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U.S. Oil and Natural Gas at the Turn of the Millennium

Figure 1.4 shows the recent history of oil production and consumption in the United States. Even at the height of production, the United States consumed more oil than it produced, and in the 30 years from 1970 to 2000, the gap generally widened, with increasing consumption and falling production. The situation for natural gas has been superficially different but similar in actual fact. As shown in Figure 1.5, in the United States, the production and consumption of natural gas were in a rough balance initially, but starting in about 1986, consumption increased rapidly, even while production increased. The ultimate result was that the gap between consumption and production grew ever wider toward the end of the twentieth century.

Figure 1.4

Figure 1.4. U.S. Crude Oil Consumption and Production, 1970–2000

Source: BP, “Statistical Review of World Energy,” June 2012.

Figure 1.5

Figure 1.5. U.S. Natural Gas Consumption and Production, 1970–2000

Source: U.S. Energy Information Administration.

Also, U.S. oil and gas reserves fell significantly from 1970 to 2000, as Figure 1.6 shows. From this dwindling resource base, the United States continued to extract more and more of both oil and gas, as shown in Figure 1.7. By 2000, the United States was extracting about 10% of its oil reserves and about 11% of its gas reserves each year. While there had been fluctuation in the production-to-reserves ratio for both oil and gas, the general trend was upward, and this was particularly true for natural gas. Further, part of the reason that these rates of production were not higher was resistance to oil and gas production on environmental grounds. Thus, the energy picture for the United States at the start of the new millennium was certainly perilous.

Figure 1.6

Figure 1.6. U.S. Oil and Natural Gas Proved Reserves, 1970–2000 (1970 = 100.0)

Source: U.S. Energy Information Administration.

Figure 1.7

Figure 1.7. U.S. Oil and Gas Produced, as a Percentage of Proved Reserves, 1970–2000

Source: U.S. Energy Information Administration.

The geopolitical situation around the turn of the millennium could only exacerbate reasonable fears about the energy future for the United States and its principal allies. The war between Iraq and Iran had dragged on for almost the entire decade of the 1980s, reducing production for both countries. Iraq’s invasion of Kuwait in 1991 only emphasized the turbulence of the Persian Gulf region, with its critical energy supplies. Then came the attack on the World Trade Center in New York in September 2001, ushering in a new era of conflict and supply disruption in the region. In assessing the near- and short-term futures for natural gas in May 2001, the U.S. Energy Information Administration (USEIA) noted that gas prices had more than doubled in the decade 1990 to 2000, and it forecast that prices would rise by 34% in just the next two years.13 Further, so much gas had been withdrawn from storage that the USEIA saw its replenishment as a challenge that would add to price pressure. The same report noted that some policy analysts were questioning the ability of natural gas to play its expected role in supporting economic growth.

Looking out to 2020, the USEIA predicted that total U.S. energy consumption would increase by about one-third over the period, as would the use of oil. The report also predicted that the use of natural gas would increase by almost two-thirds. As a result of these increases, the USEIA predicted that the United States would have to increase gas imports by about three-quarters and oil imports by two-thirds.14

The natural gas supply and demand problems for the United States stemmed from several sources. In the aftermath of the embargo-induced energy crisis of the early 1970s, Congress passed the Powerplant and Industrial Fuel Use Act of 1978 as a centerpiece of President Carter’s energy policy. One of the key purposes cited in the act was “to encourage and foster the greater use of coal and other alternate fuels, in lieu of natural gas and petroleum, as a primary energy source.” In essence, the law required that new electricity-generating plants that were designed to run on natural gas had to also be capable of using coal or some other non-gas fuel. The act also restricted the use of natural gas in large boilers. In the years following the enactment of the act, demand for natural gas waned, prices fell, gas came into excess supply, and exploration for and development of new gas resources slowed. Given the long lead times for energy development, the disincentives to exploration and development inherent in the act soon caused significant problems.

In recognition of the excess supply that developed right after and partially in response to the 1978 act, Congress voted for repeal of the act in 1987. As the USEIA noted, this repeal “set the stage for a dramatic increase in the use of natural gas for electric generation and industrial processing.”15 Soon after this repeal came “third-generation” combined-cycle gas-fired power plants, which were much more efficient and economically attractive than prior technologies. The repeal of the 1978 act, improved technology, and low gas prices stimulated a switchover to the construction of gas-fired power plants, which contributed to a demand surge for gas. In the next 20 years, the use of gas jumped more than 100%, due largely to the expanded use of gas in generating electricity.16

Natural gas sources can be either conventional or unconventional. In short, a conventional natural gas deposit is essentially gas trapped in a single underground reservoir, much like a subterranean pool of water. By contrast, unconventional natural gas deposits consist of gas dispersed over a wider area and held in a variety of rock formations, such as shale, coal, or sandstone. (These types of deposits are explored more fully in Chapter 2, “They Call It a Revolution,” as they play an important role in the natural gas revolution.) In 2000, the USEIA published an assessment of technically recoverable natural gas in the lower 48 states, both conventional and unconventional, as shown in Table 1.3. (Technically recoverable oil and gas are resources that it is possible to access with current technology, without reference to the economic viability of doing so.) The total estimate was more than 22 trillion cubic meters, divided almost exactly evenly between conventional and unconventional deposits. This is enough gas to fill the volume of the New Orleans Superdome more than 5 million times.

Table 1.3. U.S. Unproved Technically Recoverable Natural Gas Resources Onshore in the Lower 48 States, as of January 1, 2000 (Billion Cubic Meters)

Conventional

Unconventional

Region

Tight Sands

Coal Bed

Gas Shales

Total Unconventional

West Coast

623

170

0

0

170

Rocky Mountains

1,557

5,380

1,303

57

6,739

Midcontinent

2,633

425

85

0

510

Southwest

1,586

425

0

198

623

Gulf Coast

4,502

736

85

0

821

Northeast

368

680

227

1,274

2,180

Total

11,270

7,815

1,699

1,529

11,044

Source: U.S. Energy Information Administration, “U.S. Natural Gas Markets: Mid-Term Prospects for Natural Gas Supply December 2001,” p. 18.

Thus, there was lots of gas onshore, but it needed to be extracted. However, legal restrictions prohibited the development of much of this gas, particularly in the Rocky Mountain region. Further, while the industry had the technology to develop much of this gas, it was not feasible economically. Often the difference between a proved reserve and a technically recoverable reserve depends simply on the price of the resource and the cost of exploiting the resource. Offshore the United States, there are also vast amounts of technically recoverable gas. The USEIA’s analysis divided them into the Pacific, Gulf of Mexico, and Atlantic regions, holding a total of 6.7 trillion cubic meters. However, the entire Pacific and Atlantic regions were legally out of bounds for development, as was one of the three subregions of the Gulf of Mexico. These legal restrictions excluded 1.7 trillion cubic meters of offshore gas from production. Thus, with the new millennium, the prospects for natural gas in the United States appeared highly forbidding on both the supply and demand sides of the equation. Far from being a single voice of doom, the bleak future portrayed by the USEIA represented the consensus of wisdom on the subject of hydrocarbons in general and natural gas in particular.

Contrasted with these dire predictions, and not fully understood or anticipated by anyone, the energy future of the United States and the world stood on the cusp of a dramatic change. As we will see, there was soon to be a remarkable jump in estimates of gas resources, and new technologies would make it economically feasible to develop much gas that previously had been only technically recoverable.

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