Here’s another structural transformation to add to all the others that you have to get your head around: it’s the transformation of global energy markets as a result of shale oil and gas.

We’ve already got the digital revolution and the switch from consumption to savings after the GFC, not to mention the rise of China and India. Now we have the death of peak oil.

For years we have assumed that fossil fuel reserves were running out, that peak oil production had occurred some time ago and that it was only a matter of time before the oil price rose to such heights that energy-dependent economies would be crushed, starting with the United States.

In a way these assumptions have helped underpin the movement against global warming (that is, we’ll have to give up oil anyway since it’s running out, so we might as well make the best of a bad lot and embrace electric cars and wind farms and save the planet from climate change while we’re at it).

In fact the existence of vast reserves of oil and gas in shale formations, mainly in the United States, combined with the return of the oil price to $US100 a barrel without, so far, causing a global recession, is producing a profound transformation of energy markets.

Forget declining oil, there is a new global oil rush. The US has an estimated 2 trillion barrels of shale oil reserves — about 70% of the world’s total and eight times the oil reserves of Saudi Arabia. The gas reserves, in the US, Australia and elsewhere, are vast.

The cost of extracting shale oil ranges from $US95 per barrel down to $US12, although the process of fracking, where water is pumped in to break up the shale and release the oil, is very controversial — as highlighted on the ABC’s Foreign Correspondent program last night.

But where there’s oil there’s a way. BHP Billiton has paid $15 billion for shale oil and gas acreage, through its acquisition of Petrohawk, and now owns four large areas in Arkansas, Louisiana and Texas. The company is spending billions developing the project; its Haynesville project in Arkansas is already the largest shale play in the US, producing 6.5 billion cubic feet of gas per day.

There was an earlier shale energy rush in the 1980s, following the second oil shock, but it quickly collapsed with the oil price.

However, now the price is back to where it was in real terms, making it economic, and extraction technology has advanced enormously as well. It wasn’t until the late 1980s and early 1990s that the first commercial horizontal wells were successfully drilled and modern ‘multi-stage’ hydraulic fracturing (fracking) techniques did not emerge until ten years ago.

Production of shale gas in the US began to increase rapidly in 2010 thanks to advances in fracking technology. It has now been used in more than 1 million wells, and operators are currently fracturing about 35,000 wells a year.

It’s a remarkable process: the reserves are usually about five kilometres below the surface (much deeper than coal seam gas); wells are drilled down to them and then horizontally through them for another five or six kilometres; the horizontal part of the well is perforated by explosives and then fluid and sand are pumped down at high pressure to fracture the shale. The hydrocarbons then flow to the surface.

The opposition to this in the US is similar to the growing opposition to coal seam gas developments in Australia; whether any of the opponents get anywhere is a different matter, especially in the US.

The drive for self-sufficiency in oil and gas is very powerful indeed, and in pursuit of that there is a massive boom in shale energy development, leading to big fortunes being made in infrastructure and servicing, not to mention the energy itself.

Australia has relatively small shale oil reserves — here it’s more about coal seam methane. China has more shale energy reserves than the US but it’s deeper and the geology is more difficult. There are big reserves in Poland and France, as well as Russia and the Congo in Africa.

But so far it’s all about the United States, which has the reserves and the largest market close by.

The importance of this for the world is hard to exaggerate. The distribution of energy on the planet is shifting: the stranglehold that Middle Eastern dictatorships have over the world’s energy supply is loosening and just as the rise of manufacturing in China shifted the world’s economic axis, so will the rise of shale energy in North America.

There will be a rapid substitution of coal by cleaner gas, especially as (or perhaps if) emissions trading schemes and carbon taxes spread.

It means renewable energy and nuclear will become less and less economic as the supply of gas increases, whether it’s from coal seams or shale. Gas is less carbon intensive than coal, but it still produces greenhouse gases, so it may be that the policy response to reduce global warming will actually have to increase if the world moves too far towards gas and away from renewables and nuclear.

If the US could become self-sufficient in energy, its current account deficit would disappear and the US dollar would start rising again.

In fact, shale energy could be responsible for the resurgence of the US as an economic superpower, with cheap local energy underpinning the second coming of its manufacturing industry as well as helping to balance its twin deficits — the current account and federal budget.

One thing is for sure: the world isn’t running out of oil and gas any more.

*This post first appeared on Business Spectator.