Unfortunately, we have heard this song many times before. In 1973, President Richard Nixon unveiled “Project Independence” in response to the OPEC oil embargo that was triggered by the Arab–Israeli war.  President Jimmy Carter called the need to lessen U.S. dependence on Middle Eastern oil the moral equivalent of war in response to the supply disruptions that followed the Iranian Revolution. President George Bush Jr. referred to America’s dependence on foreign oil as nothing short of an addiction.

Over the past four decades U.S. presidents have waxed and waned eloquently about the need to reduce the country’s dependence on imported oil. Yet the U.S. economy still relies on imports for more than 50% of the 19 million barrels of oil burned every day. As a result, the U.S. remains as vulnerable to soaring oil prices as it was during the OPEC shocks in the 1970s.

In many ways, Obama’s plan is reminiscent of his predecessors by supporting more government subsidies for energy alternatives such as nuclear and bio fuels. Higher fuel efficiency standards will be mandated for cars and trucks.  And, of course, there will be increased reliance on offshore drilling for deep water oil and on hydraulic fracturing in pursuit of America’s new wonder fuel: shale gas.

Unfortunately, these initiatives have in one way or another been tried before by previous administrations. And many look less credible than they have in the past.

As the Fukushima nuclear disaster threatens Japan with a Chernobyl-like legacy,

President Obama is unlikely to find much support for more nuclear power in a country that already has more nuclear plants (and more radioactive spent fuel lying around) than any other in the world.

And so far the diversion of food production to energy generation, like the 12 billion gallons of corn-based ethanol that America pumps out every year, has had a far greater impact on  raising  food and fertilizer prices than on lowering energy prices.

While greater fuel efficiency is a laudable goal, past improvements in fuel efficiency have only encouraged Americans to drive more each year,- about 30% more than at the time of the OPEC oil shocks. And they haven’t been filling up their tanks with shale gas either, which has only a quarter of the energy density of either gasoline or diesel.

So far, recessions have been the only sure fire way America has cut back on its fuel consumption and the need for oil imports. But, of course, that is not an option any U.S. president can pursue.

Just as the rest of the world seems set to emulate the American engineering breakthrough for harvesting shale gas, it looks like North American producers are scaling back. Do they know something that others don’t about this supposed game-changer for world gas supply?

What investors in these companies have already found is the unprofitable wellhead economics of shale gas at today’s natural gas prices. Weak cash flows have spurred investor concerns that companies may no longer even be able to meet wellhead break-even costs at those prices. While debt rollovers, new equity offering, and asset lease sales have financed the shale gas boom, disappointing cash flows, meanwhile, are leading some investors to jump off the bandwagon. And some industry commentators are suggesting that more than a few operators will face Chapter 11 bankruptcy protection over the next year, barring a huge rise in natural gas prices.

In response to deteriorating—if not negative—profit margins, many of the biggest shale gas producers are suddenly redeploying their rigs to drill for something much more lucrative: oil. That includes the likes of industry leader Chesapeake Energy Corporation, whose CEO, Aubrey McClendon, recently noted that “the economics just compel you to go for oil rather than natural gas right now.” Other major gas producers, like Petrohawk Energy Corporation, EOG Resources, Forest Oil Corporation, and Quicksilver Resources, are following suit.

The switch in exploration activity from shale gas to oil won’t be without consequences for future gas supply. What effect more rigs drilling for oil will have on North American oil production may be debatable. Other than mucking around in the Alberta tar sands or risking another Macondo-style disaster in deep water, there probably isn’t a whole lot of oil left to be found.

But there can be no debate about what plunging rig counts mean for future US natural gas production, particularly when you consider the abnormally steep depletion rates that come with shale gas reserves. Lower rig counts mean less production tomorrow and, all things being equal, rising prices for natural gas.

So before the rest of the world jumps on the shale gas bandwagon, it had better take a good long look at what’s happening in the North American gas industry right now. Far from being the game-changer it’s supposed to be, North American shale gas production isn’t even sustainable at today’s natural gas prices.

In the EIA base case, electricity prices in the US are basically flat for the next two and a half decades, thanks to cheap natural gas, while oil prices don’t even get close to their 2008 peaks until way off in 2035.

To top it all off, despite this new world of cheap energy, carbon emissions in the US economy don’t grow. (Since the EIA is counting on no less than 5 million barrels per day from the Alberta tar sands, the same cannot be said for the Canadian economy.) American emissions remain below their 2005 peak until 2027, even though no caps or trade policies are assumed to exist, and even when the agency is forecasting an almost 30 per cent increase in national coal consumption over the period.

With fossil-fuel energy abundant, and carbon emissions remarkably self-contained, the forward-looking EIA expects only a marginal increase in the contribution from renewables, whose very viability is challenged in the absence of public subsidies.

