As we write this, the story of potential US and perhaps North American energy self-sufficiency is well-established in the public domain, to include the tantalizing possibility of the U.S. as a long-term net exporter of both natural gas and liquids. The prospective benefits are there for the taking—for customers and consumers (including beyond North America), industrial rebirth and economic renewal (within and perhaps beyond the U.S.), and environmental improvements (as natural gas and ultra-low sulfur diesel compete with higher emission-producing and less reliable fuels and technologies). There is even a chance for a rethink of national security and foreign policy (for those who believe that less reliance on oil imports will cure all foreign policy ills).

Black swans, and swans of a different color. The caveats—potential disruptions that could undermine this new paradigm, interrupting the newfound domestic production “renaissance” and killing off the golden goose before the eggs ever get laid—are rarely mentioned, at least to Joe and Jane Public. Nor, for that matter, do we sufficiently discuss the “accelerators”—altered views and paradigms that could dramatically shift forward the balance toward domestic oil and gas realization.

All of these possibilities are very real and underlie both the risks and rewards inherent in the North American resource base. A vast collection of rich but complicated, frontier plays and opportunities span onshore tight oil and shale gas, the deepwater offshore and perhaps even the elusive Arctic. Harvesting these riches will require patience, money, a fair amount of humility, many reality checks, and lots of bumps along the way. Achieving even some modicum of energy self-sufficiency over the next decade or so could be a remarkable psychological boost toward a more full-blown economic recovery. Sustaining proven successes and continuing to show progress in capturing and delivering domestic resources could provide an even more important boost to optimism and confidence for the next generation of oil and gas entrepreneurs and innovators to carry on.

Our work over the past few years, including our close involvement with U.S. natural gas restructuring in the early 1990s and Texas electric power restructuring in the 2000s, has taught us some lessons in how we look at US and North American energy dynamics. In this short review, we step “through the looking glass” and also “back to the future,” to borrow comfortable analogies, and reflect on drivers and forces as well as possible outcomes and detours. We start with a few key observations.

Arguably, we have always had a hefty resource endowment. Over the past six decades, operators and investors have succeeded in pushing out the envelope of US resource assessments to the robust estimates we see today. Roughly 2,400 trillion cubic feet (Tcf) of natural gas resources are believed to be technically recoverable (based on the 2012 biennial Potential Gas Committee review). From the modern 1993 nadir of 162 Tcf, proved reserves of dry gas climbed 88% to the current 2010 estimate of about 305 Tcf, based on data from the U.S. Energy Information Administration (EIA).

Meanwhile, from the modern low point in 2008 of 19 billion barrels, proved reserves of

This is the first of a two-part series from the University of Texas' Bureau of Economic Geology/Center for Energy Economics. Next month: commodity price scenarios and modeling results.

crude oil grew 21% to roughly 23 billion barrels in 2010, according to the EIA. Companies continued to add net reserves of both oil and natural gas in 2011 and through 2012, albeit with increasing lease condensate and a shift toward gas equivalents from oil, condensate and wet-gas locations, as dry-gas drilling slacked off with lower natural gas prices. If we count dry gas in oil-equivalent terms and compare year-end 1960 to year-end 2010, the combined proved reserves at each time period are just about even.

In sum, we have managed to grow domestic production to a level that nearly replaces more than 50 years of consumption. Importantly, net gains and greater success replacing natural gas production have offset net losses and more difficult replacement of crude oil. Our remaining resource base tends to be gas-prone, making the recent turnaround in oil supply that much more significant.

In the meantime, US population during this 50-year time frame almost doubled, and gross domestic product (GDP) expanded nearly five times in real terms. It is hard to ignore the contribution that our oil and gas wealth has made to the advancement of the American people and our economy.

Thus, the hubris: Throughout an achingly slow recovery from a historically deep recession, it has been easy to look at resource and production abundance in light of substantially softened demand and conclude that current surplus conditions will persist. Strong convictions have formed that the US has seen peaks in both gasoline consumption and electric power use; that demographic shifts and permanent changes in how energy is used are outpacing transient recession effects; that we are becoming “like Europe.”

Yet, there is no reason to think that the U.S. will not continue to be a magnet for economic development, constantly remaking itself. Geography, deep markets and attractive business climate all stack up strongly against other countries (assuming these attributes remain in roughly the same shape going forward as they have been thus far). Indeed, the US is the one developed country fully expected to continue to gain in population, and it remains and retains (so far) an open and inventive culture. Likewise, it certainly is unreasonable to not expect a global recovery that, at some point, will rebalance energy supply and demand fundamentals. These prospects, and their consequences, have to be considered.

