NEW YORK -- U.S. oil output is surging so fast that the United States could soon overtake Saudi Arabia as the world's biggest producer.

Driven by high prices and new drilling methods, U.S. production of crude and other liquid hydrocarbons is on track to rise 7 percent this year to an average of 10.9 million barrels per day. This will be the fourth straight year of crude increases and the biggest single-year gain since 1951.

The boom has surprised even the experts.

"Five years ago, if I or anyone had predicted today's production growth, people would have thought we were crazy," says Jim Burkhard, head of oil markets research at IHS CERA, an energy consulting firm.

The Energy Department forecasts that U.S. production of crude and other liquid hydrocarbons, which includes biofuels, will average 11.4 million barrels per day next year. That would be a record for the U.S. and just below Saudi Arabia's output of 11.6 million barrels. Citibank forecasts U.S. production could reach 13 million to 15 million barrels per day by 2020, helping to make North America "the new Middle East."

The last year the U.S. was the world's largest producer was 2002, after the Saudis drastically cut production because of low oil prices in the aftermath of 9/11. Since then, the Saudis and the Russians have been the world leaders.

The United States will still need to import lots of oil in the years ahead. Americans use 18.7 million barrels per day. But thanks to the growth in domestic production and the improving fuel efficiency of the nation's cars and trucks, imports could fall by half by the end of the decade.

The increase in production hasn't translated to cheaper gasoline at the pump, and prices are expected to stay relatively high for the next few years because of growing demand for oil in developing nations and political instability in the Middle East and North Africa.

Still, producing more oil domestically, and importing less, gives the economy a significant boost.

The companies profiting range from independent drillers to large international oil companies such as Royal Dutch Shell, which increasingly see the U.S. as one of the most promising places to drill. ExxonMobil agreed last month to spend $1.6 billion to increase its U.S. oil holdings.

Increased drilling is driving economic growth in states such as North Dakota, Oklahoma, Wyoming, Montana and Texas, all of which have unemployment rates far below the national average of 7.8 percent. North Dakota is at 3 percent; Oklahoma, 5.2.

Businesses that serve the oil industry, such as steel companies that supply drilling pipe and railroads that transport oil, aren't the only ones benefiting. Homebuilders, auto dealers and retailers in energy-producing states are also getting a lift.

IHS says the oil and gas drilling boom, which already supports 1.7 million jobs, will lead to the creation of 1.3 million jobs across the U.S. economy by the end of the decade.

"It's the most important change to the economy since the advent of personal computers pushed up productivity in the 1990s," says economist Philip Verleger, a visiting fellow at the Peterson Institute of International Economics.

The major factor driving domestic production higher is a newfound ability to squeeze oil out of rock once thought too difficult and expensive to tap. Drillers have learned to drill horizontally into long, thin seams of shale and other rock that holds oil, instead of searching for rare underground pools of hydrocarbons that have accumulated over millions of years.

To free the oil and gas from the rock, drillers crack it open by pumping water, sand and chemicals into the ground at high pressure, a process is known as hydraulic fracturing, or "fracking."

While expanded use of the method has unlocked enormous reserves of oil and gas, it has also raised concerns that contaminated water produced in the process could leak into drinking water.

The surge in oil production has other roots, as well:

_ A long period of high oil prices has given drillers the cash and the motivation to spend the large sums required to develop new techniques and search new places for oil. Over the past decade, oil has averaged $69 a barrel. During the previous decade, it averaged $21.

_ Production in the Gulf of Mexico, which slowed after BP's 2010 well disaster and oil spill, has begun to climb again. Huge recent finds there are expected to help growth continue.

_ A natural gas glut forced drillers to dramatically slow natural gas exploration beginning about a year ago. Drillers suddenly had plenty of equipment and workers to shift to oil.

The most prolific of the new shale formations are in North Dakota and Texas. Activity is also rising in Oklahoma, Colorado, Ohio and other states.

Production from shale formations is expected to grow from 1.6 million barrels per day this year to 4.2 million barrels per day by 2020, according to Wood Mackenzie, an energy consulting firm. That means these new formations will yield more oil by 2020 than major oil suppliers such as Iran and Canada produce today.

U.S. oil and liquids production reached a peak of 11.2 million barrels per day in 1985, when Alaskan fields were producing enormous amounts of crude, then began a long decline. From 1986 through 2008, crude production fell every year but one, dropping by 44 percent over that period. The United States imported nearly 60 percent of the oil it burned in 2006.

