Booming demand and stagnant supply drove oil prices to $125 a barrel last week. Is this a sign that fossil fuels are running out? It is more likely a sign that the cheap-oil age is giving way to the cheap-gas age. As the oil price heads north, the gas price is drifting south.
In 1865 a young economist named W. S. Jevons published a book titled The Coal Question in which he argued that Britain's "present lavish use of cheap coal" could not continue as coal would soon run out and continued prosperity was therefore "physically impossible. We have to make the momentous choice between brief greatness and longer continued mediocrity." Gladstone, as Chancellor, found Jevons' "grave and ... urgent facts" so persuasive that he proposed to Parliament, with the support of John Stuart Mill, to retire the national debt while the good times lasted.
In fact, coal output rose and the price fell for many decades. Jevons' gloomy warning that "it is useless to think of substituting any other kind of fuel for coal" was hilariously timed, six years after the first oil wells were drilled in Pennsylvania.
"Experts" regularly rush to predict the exhaustion of fossil fuels. "Already the output of [natural] gas has begun to wane. Production of oil cannot long maintain its present rate," a US presidential commission said in 1922. "We could use up all the proven reserves of oil in the entire world by the end of the next decade," Jimmy Carter said in 1976.
The world will use about 450 exajoules (billion billion joules) of fossil fuel energy this year and has so far used less than 20,000 exajoules since the Industrial Revolution began. Total oil, gas and coal resources in the Earth's crust are estimated at more than 570,000 exajoules. So if energy use was a journey from St Pancras to Istanbul by train, we have not yet reached the Channel Tunnel. Resources can be finite yet effectively inexhaustible or, like dodos and forests, infinitely renewable yet easily exhausted.
Quantity is not really the point; price is. Most fossil fuels are impossibly hard to extract at a reasonable price. More than half the reserves consist of methane clathrates hydrated gas found mostly on the seabed near the margins of the continents in vast quantities. Nobody knows how to turn them into fuel except at huge cost, although the Japanese are on the case. So the question is not whether we run out of fossil fuels but whether we run out of cheap fossil fuels.
With oil, the answer may be "yes". A huge amount of oil is still untapped, but most of it is under deep water or in oil sands and is costly to extract. But with gas, the answer is "no". Most free methane is found in impermeable rocks such as shale, not in permeable "traps" whence it is easiest to extract. Shale gas was thought to be as inaccessible as clathrates, and when it began to be exploited in the 1990s it looked as if it would still come in at the top of the price range. Now technological improvements have brought the price down so far that it undercuts conventional gas.
In a report I have written for the Global Warming Policy Foundation, published yesterday, I conclude that this "shale-gas shock" will have far-reaching consequences. It will make gas prices lower and less volatile relative to oil than ever before.
This will cause gas to take market share from coal, nuclear and renewables in electricity generation, and from oil in transport. London buses should follow Washington and Delhi in switching to gas both to save money and to produce less smog.
Shale gas is good news for America and China (which probably has even more of it than America), consumers (cheap fuel means higher standards of living) and farmers (fertiliser is made from gas). It is bad news for Russia and Iran (which hoped to corner the gas market in coming decades), for coal (until now the cheapest fuel for electricity) and for the nuclear and wind industries. The last two had expected to be rescued from dependence on subsidies by rising fossil fuel prices. They may now not be.
The losers are formidable enemies, so there is a movement, whose fans range from Gazprom to Greenpeace, to strangle the shale-gas industry at birth, by claiming that drilling for it contaminates water with carcinogenic and even radioactive chemicals. This turns out to be true only in the sense that coffee is carcinogenic, bananas radioactive and dihydrogen monoxide (water) a chemical.
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