Natural Gas: A Cure for America's Crazy Oil Addiction

If the price of oil, currently at $99 per barrel, shoots much above $100 on continuing political and social change in the Middle East, this will be the U.S.'s third oil shock since 1970 -- the fourth if you count the surge to $147.27 on speculative buying in 2008. The first two shocks were in 1973 and 1979.

Whether this is the third or fourth shock is academic because either way it's bad news for the country.

Will U.S. policymakers ever learn? The inanity of the nation's energy policy -- indeed, nonpolicy -- boggles the mind. The U.S., the largest, most technologically advanced economy in the world, is at risk of being tipped into recession -- again -- due to its overreliance on oil.

More Drilling Won't Prevent Another Oil Shock

Investors and Americans in general shouldn't delude themselves regarding U.S. oil production capabilities. The ominous reality? The country can't meet its daily consumption needs of roughly 18.7 million barrels per day (bpd) through increased drilling, so it has to import to make up the deficit. In November 2010, the U.S. imported an average of 8.25 million bpd, about 2 million of which came from Middle East producers.

Unrest in that region could send oil above $125 per barrel this spring, which would probably push the average U.S. price for regular unleaded gasoline -- currently $3.25 per gallon -- above $3.50. Add the normal price increase stemming from the summer driving season, and a gallon of gas could push past $4 per gallon by the Fourth of July.

This assumes that oil's price tops around $125 per barrel. Other, more-sobering scenarios are also possible. Nomura Holdings Wednesday forecast that if Libya and Algeria halted production, oil could peak above $220 per barrel.

A price above $200 would most certainly tip the U.S. into another recession, just as oil price surges did in 1973 and 1979.

There's a Better Way

However, it need not be this way. If the U.S. were to implement a rational energy policy, it could achieve energy independence and enhance its foreign policy flexibility.

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One solution is natural gas. Abundant, domestic, price-competitive, clean -- natural gas has many advantages over oil.

Abundance is perhaps at the top of the list. The Potential Gas Committee (PGC) estimates that the U.S. has 1,451 trillion cubic feet (Tcf) of recoverable natural gas, out of a total natural gas resource base of 2,119 Tcf. That's good for about a 100-year supply (less if natural gas consumption increases). Also, of the 22.8 Tcf of natural gas the U.S. consumed in 2009, 90% was produced in the U.S.

Federal tax policy could speed the development of new natural-gas vehicle designs that place bulky fuel tanks under the vehicle's frame, in dead space. It could also help build the natural-gas station filling network, which in the U.S. currently totals only 1,100 stations, compared to more than 160,000 gasoline stations.

While the price of natural gas -- currently about $2.50 per gasoline gallon equivalent (GGE) in Los Angeles, $2.30 in New York City -- would rise with its increased use as a transportation fuel, it's likely to remain competitive with gasoline. Most U.S. motorists know the days of $1.50 gasoline are ancient history, but very few are prepared for a price closer to $5. Given current global growth trends, $5 is looking more likely this decade, and that will help keep natural gas competitive.

Congressional Action Needed

Of course, new natural-gas vehicles won't hit showrooms soon enough to save the nation from the impact of any oil shock this year, but the sooner the nation increases the number of such vehicles on the road, the better insulated it will be from the next oil shock.

One step in the right direction would be for Congress to implement federal tax credits that encourage the production and purchase of natural-gas vehicles, with the goal of having at least 50% of the new vehicle fleet -- about 6 million to 7 million vehicles per year -- running on natural gas by 2020.

At the same time, the ongoing shift toward natural gas in bus, taxi, and truck fleets and as an energy source for industrial, commercial and residential uses will continue. In these areas, the nation is already making the prudent choice.

It's pointless to debate whether Big Oil has played a role in preventing increased natural-gas use -- both as a transportation fuel and for other uses. We know that most oil companies benefit from a higher oil price. However, many also have natural-gas operations that would profit from increased U.S. consumption of natural gas.

The point Congress should focus on is this: If national oil use makes the oil companies strong and the U.S. economy weak, the move has to be away from oil and toward natural gas.

Greater use of natural gas will also enhance the nation's foreign policy flexibility. Currently, the U.S. has to balance competing -- and at times conflicting -- demands in the Middle East, and is ever-wary not to offend key oil suppliers. A U.S. that doesn't import oil from the Middle East doesn't face that potential cross-pressure.

Gain, Not Pain

And although the natural-gas sector isn't as job-intensive as the oil patch, greater use of domestic natural gas would create jobs in the U.S. That would mean more dollars recirculating in American towns and counties -- something that should benefit local economies and support U.S. GDP growth.

The nation has a great deal to gain and very little to lose from increased use of abundant, domestic natural gas. That sure sounds like a smarter move than debating whether the price of oil will be $60 or $160.