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2012 was a year of shifting production balances for world energy markets. Hydraulic fracturing technologies helped to significantly increase extraction and production of oil and natural gas in the United States. Improvements in hydraulic fracturing technology are expected to help the U.S. surpass Saudi Arabia as the leading oil producer by 2020, according to the International Energy Agency's World Energy Outlook.

The IEA's World Energy Outlook projects U.S. oil production to reach 11.1 million barrels per day by 2020, which would surpass projected production in Saudi Arabia. Given that the U.S. oil production rate in 2011 was 5.7 mbpd, the increase to 11.1 mbpd by 2020 shows the significant amount of resources available for supply through hydraulic fracturing methods. The increased extraction of oil and natural gas through hydraulic fracturing technologies is also expected to help the U.S. become a net oil exporter by 2030, according to the IEA.

Due to the production increases, global oil prices are expected to fall. In the U.S. Energy Information Administration's 2013 Annual Energy Outlook, the agency predicts Brent spot oil prices will decrease from $111 per barrel in 2011 to $96 per barrel in 2015.

Hydraulic fracturing has also caused a significant reduction in natural gas prices due to the increased supply of the commodity. The EIA's 2013 AEO projects natural gas prices will remain below $4 per million British thermal unit through 2018.

Increased production of oil and gas through hydraulic fracturing is also good for electricity prices. The EIA's 2013 AEO estimates electricity costs to fall from 9.9 cents per kilowatthour in 2011 to 9.2 cents per kilowatthour in 2015, due to the use of natural gas alternatives.

Retail gas prices, although influenced by lower oil and natural gas prices, are still expected to increase, according to the EIA's 2013 AEO. The Outlook projects gas prices for motor vehicles to increase from $3.45 per gallon in 2011 to $4.32 per gallon in 2040. Other factors, including refinery costs and tax increases are expected to contribute to the increase despite the lower projected oil and natural gas prices.

While other energy commodities are expected to be greatly influenced by increased production from horizontal drilling and hydraulic fracturing technologies, coal production and prices appear to remain unaffected.

The EIA's AEO estimates the average minemouth price of coal will see some increases, rising from $2.04 per million Btu in 2011 to $3.08 per million Btu in 2040. The EIA attributes the increase to higher prices associated with mining coal in new reserve sites.

Overall, the improvements in oil and natural gas production should increase profitability for U.S. energy companies with hydraulic fracturing capabilities in 2013. In particular, Dow components, Exxon (XOM) and Chevron (CVX) should see improved stock returns in the year ahead.

Both companies have shown slower stock gains in 2012 due to economic factors and delayed production, however, Exxon appears to have a brighter outlook for 2013 due to its onshore resource advantages.

Exxon has been a leader in the industry for hydraulic fracturing. The use of hydraulic fracturing has helped the company to achieve an average production rate of 2,197 kbd for oil and 12,609 mcfd for natural gas over the past four quarters.

Exxon's acquisition of XTO Energy has also added 10,400 acres to its holdings in the Bakken and makes the company the fifth largest landholder in the U.S. region. Offshore production expansions are also helping to significantly increase oil and gas production for the company. The expanded production sites have led to a compound annual production growth rate forecast of 1.1 percent, according to Morningstar analysts.

Chevron, while still a strong U.S. energy company, appears to lag Exxon in resource production expansion. The company is also a leader in hydraulic fracturing technology but has focused the majority of its production expansion on offshore sites, with political challenges causing extended delays and decreased production volumes. New drilling projects in Canada could help long-term production rates but in the short-term Morningstar analysts predict little production growth.

Chevron's lagging production has slowed earnings for the company and also hurt its equity returns. In 2012, Chevron stock gained 1.63 percent versus Exxon's 2.10 percent and the Dow Jones Oil and Gas sector's 2.60 percent.

Given the world energy market's shifting balances, Exxon appears to have a greater advantage over Chevron in 2013 due to increased production from onshore resources.

Source: Hydraulic Fracturing Causes Shift In World Energy Balances