Oil well in West Texas at sunset © BRANDON JENNINGS, Getty Images

Five years ago, I never imagined I'd type these words: By 2017, the United States will overtake Saudi Arabia as the world's largest oil producer.

In addition, according to the International Energy Agency, by 2015, the United States will overtake Russia to become the world's largest producer of natural gas.

The United States is now the fastest-growing oil and natural gas producer in the world. During the past five years, according to Citigroup, the United States has added 2.59 million barrels a day to total production.

You'd think there's an investable angle there somewhere.

I can think of four:

  • First, the stocks of the companies responsible for this huge surge in U.S. production.
  • Second, the stocks of the companies that will make money from solving the current bottleneck in getting this supply to market.
  • Third, the stocks of companies that will benefit from the long time frame of this trend. The trend is likely to stretch on for a decade or two -- with a likely extension past 2030 as supply from Canada and Mexico increases. This will drive North America as a whole toward energy-self-sufficiency projects with long time lines that had been discounted on the risk that the boom would be over before they were completed.
  • Fourth, the sectors in the U.S. economy that will reap benefits from lower U.S. energy prices, beyond the general advantages flowing to the U.S. economy from lower energy costs.

Jim Jubak

Jim Jubak

Let me start with the general picture and then move to individual sectors and trends.

What changed the picture

I don't think it's overstatement to call what we're seeing now "the shale revolution." Higher oil and natural gas prices met up with the maturing of technology pioneered in the 1970s to send oil production soaring. The new production is coming from shale formations that, until the development of new technologies for hydraulic fracturing (fracking), were thought unlikely to ever give up their oil content.

Not so long ago, the U.S. energy story was about an apparently irreversible decline in production from the big oil states of Alaska, Texas and California. Production from Alaska, for example, peaked at 2 million barrels a day in the 1970s. Production in the state ran at 567,481 barrels a day in March 2012. Production from Texas and California was falling as well.

Nothing shows the reversal in the trend more starkly than production figures from North Dakota. With 6,336 wells now pumping, oil production from the Bakken and Three Forks shale formations in North Dakota climbed to 575,490 barrels a day in March 2012 from 118,103 barrels a day five years earlier. That put North Dakota ahead of Alaska -- with its March 2012 production of 567,481 barrels a day -- and moved North Dakota into second place among U.S. oil-producing states. North Dakota now chases only Texas, which is seeing its own oil-shale boom turn projected production declines into production increases. Oil production in Texas climbed 12% from September 2011 to March 2012 to 1.72 million barrels a day.

The boom companies

The shale revolution wasn't led by Big Oil. To take one example, the key technique known as "slickwater fracturing" was pioneered by Union Pacific Resources, now part of Anadarko Petroleum (APC), and Mitchell Energy, now part of Devon Energy (DVN).

Big Oil has, in fact, been playing catch-up by buying acreage from smaller oil producers or buying the small producers outright. For example, Exxon Mobil (XOM) bought 196,000 acres in the Bakken formation from Denbury Resources (DNR) for $1.6 billion.

The problem with these deals, if you're an investor, is that they aren't big enough to move the needle at Big Oil. Take Royal Dutch Shell's (RDS.A) purchase of acreage in the West Texas Permian Basin from Chesapeake Energy (CHK) in September for $1.94 billion. That acquisition tripled Shell's production from unconventional sources and marked a major milestone in the company's march to have 250,000 barrels a day in worldwide production from shale by 2017. Even if the company hits that goal, shale would still make up just 6% of Shell's forecast 2017 production.

No, as I have written earlier -- as early as Oct. 21, 2011, in this post on Big Oil snapping up smaller players -- if you want to buy producers to take advantage of the U.S. oil boom, it's better to buy the small companies that staked out big acreage early. Names like Pioneer Natural Resources (PXD) and Concho Resources (CXO) might be familiar, since I've owned them on and off in my Jubak's Picks 12- to 18-month portfolio.

Pioneer is also currently a member of my long-term Jubak Picks 50 portfolio. The stock is up 5.28% since I added it to that portfolio on Jan. 13, but it's down 9.2% from its Sept. 14 high on worries about the global and U.S. economies. Concho Resources is down 12.3% since I sold it on May 21 at $90.26 for the same reasons. Other names to look at include Oasis Petroleum (OAS), Devon Energy, Rosetta Resources, (ROSE), EOG Resources (EOG) and Approach Resources (AREX).

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Moving the oil

Big Oil wasn't the only group of companies caught short by the unconventional oil shale boom in the United States. The mid-continent oil infrastructure wasn't ready for the boom, either. Whether it's a lack of pipelines, pipelines designed to flow in the wrong direction or even a lack of storage facilities, the infrastructure hasn't been able to handle the increased production of oil from these unconventional plays.

The result is a huge gap between the price that oil from these regions brings and the global market price for oil. Recent quarters have seen a huge discrepancy open up between the European Brent benchmark and the U.S. West Texas Intermediate benchmark. On Nov. 16, for example, WTI closed at $86.92 a barrel and Brent closed at $108.95 a barrel.

But that captures only some of the price gap created by the U.S. production boom. For example, on Nov. 8, at Midland, Texas, in the heart of some of the biggest unconventional plays in the country, WTI closed $7 a barrel cheaper than at the big central oil terminal in Cushing, Okla. The price difference between WTI and the Gulf Coast's Louisiana Light and Sweet has ranged recently from $8.50 to $30 a barrel.

Those price differences are a reflection of a glut of oil from these new sources because of a lack of transportation capacity to get the oil to Cushing or to the big refineries on the Gulf Coast.

