Why the Oil Spill Might be Good News for Natural Gas

Most analysis of the oil spill’s policy implications has focused on the future of offshore drilling and on the implications for efforts to move beyond fossil fuels. My guess, though, is that natural gas might actually be a real near term winner.

Offshore natural gas would obviously suffer from a climate when expanded offshore drilling is impossible. Last year’s EIA Annual Energy Outlook estimated that if all the offshore areas opened up to drilling by the Bush administration were removed, the impact would be 0.8 trillion cubic feet (tcf) less offshore gas production by 2030. (The areas Obama was likely to open would have been a fraction of that.) The same report estimates that unconventional gas production from shale gas rises from 1.2 tcf in 2007 to 4.2 tcf in 2030, a jump of 3.0 tcf, nearly four times the fall in offshore production. Big policy decisions made for shale gas are likely to have a larger effect than those made for new offshore gas.

And I can see two ways in which the oil spill could lead to increased support for shale gas. First, past calls from people ranging from Boone Pickens to John Podesta to increase incentives for the use of natural gas in heavy duty and fleet vehicles are likely to gain more traction. Using natural gas for such vehicles would directly and immediately replace oil, making the argument in their favor relatively simple to articulate. Electric vehicles, in contrast, suffer from a longer time horizon; their impact will ultimately be greater, but it may be trickier to make the immediate case. (Renewables other than biofuels, meanwhile, have only an indirect connection to oil use, through electric vehicles.) Moreover, I suspect that it may be easier to push for natural gas without being accused of “politicizing” the oil spill tragedy than it would be to push similarly for broad energy and climate legislation soon.

Second, the oil spill may lead to greater industry support for serious regulation of shale gas production – and that would be a good thing for production in the long term. If one bad apple causes a bad shale gas production accident, it will tar the whole industry, leading to severely curtailed shale gas production. This danger of this dynamic should now be obvious to industry, given the massive impact that BP’s offshore accident is going to have on ExxonMobil and company’s access to new acreage for offshore drilling. The lesson should be clear: serious regulation is in the interest of responsible companies, because it protects them from the consequences of others’ mistakes. If serious shale gas players didn’t understand this before, they certainly ought to now.

Of course, the spill has some negative ramifications for shale gas too. Some will see the oil spill as a sign that all drilling is dangerous, and become more entrenched in their opposition to all shale gas production. I wouldn’t rule out the possibility that the politics tip in that direction. But increased support for gas – together with tighter regulation – seems to be the more likely outcome.