(FORTUNE Magazine) – NATURAL GAS is a regulated commodity that can be neither seen nor felt and that sometimes smells awful. Long regarded as crude oil's poor cousin, gas has been wasted, vilified, and underutilized. Yet in many ways it is the best of all possible fuels. It is abundant in the U.S. and burns without spewing out much pollution. As the power in world oil markets swings back to OPEC, the fortunes of natural gas, if not its odor, should sweeten. Big changes are taking place in the gas industry, albeit slowly. The government is loosening regulations, making distribution and marketing more efficient. Even without government help, the free market is making a bit of a comeback. And new technologies are starting to produce such once impractical devices as natural-gas-powered cars and trucks and clean-burning electric power plants. A bubbling natural gas business would benefit consumers as well as U.S. energy policy. Come another OPEC crisis, gas may do more than in the 1970s to cushion the blow. Since there's likely to be more gas in your future, you probably have some questions.

In the 1970s, it seemed that gas was scarce. How much does the U.S. have? A lot more than oil. Roughly 163 trillion cubic feet (tcf) of proven gas reserves lie in the lower 48 states. Alaska holds another 35 tcf, but the transportation is so expensive that the gas is stranded there. All together, the U.S. has enough gas to last 12 years at the present consumption rate of about 17 tcf a year. By contrast, reserves of oil are sufficient for only eight years. Proven reserves, of course, are inventory much like cornflakes awaiting shipment from a warehouse. The gas industry creates the inventory by drilling discovery and production wells. The Potential Gas Committee, which is affiliated with the Colorado School of Mines, estimates that about 739 tcf of easily recoverable gas may ultimately be liberated by the drill bit. That's enough domestic gas to last another 46 years. And there's more. An estimated 200 years' supply of natural gas is trapped in geologic conditions that make it difficult and expensive to produce. These unconventional resources, as they are called, include gas dispersed in coal deposits, contained in shale and sandstone, and mixed with salt water and buried under tremendous pressure beneath the Gulf of Mexico. The high cost of extraction makes this a resource for the future. ! Canada and Mexico are positively bilious with natural gas and, unlike the OPEC countries, are potential sources the U.S. can count on. Canada has enough proven reserves to supply its own market at current rates of use for 50 years. Consequently it is piping nearly one tcf a year to the U.S. It would like to send even more, but the U.S. does not need it. Natural gas from Canada accounts for 4% of U.S. demand and virtually all imported gas. Mexico has 77 tcf of proven reserves and produces a little more than 1 tcf for domestic use.

What would it take to bring all that gas to market? Higher prices, but that will take a very long time. Natural gas competes with heating oil in most places, and oil prices put a ceiling on gas prices. That's because oil is much more widely used. With crude oil prices at only $19 a barrel (the heating equivalent of about $3 per thousand cubic feet, or mcf, of gas), producers are drilling for neither gas nor oil and reserves are falling. Higher oil prices would stimulate drilling. George Mitchell, chairman of Mitchell Energy & Development Corp., a gas exploration and production company located in Houston, says that a gas price of about $4.50 per mcf would stimulate gas production 40% over ten years. But for gas to reach that level, crude oil prices would have to rise to about $30 per barrel. Like some in the oil patch, Mitchell wants the federal government to speed that process by putting a variable tax on imported oil that would raise the price of crude in the U.S. to $30 a barrel. That tax is higher than any currently contemplated in Congress; all would boost inflation. Besides, less government intervention, not more, will help make natural gas a market-oriented commodity. Another reason gas prices won't rise anytime soon is that since 1981 U.S. wells have been able to pump out more gas than consumers wanted. This surplus, called the gas bubble, did not send prices tumbling. In fact, though some big industrial consumers have enjoyed lower prices, the average price gas consumers pay is about what it was in 1982. Over the same period, the price of residual fuel oil has dropped as much as 60%. Consequently, a surplus many believed would be temporary has lasted five years. One expert calls the extended bubble ''a gas sausage.''

If demand has fallen, why haven't prices? Federal regulations have governed the price of gas produced in one state and sold in another since 1938. In the mid-1970s, price controls caused a surplus of gas in producing states, such as Texas, and a shortage in the interstate market where prices were being held artificially low. When a long and bitter freeze struck in the winter of 1977, gas supplies ran out in some interstate markets.