As you might imagine, price differences like that have created boom times for any company that can get a bucket of oil to the end markets. It costs about one-third as much to transport oil by pipeline as it does by rail, but it takes years to build a pipeline. In the meantime Burlington Northern, now owned by Warren Buffett's Berkshire Hathaway (BRK.A), and Union Pacific (UNP) have seen rising revenue from this oil boom (just in time to make up for a decline of shipments in coal).

The big build-out plays

Eventually, the pipelines will catch up -- and the longer the boom runs, the more sense it makes to build a new pipeline. From that long-term perspective, I'd look at Magellan Midstream Partners (MMP), because of its focus on pipelines in the mid-continent region and its connections to Anadarko Petroleum, one of the biggest players in the Bakken formation, and Plains All American Pipeline (PAA), with its interesting mix of pipelines and storage capacity in the region.

I'd like to get these shares of these a little cheaper than they trade today, with dividend yields of 5% or higher. They now yield 4.67% and 4.82%, respectively.

There's a similar investment opportunity in the demand for liquefied natural gas terminals that would enable natural gas producers to ship cheap gas from producers in the United States and Australia -- on trend to run neck and neck with Qatar as the world's largest exporter of natural gas by 2030. If you're interested in investing in this transportation trend, I'd suggest Cheniere Energy (LNG), the leader in the race to build the first liquefied natural gas export terminal in the United States.

The increase in U.S. oil production isn't occurring in isolation. The same fracking technologies and unconventional geologies that are at the heart of this increase in oil output have produced an even bigger boom in natural gas production. Between the two hydrocarbons, energy prices in the United States will be cheap compared with those in the rest of the world. Electricity, for example, is forecast to be about 50% cheaper in the United States than in Europe, according to the International Energy Agency, over the next two decades as the U.S. relies on cheap natural gas to fire new power plants.

The cheap energy plays

Cheap energy is no guarantee of faster economic growth, but it sure won't hurt, as cheap energy prices get factored into the thinking of companies trying to decide where to locate production. The biggest effect will be in industries where energy --and natural gas in particular -- is a huge percentage of the cost of raw materials. Think Dow Chemical (DOW), DuPont (DD), and LyondellBasell Industries (LYB) in chemicals or CF Industries (CF) in nitrogen fertilizers. Companies that rely on the chemicals produced by these companies for raw materials for their own products will also benefit from lower U.S. energy costs. Paint-maker Sherwin-Williams (SHW) comes to mind.

And the effects of cheap U.S energy and the boom in U.S. oil and natural gas production aren't limited to the U.S. economy. I don't expect global oil prices to fall dramatically as more U.S. oil production works its way into the global supply chain, first as refined petroleum products and eventually as oil exports. The gradual recovery in U.S. and Chinese economic growth should keep prices in something like their current range. But that current range is bad news for some of the world's biggest oil exporters, and most especially Russia. Russia needs an oil price near $120 a barrel to balance its national budget and to attract the capital it needs to modernize its own industry.

It's not clear that the surge in U.S. oil production is enough to put a damper on the very expensive oil produced by Canada's oil sands industry or that promised from Brazil's deep, deep, deep water South Atlantic finds, but I'd certainly steer my portfolio away from the most financially leveraged companies in these projects. Cheaper natural gas and oil aren't exactly what the beleaguered global solar and wind industries need, either.

What could change the trend

And, of course, in general it pays to think about what can go wrong -- and about how fast the energy picture can change (and change again). A good part of the swing toward the possibility that the U.S. will become an oil exporter again –- or at least achieve self-sufficiency in energy use and production -- is due to expanding production. But it is also a result of increased energy efficiency in the U.S. economy prompted by higher energy prices over the past decades. (The International Energy Agency says production is about 55% of the story and energy efficiency 45%.)

If an increase in oil production leads to a rollback in those gains in energy efficiency, you can throw energy self-sufficiency as a goal out the window. (The International Energy Agency has said that its projections for U.S. energy self-sufficiency assume that the U.S. will continue to increase energy efficiency for its cars, homes and appliances.)

I'm sure this boom in U.S. energy production from unconventional sources will persuade many people to completely discount the theory known as Peak Oil. Certainly the hard form of Peak Oil is dead, but the more realistic form, which held that U.S. production from conventional sources had peaked in the 1970s and was in decline, still looks good for the U.S. and the global oil industry as a whole. From this perspective, you can think of each successive "exhaustion" of a conventional source of oil as something that will move the base price of oil higher, even if all the conventional supply is replaced by (more expensive to produce) unconventional sources.

And finally, of course, there's the possibility that the real world will deliver enough disasters, storms and data to convince everyone that global climate change is real and that the world needs to reduce its burning of all forms of hydrocarbon, even natural gas. Personally, I find the data on climate change convincing, and I wish that the United States and the world would move on this problem sooner rather than later. But just because I wish it doesn't make it so. One of the essentials in investing is separating the world as you'd like it to be from the world that is likely to be. Surveying the world, with some sadness, I don't see action on global climate change as a near- or medium-term danger to any investment in oil stocks.

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Updates to Jubak's Picks

These recent blog posts contain updates to the stocks in Jubak's market-beating portfolios:

At the time of publication, Jim Jubak did not own or control shares of any company mentioned in this column in his personal portfolio. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this column. The fund owned shares of Cheniere Energy at the end of September. Find a full list of the stocks in the fund as of the end of September here.

Jim Jubak's column has run on MSN Money since 1997. He is the author of the book "The Jubak Picks," based on his market-beating Jubak's Picks portfolio; the writer of the Jubak's Picks blog; and the senior markets editor at MoneyShow.com. Get a free 60-day trial subscription to JAM, his premium investment letter, by using this code: MSN60 when you register at the Jubak Asset Management website.

Click here to find Jubak's most recent articles, blog posts and stock picks.

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