China’s growing thirst for oil will leave the rest of the world scrambling for supply, oil could soon face a competitor it never expected and the US has no free market for energy. These are just a few of the provocative ideas former Shell Oil President John Hofmeister shared at a recent New York Energy Forum meeting.

Upon retiring from Shell Oil – the US subsidiary of Royal Dutch Shell – in 2008, Hofmeister founded the non-profit nationwide membership association Citizens for Affordable Energy. The group is dedicated to promoting sound US energy security solutions that include a range of affordable energy supplies, efficiency improvements, essential infrastructure, sustainable environmental policies and public energy issue education.

Hofmeister has a bleak medium to long term outlook for global oil market fundamentals: Given the world’s existing oil reservoir decline rates and growing oil demand, there will be no way for supply to keep pace with consumption. In the next five to six years, China will satisfy its oil demand and leave the rest of the world short. And the supply/demand disconnect will only be compounded if global economic growth rates and energy demand growth return to pre-recession levels.

So What Can We Do About It?

Hofmeister sees a world in which the US can completely sever OPEC oil dependence, cutting over 10 million barrels per day of oil imports, and replacing most of it with domestic supply. A major cornerstone of this plan involves a massive shift toward natural gas as a transportation fuel and transport fuel feedstock. The US consumed over 19 million barrels/day of oil in 2010 and imported 9.2 million barrels/day – 49% of which was supplied by OPEC.

He estimates 5 million barrels/day of imports could be displaced by using CNG/LNG for trucking, an additional 3 million barrels/day could be displaced by using methanol (produced from natural gas, coal and biomass) as a transport fuel, and a further 2 million barrels/day could be cut by efficiency improvements.

Over the medium to longer term, natural gas could give oil a “run for its money” in the transportation fuel market. In recent years, advanced drilling technology – including horizontal wells and hydraulic fracturing – revolutionized the North American energy landscape, unlocking enormous volumes of natural gas. As this technology is transferred to shale and other tight geologic formations around the world, natural gas could compete with, and displace oil as a fuel for vehicles, says Hofmeister.

The CME Group’s Chief Economist, Blu Putnam, shares a similar view. He recently told Breaking Energy, “Those groups and cities and companies that are already thinking about and planning for natural gas conversion will speed up the conversion process.”

The World’s Oldest Power Delivery System

The US boasts the world’s largest electricity delivery system, but it is also the world’s oldest. Europe rebuilt most of its power infrastructure after World War II and large swaths of the developing world still have no access to electricity. The US system was constructed in the early- to mid-twentieth century and now desperately needs upgrading.

Aging US power infrastructure requires roughly $15 trillion worth of upgrades, estimates Hofmeister. And he blames an adversarial system that pits regulators like the EPA against utilities, which impedes the formulation of sound energy policies that could facilitate infrastructure funding.

No Free Market for Energy in the US

While consumers can choose where to buy gasoline – and in an increasing number of states with deregulated electricity markets – they can choose power providers, Hofmeister argues there is no free market at the producer level. The American people cannot trust utilities and oil companies to do what’s best for consumers, because these companies’ fiduciary interests are to their shareholders. Government needs to play a role, he said.

An “Unpopular” Solution

The creation of an effective long-term energy policy in the US is impossible because of short two and four year political cycles. What’s needed, says Hofmeister, is a centralized regulatory body similar to the Federal Reserve System that governs economic policy.

This federal energy body would focus on four main areas:

• It would decide how much energy should come from each source – then implement policies so that optimal balance could be achieved in about 10 to 15 years
• Focus on what major technology choices could be made to increase energy efficiency, then design policies to enable those technologies
• Align environmental goals with the country’s existing energy supply – for example, find ways to use the country’s abundant coal resources more cleanly and efficiently
• Design and implement policies that facilitate construction of much needed new energy infrastructure and upgrades to existing systems

Oil companies bristle at the idea of an independent regulatory body telling them how to do business, but Hofmeister argues that would ultimately be more constructive than perpetually wrangling with an ever changing cast of politicians.