For decades, doomsayers have wailed that we are running out of oil, and economists have replied smugly that price rises would always bring forth extra supply. A new report from the consultancy, Wood Mackenzie, suggests that both may be right and that will lead to some difficult choices.

Wood Mackenzie’s report identifies 3,600bn barrels of unconventional reserves such as oil shales and sands. This is a colossal figure: current global oil consumption is about 30bn barrels a year. Better, these reserves are widely dispersed, with large resources near consumers in North America and China. They offer reassurance against the depletion of conventional oil and against instability in the Middle East.

The good news ends there, however. The report makes it clear that these reserves might be needed much sooner than many industry experts had expected. Demand continues to blossom and, while new oil is always being discovered, many of today’s largest fields are in decline. As soon as 2020, conventional production could reach a plateau, leaving unconventional reserves to take up the slack.

If the report is correct – a big if – then it is worrying. Unconventional oil is expensive to exploit. The technology is unproven for all but a few early projects, and engineers are scarce. Unconventional oil production is also an environmentally damaging mining operation that uses a lot of energy and water to produce low-quality crudes.

Unconventional oil has become more attractive in the past few years because of high crude prices, technological breakthroughs and the monopolisation of many of the most promising conventional oil fields by state-owned companies. The longer oil prices stay high, the greater the private sector’s confidence in unconventional oil. So how should governments respond?

There is a balancing act here. It would be handy to have proven techniques for extracting oil and gas from unconventional sources in the US and Canada. Society as a whole would benefit from the increased security of supply but subsidising unconventional production promises high emissions and plenty of pork with little assurance of success. Governments should focus more on basic technology and here the scarcity of qualified engineers is as worrying as the scarcity of oil.

The shift to unconventional resources also amplifies the case for pollution taxes or a credible system of tradable permits. A predictable price on carbon dioxide would promote the development of a wider variety of alternative energy sources; it would encourage energy conservation; and it would boost technologies that reduce the environmental impact of any energy source, including unconventional oil.

The next few decades will see a tug-of-war between ever better energy production technology and ever more elusive energy sources. If we can give the technology a hand, so much the better.