in the U.S. market, is about $5,200 more expensive than a comparable vehicle that runs on gasoline.

Still, private companies are working hard and investing heavily in research and development efforts aimed at reducing the costs of natural gas vehicles.

For instance, 3M Co (NYSE:MMM) and Chesapeake Energy Corporation (NYSE:CHK) joined forces last year to develop lighter and better natural gas fuel tanks. The tanks will have linings wrapped in ultra-light, carbon-composite materials, which could make them as much as 20% lighter than currently available tanks.