The Burden of Transition

The July issue of Gregor.us 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. Such a large, 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 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.

-Gregor

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)

  • ak_guy

    I always enjoy your thoughts. NG should be viewed as a NA asset not just US. Horn River and Montney in BC are huge. With the new tech ie fracturing I doubt we will see a North Slope gas line in AK anytime soon. In a post Peak Oil world AK will be a very tough place to live. I see myself somewhere on the Amtrak Cascades route in about 10 yrs. Do you have any thoughts on the NS line? With SP gone should be a plus for the state dealng with our energy issues.

  • http://www.jeffnolan.com jnolan

    “North America does not have new natural gas deposits.” True, nobody has new deposits, just newly discovered deposits which may be the case in the U.S. if companies were allowed to look for them in places like the California coast. Then there is the issue of moving the NG to where it is needed… and the LNG terminal projects in Ventura County, LAX, and Long Beach abandoned b/c of political pressure should serve as a call for action among those who want to see the American economy shift to LNG and CNG.

    The two greatest disappointments for me when it comes to energy and California are our willful shunning of diesel despite it's advantages and our arrogance about consumption of energy as long as it is produced somewhere else.

    Love your series on these topics, keep it up.

  • http://economic-undertow.blogspot.com steve_from_virginia

    Hi Gregor!

    Interesting approach to a complex issue, I just posted a little while ago claiming that now is 'Peak Gas' and maybe it is and maybe it is not.

    http://economic-undertow.blogspot.com/2009/07/p

    One thing for sure (hedge, hedge) is the price of gas of the last few months is probably gone foreever and as the price constraints multiply the production effects of those constraints will likely be felt in production rates. Right now, gas is too cheap @ the well head to finance production out of cash flow it is contrariwise too expensive – or shortly will be – to be used as a recreational fuel, which is the task of petroleum oil today.

    So the question must be asked of all the 'new' fuels or technologies is 'what will (this gas) be used for?' The useage determines price of gas (or suggests what might be done with it) and allows the flow – it is the tap size that matters much more than the abstract size of reserves or 'resources'. If the priorities are fertilizer (N) production, base load and balancing (for wind and solar) electric power, chemical feedstock and home/business heating fuel, the price will be high enough to support production at a reasonable cost, provide a yield or return and mitigate environmental consequences.

    If the aim is motor fuel, the use of NG is a non- starter, even with large gas resources there is insufficient financial means to create the giant tap required to service the massive US/world motor fleet, there would be the ruinous competition worldwide with OPEC and in the end, the NG bounty would be depleted too soon. The gas would not only be requred to service the fleet itself but the entire infrastructure that supports auto use. This totality seems invisible to many economists but is the reason for the depletion to the peak in petroleum.

    Absent priorities there is not much chance in my opinion for a large expansion in gas production, even if there is lots of it just out of reach underground.

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  • al wagar

    Big oil has enormous lobbying clout, natural gas doesn't, If NG is to be used while we transition into nonfossil sources, it needs a constituency, probably grass roots. Maybe we need a national advocacy group called something like NATGAT (NAturalGAsTransition) to build a fire under congress

  • al wagar

    Big oil has enormous lobbying clout, natural gas doesn't, If NG is to be used while we transition into nonfossil sources, it needs a constituency, probably grass roots. Maybe we need a national advocacy group called something like NATGAT (NAturalGAsTransition) to build a fire under congress

  • al wagar

    Big oil has enormous lobbying clout, natural gas doesn't, If NG is to be used while we transition into nonfossil sources, it needs a constituency, probably grass roots. Maybe we need a national advocacy group called something like NATGAT (NAturalGAsTransition) to build a fire under congress