I’d like to make a quick point about the “shale revolution,” which may be old news to those immersed in North American energy policy but might be helpful to those just starting to think about the wider implications of increased North American production of oil and gas.

Increased production of oil & gas from shale formations using hydraulic fracturing and horizontal directional drilling is often referred to as North America’s shale revolution because of the way it has transformed oil & gas production, reserves, production, and pricing. But the “revolutionary” part of these changes mostly boils down to two big changes: 1) natural gas prices, which were rising, are now falling, and 2) oil production, which was falling, is now rising.

Increased production of natural gas has had a dramatic effect on natural gas prices because natural gas is hard to transport. If you can’t send natural gas by an existing pipeline to an existing market, your next best option may be to cool it into a liquid at −162 °C, load the liquid onto a giant, insulated, quarter-billion dollar vessel and ship it across the ocean, where it can be regasified and burned. This is an expensive process, so when natural gas production rises, prices fall quickly because there is little use for the excess gas in the markets it can reach. Prices will keep falling until 1) gas is so cheap that energy users reliant on alternatives like coal and heating oil switch to gas, 2) gas is so cheap that it can be profitably liquefied and sent overseas, or 3) gas is so cheap that it’s no longer worthwhile to keep expanding production. In the United States, there has been a bit of all three: 1)utilities and manufacturers have started to use more gas, 2) companies are planning several projects to export liquefied natural gas to Asia and Europe, and 3) there has been a bit of a slowdown in investment in new shale gas production. But natural gas prices can fall pretty far before any of these stabilizing factors kick in.

In contrast, despite all the recent controversies about oil pipelines and rail transport, oil is still relatively cheap to transport because you can send it by train or boat. And there is an integrated, worldwide market in oil so world oil prices tend to move in tandem. This means that increased production in the U.S. has little effect on U.S. oil prices. But a stable price means that oil producers can keep ramping up production at every possible opportunity and keep earning large profits. That’s why the shale revolution in oil has been about production levels, not prices. And it’s also why incomes have risen much faster in states with shale oil than states with shale gas.

So that’s why I say the shale revolution is mostly about 1) gas prices, not gas production, and 2) oil production, not oil prices. The following four charts show oil & gas production and prices from 1997-2013. They show that the shale revolution in the US has turned around rising natural gas prices and falling oil production. You can also see a more gradual increase in natural gas production. Finally, you can see that U.S. oil prices show little impact from all that increased production.

With increased challenges to crude transportation and growing liquefied natural gas markets, gas and oil markets may become somewhat more similar over time. But for now they are very different. So when you talk about the shale “revolution,” keep in mind whether you are discussing oil or gas and prices or production. It will help you make sense of many of the developments in energy markets and policy and will help you sort out some of the talking points from those arguing that the shale “revolution” changes everything and those arguing it changes nothing.