To turn up production, Congress deregulated the price of certain costly varieties of gas, such as those from wells deeper than 15,000 feet. And it allowed the price of new discoveries in shallower wells to rise slightly more than inflation. Production from existing wells (''old gas''), which could have been expanded at the least possible cost, remained controlled. As a result, producers went out and developed plenty of costly new reserves. Then the interstate pipeline companies, hoping never again to be caught short, rushed in to lock up the costly new gas with long-term contracts. Many of these deals had what are called take-or-pay clauses under which the pipelines agreed to buy up to 90% of production whether they could sell the gas or not. To increase the chances of peddling the stuff, the pipeline companies offered their customers contracts in which the customers promised to buy minimum quantities of the take-or-pay gas. With that the stage was set for what Richard Adkerson, managing director of Arthur Andersen's oil and gas group, calls the ''death spiral.'' When high prices began eroding energy demand in the early 1980s, pipelines stuck with take-or-pay commitments for high-cost gas started cutting back on purchases of old, low-cost gas. As they did, the average cost of the gas they were buying and transporting went up. Customers were furious. They could see the price of old gas, spurned by the pipelines and now in surplus, tumbling in a tiny but rapidly developing spot market. Many of these customers appealed to the Federal Energy Regulatory Commission for relief from their promises to buy take-or-pay gas from the pipelines. The regulators, ever sensitive to the price voters and campaign contributors pay for energy, declared the minimum purchase provisions void. Soon, big pipeline customers began doing end runs around their old suppliers. They contracted for spot market gas directly with producers. And, with the help of some arm-twisting by the Federal Energy Regulatory Commission, they gained partial access to the pipelines' spare capacity in order to ship the gas. Both pipeline companies and producers suffered. The pipelines have accumulated almost $14 billion in take-or-pay potential liabilities, gas they are unable to sell but are obligated to buy sooner or later. They are frantically renegotiating those contracts, paying the producers as little as 8 cents on the dollar. Naturally gas customers, such as power plants and factories, that are big enough to buy supplies directly from producers love the spot market prices. They are, after all, about 25% less than the average wellhead price. But there's not enough spare capacity on the pipelines, or willingness on the part of pipeline companies, to carry all the available spot gas. The result is that overall gas prices have stayed the same in spite of the bubble.

Now that pipelines are renegotiating contracts and a spot market is developing, won't gas prices start to move? The situation is getting better. By renegotiating huge numbers of take-or- pay commitments, pipelines are starting to buy gas at something like market prices. And as the price of take-or-pay gas becomes less onerous, the pipeline companies are warming to the idea of carrying spot market gas. They do, after all, make money transporting gas no matter who owns it. Kenneth Lay, chairman of Enron Corp., which owns the largest U.S. pipeline system, says, ''Some pipelines are moving kind of slow, but eventually all will be open to spot market gas.'' Experts believe that in two to five years the natural gas business could be freer than it has been in decades, thanks to a healthy spot market. Total deregulation of gas, however, is politically out of the question. Legislators see it as tantamount to throwing defenseless homeowners into the jaws of a monopoly.

