In a series of posts (most recent here), I’ve noted that oil and natural gas prices have become unhinged from each other. Oil (denominated in $ per barrel) used to trade at 6 to 12 times the price of natural gas (denominated in $ per MMBtu). But lately that ratio has been north of 20, thanks to a surfeit of new gas in the United States (and elsewhere) and, recently, growing global demand for oil.
The wide spread between oil and natural gas prices provides a tempting incentive for any innovators who can figure out how to use natural gas, rather than oil, to make transportation fuels.
Over at the New York Times, Matthew Wald identifies one possibility, using natural gas to produce diesel:
Diesel and jet fuel are usually made from crude oil. But with oil prices rising even as a glut of natural gas keeps prices for that fuel extraordinarily cheap, a bit of expensive alchemy is suddenly starting to look financially appealing: turning natural gas into liquid fuels.
A South African firm, Sasol, announced Monday that it would spend just over 1 billion Canadian dollars to buy a half-interest in a Canadian shale gas field, so it can explore turning natural gas into diesel and other liquids. Sasol’s proprietary conversion technology was developed decades ago to help the apartheid government of South Africa survive an international oil embargo, and it is a refinement of the ones used by the Germans to make fuel for the Wehrmacht during World War II.
The technology takes “a lot of money and a lot of effort,” said Michael E. Webber, associate director of the Center for International Energy Environmental Policy at the University of Texas, Austin. “You wouldn’t do this if you could find easy oil,” he said.
But with the huge spread between oil and gas prices, and predictions of oil topping $100 a barrel next year, the conversion technology could be a “a money-maker for whoever is a first mover in that space.”
“Oil and natural gas prices have become unhinged from each other”. The same thing is happening within oil (its different “grades”). Diesel, the cheapest to make (its almost crude oil) is more expensive than gasoline (which takes much more refining, and is therefore more expensive to produce).
Robbing Peter to pay Paul. The transformation process does not occur without the use of energy by the process, so fuel is required to transform gas to liquid (NG to Diesel) then NG-Diesel reduces the amount of NG available for heating and electrical generation causing a rise in the price of NG, thus negating any economic advantage in using Natural Gas arbitrage re Oil. It may increase the amount of Diesel available but only at the cost of a reduction in the amount of Natural Gas available and it will not lower the cost of Diesel, it will in fact contribute to the complacency that assures peak oil will happen faster and without viable alternatives in place.
The economic shocks are already upon us, but they will grow ever more damaging as cheap supplies disappear and the USD drops in value resulting in ever increasing energy prices.
Diesel from Natgas is not a genie, it is a sign of desperation.