By the end of this year, U.S. crude output will be at its highest level since 1998 and oil imports will be lower than at any time since 1992, at 41 percent of consumption.

"It's a stunning turnaround," Burkhard says.

Whether the U.S. supplants Saudi Arabia as the world's biggest producer will depend on the price of oil and Saudi production in the years ahead. Saudi Arabia sits on the world's largest reserves of oil, and it raises and lowers production to try to keep oil prices steady. Saudi output is expected to remain about flat between now and 2017, according to the International Energy Agency.

But Saudi oil is cheap to tap, while the methods needed to tap U.S. oil are very expensive. If the price of oil falls below $75 per barrel, drillers in the U.S. will almost certainly begin to cut back.

The International Energy Agency forecasts that global oil prices, which have averaged $107 per barrel this year, will slip to an average of $89 over the next five years – not a big enough drop to lead companies to cut back on exploration deeply.

Nor are they expected to fall enough to bring back the days of cheap gasoline. Still, more of the money that Americans spend at filling stations will flow to domestic drillers, which are then more likely to buy equipment here and hire more U.S. workers.

"Drivers will have to pay high prices, sure, but at least they'll have a job," Verleger says.


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Captions by Reuters
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  • Saudi Arabia

    <em>Oil workers operate the drill at the oil exploration camp named Musa 1 at Rub Al-Khali, known as the Empty Quarter, in Saudi Arabia in 1976. (AP)</em> Saudi Arabia used to pump oil through the Trans-Arabian Pipeline across Jordan, Syria and Lebanon to the Mediterranean. But since the different legs of the 0.5 million bpd "Tapline" were shut from 1976 to 1990, Saudi has exported most of its crude on tankers passing through the Strait of Hormuz.

  • Saudi Arabia

    <em>Israeli navy vessel Eilat crosses the Suez canal waterway near the port city of Ismailia, 120 km northeast of Cairo, on September 5, 2011. (Getty)</em> Saudi Arabia's only other operational pipeline route is the Petroline, or "East-West Pipeline," which mainly transports crude oil from fields clustered in the east of the Red Sea port of Yanbu for export to Europe and North America. The 5 million bpd Petroline could transport around 60 percent of total Saudi exports, which can get close to 8 million bpd. But it is already used for supplying markets west of the Suez Canal, leaving less than 5 million bpd of spare capacity for fuel looking for another way out of the Gulf.

  • Saudi Arabia

    <em>Navy warship, the DDG-171 Haikou destroyer, patrols the waters of the Gulf of Aden on January 19, 2009. (Getty)</em> Around two-thirds of Saudi crude exports goes to Asia, so pumping it west across the desert and then shipping it east means tankers would also have to sail through the pirate-infested Bab el-Mandab Strait and Gulf of Aden on a voyage that is about 1,200 miles and five days longer. A parallel 290,000 bpd Abqaiq-Yanbu natural gas liquids (NGL) pipeline links gas processing plants in the east with NGL export facilities at Yanbu. But it too provides only a partial alternative to Saudi shipments of NGL from the Gulf.

  • Saudi Arabia

    <em>An Aramco security guard holds a machine gun as he keeps watch over oil pipelines at the Aramco refinery at Ras Tannura, Saudi Arabia, Sept. 25, 1990. (AP)</em> Saudi energy infrastructure has been targeted by terrorist groups but heavy protection has so far prevented major problems. The kingdom is thought to keep some redundancy in its export system as insurance against the disabling of some facilities, according to the EIA. Saudi Aramco refuses to comment on what those options are. There has been talk of reopening the long Saudi leg of the Tapline to Jordan but it is unclear how quickly a pipeline closed for two decades could be resurrected, and there seems little prospect that the leg across Syria could reopen soon.

  • Other Gulf Procedures

    <em>Seagulls fly over a fisherman as he pulls his net out of the sea in the emirate of Fujairah on November 20, 2011. (Getty)</em> Iran (the world's third-biggest crude exporter), the UAE (4th), Kuwait (6th) and Qatar (15th) currently rely entirely on the Strait of Hormuz. The UAE has been building a new pipeline that will have the capacity to carry the bulk of its production to Fujairah, a bunkering hub and an oil terminal outside the Straits of Hormuz. The Abu Dhabi Crude Oil Pipeline is expected to have a capacity of 1.5 million bpd, which could go up to 1.8 million eventually.