Deliverability from our resource base can vary, sometimes considerably (as it should). Over these same six decades, the 1960s to the 2010s, we have witnessed extraordinary movements in price as sharp shifts in supply-demand balances emerged, energy demand habits changed, and new tranches of supply were achieved. Contrary to expectations, there is no reason to expect volatility, in some form, to disappear from the energy system.

In fact, contrary to popular opinion, volatility is both necessary and good. Sharp, sometimes shocking, commodity prices dampen and reorganize demand while luring new investment in supply. Spreads—differentials between price signals across products and locations—provide the crucial boost for amortizing midstream and downstream infrastructure. Interventions, whether by industry or government, to suppress volatility (as opposed to fostering clever management) are likely to lead to greater disruptions in the long run.

Increasing unconventional and frontier resources in the U.S. and North America make prediction more difficult, not less. The fact remains that our resource endowments, while vast, are complex, challenging and costly. For all of their attributes, the main US unconventional and deepwater plays are at the expensive end of the global oil and gas supply stack. This places achievement of scale—as a mechanism for reducing unit costs and thus end-user prices—at the top of the “to do” list.

Certainly, important lessons are being taken to heart both in the field and in the lab. The oil and gas industry is nothing if not creative when it comes to devising and implementing solutions, especially in the face of adverse business conditions, that can improve cost management and optimization.

But recognizing hubris, again, is important: Most technology development and deployment is incremental in nature. Commercialization of new technology in oil and gas is slow—much longer than other faster-moving industries such as consumer products and information technology (the latter itself being an integral component of oil and gas technology advancement). The need for solutions is counterbalanced by cautious deployment and the weight of regulatory uncertainty.

Some unconventional and frontier plays may never see the light of day—they either will remain too costly, or attainment will be limited by substitutes for hydrocarbons (although difficult to achieve).

People make markets. Our behaviors, biases, prejudices and expectations bend market outcomes. One of the more acute strategic dilemmas is how or even whether to push forward with mega-projects in a world in which the lumpiness of these projects can alter market outcomes in ways that undermine that capital investment. Capital destruction in oil and gas and across the energy space is notorious. Sooner or later, supply response to high price signals creates the potential for overcapacity and erosion of value.

Chances are greater that downside adjustments will be sharp the stronger the price signal and more robust the investment response. Costs always lag on the downside of price cycles—costs are “sticky downward.” Suppliers and service companies are always reticent to lower day rates (and vendors will argue, sometimes fairly, that operators try to beat down service company costs unrealistically). Salaries have risen to attract and retain a scarce labor pool that everyone is reluctant to give up and that represents the future of the industry. And governments will (almost) never back off on fiscal policies and regimes that they view to be a “fair” capture of economic rents.

Again, volatility is essential. Lower prices and softer asset values help to weed out inefficiencies and allow subsequent waves of investors to high-grade opportunities and projects. Costs eventually are reduced and operators are able to regain margins. Sometimes governments learn lessons.

At this point in time, given events of the past decade, we can wonder whether “commodity super-cycles” (China's coming-out party) are a relic of the past or a sign of things to come. For all of our optimism about the US situation, the world is full of energy needs and not well-equipped in institutions or guidance to meet those needs. The sheer lack of institutional depth and skill, even in countries that have made substantial progress and/or where knowledge about global commodity markets is more sophisticated, suggests that future cycles may be even more pronounced and demanding.

Our most cautionary note regards the politics of volatility. The desire to suppress price volatility is exactly the wrong response. On many issues of the day, price signals are essential. Questions range from whether to export domestic production, how best to encourage alternative energy technologies, and how to ensure reliability of power grids and pipeline networks. We can distinguish price signals and volatility from irresponsibility, either by business or government. Given options and opportunities to pursue more flexible, resilient, reliable technologies and strategies, suppliers and customers should do so. Many of the most popular choices for providing energy simply fail these tests but remain priorities because of vested interests and agendas.

Michelle Michot Foss is chief energy economist and program manager for The University of Texas' BEG/CEE. She has extensive experience in U.S. and global energy including investment banking and consulting. She publishes separately and with the Oxford Institute for Energy Studies on U.S. and North American oil and natural gas prices, drivers and markets and leads BEG/CEE's analysis and modeling on energy futures. Gürcan Gülen is senior energy economist and research associate and manages BEG/CEE's electric power analysis and modeling. Miranda L. Wainberg is a senior energy advisor for BEG/CEE with a long background in corporate energy finance and energy banking. She specializes in upstream metrics.