What are the new markets for gas? One of the biggest potential markets is gas-fired utility plants. Believing gas to be scarce, Congress passed the Powerplant and Industrial Fuel Use Act of 1978, which restricted public utilities from building any major, or ''base load,'' electric power plants using gas for fuel. The law permitted only small gas generators for use in such times of peak demand as the hot summer months. Now Congress has passed a bill that amends the 1978 law and allows gas-fired plants; it awaits the President's signature. The coal industry, which would rather not compete with gas in the utility market, squashed previous attempts to repeal the ban on gas-fired plants. Since the Fuel Use Act was passed, coal sales to the electric power industry have grown 40%, while gas sales have dropped almost 20%. Trying to hang on to their advantage, coal men insisted that any repealing legislation stipulate that new plants be ''capable'' of burning coal. Gas's advantage for utilities is that gas-fired facilities cost less to build than coal plants, about $600 per kilowatt of capacity vs. roughly $1,500. But gas costs more than coal as a fuel. Thus, building a coal-capable, gas-fired plant would be getting the worst of both worlds. A nifty new technology with the galumphing name ''integrated gasification combined cycle'' (IGCC, for short) has brought compromise to the oil-vs.-gas debate. This technology allows base-load plants to be constructed in modules, with each successive stage contributing to the power grid as it is completed. In the first step, turbines are installed that might burn gas or oil or both. Second, a steam generator that converts waste heat from the turbines into electricity is added. Finally, should the price of gas and oil soar to previous OPEC-ian highs, a coal gasifier can be added. The gasifier would turn coal into synthetic gas for the turbines and, in the process, make heat to generate more electricity. The notion that these plants might someday consume coal mollifies the coal men. A $263-million, 120-megawatt demonstration plant called Cool Water has been generating and selling electricity for three years in Daggett, California, 130 miles from Los Angeles. Cool Water is run by a consortium that includes Texaco, Southern California Edison, and the Electric Power Research Institute. Utilities, which have been whipsawed between the unpopularity of nuclear power and the high capital costs of big coal plants, like what they see at Cool Water. Peter Benziger, senior vice president of Potomac Electric Power of Washington, D.C., reports that his company plans to complete the first phase of an IGCC plant in the early 1990s. He says: ''We like the fuel flexibility this gives us. We like the manageable schedule of investments. And it's clean. IGCC looks like the technology of choice in the Nineties.'' The way gas men see the future, IGCC is only one of the new ideas they have up their pipelines. Small new gas-powered cogeneration units that provide electricity and heat (or cooling) for stores, hospitals, and small offices may soon compete with the utilities in the commercial market. One of these gas- powered units is a fuel cell that combines the hydrogen stripped from methane (or CH4, the main ingredient in natural gas) with air to produce electricity and water. The fuel cell is quiet, efficient, and, since no combustion is necessary, it is clean. But it's also expensive, about $2,500 per kilowatt of capacity. Experts at the Gas Research Institute of Chicago, which helped develop the technology, expect that economies of scale in production could lower the cost to a more competitive $1,000 per kilowatt, vs. about $1,200 per kilowatt for comparable cogeneration units. United Technologies and Toshiba have formed a joint venture to make the fuel cells.

If cars and trucks were fueled by gas, the U.S. might never worry about an oil crisis again. Would that be realistic? The last frontier for gas as a fuel lies on the highway. Optimists in the gas industry say their product could make significant inroads, and point to the fact that Italy has 250,000 gas vehicles in operation, New Zealand has 70,000, and the U.S. 30,000. Gas is at least as safe a fuel as gasoline, and right now gas prices are about 20% less than gasoline's. Natural gas cars and trucks have lower maintenance costs than gasoline vehicles because clean- burning gas is less likely to clog the engine. People who drive gas-powered vehicles say they can't tell the difference from a gasoline one. Filling up a tank with natural gas can be as easy as putting air in a tire, though if the compressor isn't powerful enough it can take a lot longer. On the other hand, force of habit, countless gasoline stations, and the rolling stock of petroleum-reliant cars and trucks make it unlikely that natural gas will overtake gasoline anytime soon. Aha, say the proponents of gas buggies, pollution control may soon take a hand. Over the next few years, several deadlines for cleaning up both ozone (which is partly the result of vehicular traffic) and particulate emissions from diesel-burning vehicles come due. The Gas Research Institute is working on technologies that would help diesel engines meet the emissions standards by converting them to burn gas or a mixture of diesel fuel and gas. Robert Catell, chief operating officer of Brooklyn Union Gas, says his company is working with New York City to convert 1,000 vehicles, including buses, taxis, and police cars, to gas in a program to clean up the air. Brooklyn Union, like many gas companies, powers its own 200-vehicle fleet with gas. If gas can't beat oil, maybe it will join it. Standard Oil in Ohio is developing a catalyst to convert natural gas into gasoline. Standard would like to turn its vast reserves of Alaskan natural gas into a liquid that could be shipped through the Alaskan oil pipeline. (A gas pipeline from Alaska to the U.S. would cost so much -- about $40 billion -- that it would push the price of gas up to noncompetitive levels.) Rodger McKain, who is in charge of Standard's project, estimates that Prudhoe Bay's reserves of natural gas might yield as much as 200,000 barrels a day of gasoline, enough to replace 5% of current crude oil imports. Even if gas never catches on with cars, trucks, and buses, the American Gas Association estimates that other new technologies, and America's abundance, will give gas the potential to replace 1.6 million barrels of oil, or 30% of today's oil imports, within five years. That's a real ace in the hole against OPEC's hand.

CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: A Bigger Slice, Please The U.S. is twice as reliant on oil as it is on gas, even though resources of natural gas are much larger. DESCRIPTION: Energy consumption in United States in 1986: petroleum, coal, nuclear, hydroelectric and natural gas.