  • Other Gulf Procedures

    <em>A petroleum refinery of Qatar Petroleum stands on October 26, 2011 near Umm Sa'id, Qatar. (Getty)</em> Qatar, a small crude exporter, shipped nearly 95 billion cubic metres (bcm) of gas in 2010, according to BP Statistics, of which nearly 76 bcm sailed through Hormuz as LNG. Another 17.4 bcm was shipped to the UAE via the Dolphin pipeline, which would transport up to 32.8 bcm per year. Some of the extra gas could be sent to Oman, which already takes about 1.9 bcm from Qatar, freeing up a little more Omani gas for export as LNG. But a lack of pipeline links with export terminals on the eastern tip of Oman means the additional amounts would be insignificant for world gas markets and Qatar.

  • Iraq

    <em>Turkish Energy Minister Taner Yildiz (2nd L) and Iraqi Oil Minister Hussein al-Shahristani (R) sign a deal to extend for 15 years the use of the main pipeline linking its northern oilfields to the Mediterranean port of Ceyhan, on September 19, 2010, in Baghdad. (Getty)</em> Nearly 80 percent of Iraq's crude is exported through Gulf ports, mostly to Asia, and the rest via a 1.6 million bpd pipeline through Kurdistan to the Turkish port of Ceyhan. There are plans to increase capacity on the northern route by 1 million bpd to help cope with an expected rise in production and reduce reliance on the Gulf ports, which are already running close to capacity, but the existing pipeline has been dogged by a decade of disruption. The 1.65 million bpd Iraqi Pipeline across Saudi Arabia (IPSA), which has been shut since the first Gulf War in 1991, may again be used to transport crude south to the Petroline. But if Hormuz is blocked, there is little chance any Iraqi crude would find space in Saudi's only remaining export route. The 0.7 million bpd Iraq-Syria-Lebanon Pipeline has been unusable since the 2003 war in Iraq, but could be fixed.

  • Iran

    <em>An Iranian war-boat fires a missile during the 'Velayat-90' navy exercises in the Strait of Hormuz in southern Iran on December 30, 2011. Iran, which has been carrying out war games in the Strait of Hormuz over the past week, has said that 'not a drop of oil' would pass through the strait if Western governments follow through with planned additional sanctions over its nuclear program. (Getty)</em> Iran's total reliance on crude exports through Hormuz is one of the reasons why it is unlikely to be blocked. Iran is considering several international oil pipeline projects but does not export LNG, and its pipeline plans have made little progress.

  • Suez Canal/Sumed

    <em>An Egyptian man looks at the US nuclear aircraft carrier USS George Bush crossing the Suez Canal waterway near the port city of Ismailia, 120 kms northeast of Cairo, on November 20, 2011. (Getty)</em> The closure of the Suez Canal, through which around 735,000 bpd of crude passed in 2010, would not be disastrous for crude exports from the Middle East because only around 428,000 bpd sailed north in 2010. The 2.3 million bpd Sumed pipeline connecting the Red Sea to the Mediterranean, which is 65 percent filled with Saudi, 25 percent Iranian and 4 percent Kuwaiti crude, could accommodate it because Sumed flows have averaged less than 1.15 million bpd for the last two years thanks to rising demand in Asia, dampened European demand and some ships avoiding the region altogether. However, the 300,000 bpd of crude that sailed south through the Suez Canal in 2010 would be unable to use the one-way pipeline, while some 1.5 million bpd of gasoline, fuel oil and two huge LNG tankers that use it every day would be blocked because it only transports crude.

  • Bab Al-Mandab Strait

    <em>Yemeni forces arrive to the southern port of Mukalla aboard a navy ship after freeing an oil tanker seized by pirates off Yemen's coast on April 27, 2009. (Getty)</em> The closure of either the Suez or Sumed could be managed by heavier reliance on the other. But a blockage of the 2-mile-wide shipping lane between unstable Yemen and mainland Africa would render both of them nearly redundant. The U.S. EIA estimates over 3-4 million bpd of oil typically sails through the narrow, pirate-infested channel. Its closure would force oil and LNG tankers to sail around the southern tip of Africa, tying up tankers for weeks and driving up costs. In 2002, a French oil tanker was attacked off the coast of Yemen, an established base for a wing of al Qaeda.