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The July issue of Monthly, The Burden of Transition, takes a renewed look at North America’s quite large natural gas inheritance, but then wonders how our economy could transition more fully to that resource. At our present moment, nothing is more clarifying to the case of peak cheap oil than to watch Brent trade at 73.50 as double digit unemployment negatively blooms across the United States. Strictly on a BTU basis, natural gas is dirt cheap and trades at an equivalent to 24 dollar oil. What a pity. If only we were set up structurally to capture more of this energy, at nearly 1/3 the price of oil.

North America does not have new natural gas deposits. But, we do have a new technique to extract this gas, from shalewood-and-coal-london-1400-18001 rock. Over the past year, both a learning curve and a cost curve have kicked in on shale natural gas, and the result is that our total resource base is leaping ahead rather quickly. As one might imagine, there’s a fair amount of dispute over the size and recoverability of this resource. I see a mistake from each side, in the debate.

First, natural gas is not oil. It’s fairly meaningless to tally up the BTU content of a 2000 trillion cubic foot (tcf) resource base (in the USA) and then equate that, say, to Saudi reserves of oil. Liquid energy carries a price premium and for good reason. Additionally, the amount of energy and water that will be required to extract natural gas from shale, at scale, is daunting. Also a big, future call on our natural gas resource base will also require an enormous new buildout of pipelines, and there will be runoff and environmental issues. That said, it strikes me now as futile to resist the upward revisions to the estimated size of our inheritance. Many are still clinging to a view from just two years ago that North American natural gas had peaked. That’s just not the case any longer. It was only a few years ago that Gazprom (OTCPK:OGZPY) and Russia were thought to be the future giants of world natural gas. Fact is, North America is sitting on mammoth NG. And I expect that more reserve additions are coming.

From my newsletter:

A successful energy transition appears to require three things: the development of extraction tools to effectively access the new resource base. The development of new energy tools that can utilize the new resource. And finally, enough economic pain and difficulty to trigger the transition. That economic pain and difficulty of course begins to unfold when the supply of the previous resource declines in both nominal and real terms. This is precisely what happened to Britain, as it transitioned twice, once from wood to coal, and then again from coal to oil.

But there is yet another feature of randomness and chaos in all of these historic energy transitions, that may be the most important of all: Luck. You must be lucky enough to be sitting on top of the next, great deposit of untapped energy when your diminishing energy resource starts to decline. If not, your population and your economic system which have been built on top of an existing, abundant energy resource base will likely face trouble. There is little doubt, for example, that had Britain not been sitting on coal–nay, an extraordinary motherlode deposit of coal–the British Isles would have wound up on a collapse path similar to Easter Island, denuded of its woodlands.

North America is indeed very lucky to be sitting on natural gas, as the brutal reality of global oil depletion presses down upon us. However, society must decide how to use this gift. And, as we’ve seen so far, we not only make poor decisions, but we appear to be unable to even make decisions. The current public discussion about “getting off oil” remains incoherent, fractured and tends to recede to the background after noisy flare-ups. Worse, a new government only 6 months old has invested tens of billions in cars, auto companies, roads and bridges and biofuels. We are just as naked now as we were a year ago, in the face of a global price of oil. We remain a country without an energy policy.

Graphic: Real Price of Wood and Coal in London 1400-1800, by Robert C Allen, from The British Industrial Revolution in a Global Perspective (.pdf)
Source: America's Mammoth Natural Gas Inheritance: The Burden of Transition