Could the U.S. Actually Become the World's Leading Energy Producer?

The U.S. oil and gas revolution of the past few years, which was made possible by the large-scale application of advanced drilling techniques such as horizontal drilling and hydraulic fracturing, has attracted a great deal of attention.

Citigroup has said the boom holds the key to reaching energy independence, which the bank predicts could arrive as early as the end of this decade, while the International Energy Agency last year claimed that the U.S. would become the world's leading oil producer by 2020.

But could the U.S. actually surpass heavyweights like Russia and Saudi Arabia that have long dominated global energy markets? The U.S. Energy Information Administration (EIA) thinks so. Let's take a closer look.

U.S. oil and gas production to surpass Saudis and Russians
Last week, the EIA released a note arguing that the U.S. will surpass both Saudi Arabia and Russia to become the world's leading producer of petroleum and natural gas hydrocarbons in 2013.

In July, US crude oil output reached 7.5 million barrels per day, representing a 45% increase from the same period in 2008, while natural gas production hit 2.5 trillion cubic feet, up 16% from five years earlier.

This year, the EIA estimates that the U.S. will produce nearly 50 quadrillion British thermal units of petroleum and natural gas, which should allow it to easily surpass Russia by roughly five quadrillion British thermal units. While the EIA's projections should no doubt be hailed as a major milestone for the U.S., there are a few important caveats to be aware of.

A couple of caveats
First, while total energy production for the U.S. and Russia is almost evenly split between crude oil and natural gas, Saudi Arabia's production is heavily concentrated in crude oil. Second, there are subtle yet important differences in the way oil and natural gas production is measured across different countries.

For instance, the EIA includes natural gas plant liquids, corn ethanol, and refinery processing gains in its calculations for the total U.S. oil supply, which makes crude and condensates a much smaller share of the total figure. Last year, crude and condensates accounted for less than 60% of total U.S. oil supply under this definition. By comparison, they made up about 85% of Saudi Arabia's total oil supply.

Shale plays driving output growth
While much of the increase in oil production can be traced to a handful of major plays, such as the Eagle Ford shale, the Bakken, and the Permian Basin, the growth in natural gas output can be attributed mainly to the prolific Marcellus shale of Pennsylvania, one of the few shale gas plays where drilling activity remains robust, despite the commodity's depressed price.

Companies such as Chesapeake Energy (CHKA.Q), EQT (EQT 1.42%), Cabot Oil & Gas (CTRA 0.59%), and Range Resources (RRC 0.78%) continue to report stellar results in the prolific and highly economical play. In the second quarter, Chesapeake increased its dry gas production in the Marcellus by 58% year over year and wet gas production by 56%, despite a lower rig count, while Cabot boosted its output 52% year over year to a record 95.2 Bcfe. EQT similarly grew its Marcellus gas sales by 111% year over year, while Range said production volumes grew 27% year over year, averaging 910 Mmcfe per day in the second quarter.

The bottom line
Even if the U.S. doesn't surpass Saudi Arabia and Russia in terms of total petroleum and natural gas production this year, the EIA data show that America's domestic energy landscape continues to improve.

Not only is this great news for consumers and energy-intensive businesses, but it should also be hailed as another major step toward reducing the nation's reliance on foreign oil and improving its trade balance. Indeed, U.S. imports of oil and gas have plunged by 15% and 32%, respectively, over the past five years as a result of surging shale production, which has helped reduce the U.S. trade deficit considerably.