The next big change for small business may be coming via the utility bill.
A surge in domestic natural-gas production is starting to alter some basic business equations across the country. From an office’s monthly overhead to fuels that power transportation fleets to the basic materials for an array of consumer products, a dramatic decrease in U.S. natural-gas prices has many decision-makers rethinking supply chains and the way they work. It has some small business owners starting to consider switching their operations over to natural gas to save money.
This shift follows new energy-extraction innovations that have brought previously unreachable U.S. supplies to market. Spots like the Marcellus Formation, which lies beneath New York, Pennsylvania, and Ohio, contain vast reserves, though estimates of the amount vary greatly. The most controversial of these methods, hydraulic fracturing, or “fracking,” involves pumping water, sand, and chemicals underground to extract gas embedded in the rock. Critics say the process harms underground water supplies, and threatens human and animal health and the environment.
Right or wrong, the amount of natural gas already pulled from the ground has been enough to lead to unprecedented drops in U.S. prices. The frenzy in drilling has caused the wholesale price of natural gas to plummet from $7 or $8 per unit to about $3 in just the past four years, making the fuel cheaper to burn than coal and slashing expenses for its heaviest users.
For businesses that own their own structures and heating systems, the draw is growing. While the cost of switching from a heating oil-fired system isn’t inexpensive—removing oil tanks, installing a new furnace and its controls can run into five figures, though rebates for energy-efficiencies soften the blow—the savings on monthly fuel bills may pay off that investment in a few years. (Prices vary in different regions of the U.S., but you can do the math on online calculators offered by utility companies, such as this one.)
“There are general economic incentives to do it, but the main incentive is saving money,” says Bruce McDowell, director of policy analysis for the American Gas Association, an industry group. “Industrial users have environmental standards to adhere to, so converting to gas from coal or oil means they can still expand while staying within requirements on emissions.”
The U.S. has numerous advantages when it comes to natural gas, asserts John Graves, who wrote a book about the hydraulic fracturing boom. In it he says the U.S. has a built-in infrastructure of pipelines, tankers, as well as a skilled workforce and home-grown technology, that other nations lack. Overseas, as much as 90 percent of drillable land is government-owned; here, Graves says, the higher rate of private land ownership allows for greater access.
Natural gas is also a commodity that’s coming at a fraction of the costs in Europe, Russia, China, and elsewhere, and the cheaper energy is already luring manufacturing back to the U.S. from overseas. States like Connecticut are pushing individuals and 75 percent of its businesses to convert to natural gas from oil in the next seven years. Regional transit agencies, port authorities and even Detroit are all in various stages of turning to natural gas.
Now small businesses are also starting to make a move, too.
Monarch Beverage, an Indianapolis-based wine and beer distributor, made the decision in December to switch 85 percent of its 100-truck fleet to compressed natural gas (CNG) and build an on-site fueling station, at a total cost of $7.6 million. The move will eliminate consumption of an estimated one million gallons of diesel per year, at a savings of 60 percent. It will also allow the company to step away from more volatile oil-market prices.
Phil Terry, chief executive of Monarch, says they’re a quarter of the way through the process and so far, so good. He says the idea for the project began after discussions with his VP of operations and their common frustrations with planning for diesel prices, which only seemed to go up for his rigs, which log some six million miles every year. “After Hurricane Katrina, here in the Midwest we really saw how fragile the oil and refinery supply system was,” Terry says. “It was hard to budget for diesel—it was always a gamble on long-term contracts.”
“And we were really good about picking the exact wrong time to lock in our prices,” he says, laughing.
Monarch became a beta test station for CNG-powered trucks from Cummins, a global engine manufacturer based down the road in Columbus, Ind., and their Canadian natural-gas engine unit, Cummins Westport. The initial worry was the engines wouldn’t be able to deliver the horsepower necessary to pull the beverage-laden vehicles, but Terry says the machinery worked perfectly. Drivers report the trucks are a little quieter and tank structures make turns a bit different, but otherwise it’s been a good transition, he says.
Other bonuses: an unexpected subsidy from the federal government for the switch, and an expected greenhouse-gas emissions reduction of 22 percent (Monarch’s dubbing their brews “Indiana’s Greenest Beer.”).
Terry says their local-delivery business model is ideal for the CNG fleet because they operate on a back-to-base system, with all trucks coming back to headquarters every day and making them independent from outside infrastructure to gas up. He says other good candidates might be trash haulers, mail and package delivery companies, bottlers, and other ventures with short-range routes. “For long hauls, the natural-gas fuel infrastructure just isn’t there yet,” explains Terry.
But that too could change soon, as the country looks to explore greater energy independence from overseas oil suppliers. While taxes vary from state to state and some utilities are locked into scheduled rate structures, lower natural gas prices will likely affect every level of commerce over the long term, Graves says.
“It’s going to affect every renter, every small consumer, every business, and will translate to huge savings, says Graves. “It’s going to be an extreme change.”