A doubling in estimates of shale gas reserves drives much of the energy abundance the EIA predicts. Whether shale gas turns out to be the game-changer the agency claims or the gas industry’s version of the subprime mortgage market will ultimately depend on where its true cost curve lies.

If it’s really in the neighborhood of $4 per 1000 cubic feet (Mcf) then there is enough gas to keep the lights on in America for years. But if the true cost curve lies closer to $8 per Mcf (even before environmental costs like local groundwater contamination are factored in), then gas may not be as abundant as the EIA believes, and long-run electricity prices may not be nearly as cheap as forecast.

Either way, as I noted months ago in my post about Boone Pickens’ plan, shale gas doesn’t address the emerging shortage of the liquid fuel that is needed to power the 250 million vehicles or so that run on US roadways.

Which bring us to the EIA’s oil price forecast. Measured in today’s dollars, the agency doesn’t see oil getting to $125 a barrel until 2035. The $125-per-barrel oil price that the EIA has spotted on the very distant 25-year horizon, I believe, will actually be staring the agency in the face within the next twelve months. I leave it to others to assess what that will imply for the credibility of the rest of the EIA’s outlook.

Of course the world will never run out of oil in the literal sense. There are some 170 billion barrels of the stuff trapped in the Alberta tar sands, and over 500 billion barrels more in the Orinoco tar sands in Venezuela. And if we suck them dry, there are billions more barrels of oil in shale, just as there is natural gas.

But what the global economy has already run out of is the oil it can afford to burn. Depletion isn’t just a geological concept; it’s also an economic one. From a purely geological standpoint, you can always boost production—or at least offset depletion—by accessing increasingly costly and environmentally problematic sources of new supply (such as the tar sands). But as we saw from the recent recession, the global economy can’t afford to run on the prices needed to pull that oil out.

For some people, the fact that oil prices fell to around $40 per barrel during the depths of the recession was proof enough that it had no business being in triple-digit range in the first place. But what those folks forget is that world oil demand fell during the recession for the first time since 1983. Peak oil is not a problem if the economy it’s supposed to power is shrinking—it’s only a problem if we actually want our economies to grow.

The first thing you notice about an economic recovery, even an anemic one, is that the world economy starts consuming more oil. The next thing you notice is that the price of oil starts heading up.

We all might have liked the pump prices that came with $40-per-barrel oil during the recession, but we shouldn’t expect much to be flowing out of the gas pumps at that price. Even deep-water oil, like at BP’s ruptured Macondo well in the Gulf of Mexico, doesn’t work at that price, to say nothing of mining bitumen in Alberta and processing it into synthetic crude.

If you doubt that, just look at what happened in the Alberta tar patch when world oil prices plunged during the recession. Some $50 billion of planned investment was cancelled literally overnight.

No, the world’s not running out of oil. It’s just running out of the oil we can afford to burn.

There’s a reason for the fact that, for a given amount of energy, natural gas prices today trade at a fraction of the price of oil. If people could just switch from using one fuel to the other, that price gap would quickly be arbitraged away. But they can’t—at least not where it counts the most.

Not that there hasn’t been scope for substitution. Few households in North America still burn oil to heat their homes—most switched to much cheaper domestically produced natural gas after the OPEC oil shocks of the 1970s. Even fewer North Americans rely on burning oil to generate power for their homes. And most petrochemical producers can switch from oil to a natural gas feedstock.

But unfortunately, the majority of oil consumed in the United States—and indeed in the rest of the world—is used as a transport fuel. On average it’s about 60 per cent of all the oil consumed, and as much as 90 per cent of each new barrel that comes out of the ground. And that’s exactly where prices for oil and natural gas disconnect.

Planes fly on jet fuel made from oil, ships run on bunker fuel made from oil, and, most importantly, motor vehicles run on gasoline or diesel made from oil. And with good reason: oil packs about four times the energy density of natural gas. And it carries about 20 times the energy density of the lithium-ion battery found in an electric car.

That’s a key reason why neither electric- nor natural gas–powered cars have made any sizeable inroads into the North American vehicle market. The 110,000 or so natural gas–powered vehicles in the US, most of them urban buses, remain an insignificant fragment of a 250 million-vehicle market. And the story isn’t any different with electric powered cars: GM doesn’t expect to sell more than 10,000 of its heralded Volt next year.

Another reason is the absence of a fuel distribution system. Outside of urban centers, there are few gas stations that supply natural gas, which means that, at best, the fuel can only be used for urban commutes. To build a national distribution system for the fuel would require subsidies that far exceed anything already squandered on encouraging home-grown ethanol production.

Switching to natural gas is no more attractive an alternative for most American motorists right now than switching to corn-based ethanol or electric power. And until it is, expect natural gas and oil prices to stay disconnected, leaving the American economy as dependent as ever on foreign oil suppliers.