High Oil Prices Are Here to Stay

One month ago, the International Energy Agency stated in its World Energy Outlook that "If, between 2011 and 2015, investment in the [Middle East and North Africa] region runs one-third lower than the $100 billion per year required, consumers could face a near-term rise in the oil price to $150/barrel." Two weeks ago, while America focused on the failure of the supercommittee, you likely missed a hugely important but little reported event. The CEO of Saudi Arabia's state oil company announced it was stopping a $100 billion expansion program of its oil production capacity in an effort to keep supply tight. While Saudi Arabia is not the only oil producer in the region, it is the biggest. Read along and I'll explain why the Saudis need high oil prices, why new unconventional sources aren't going to save you from high prices, and what you can do to protect yourself.

The Saudi expansion
Saudi Aramco's expansion was expected to increase the company's production capacity from 12 million barrels a day to 15 million barrels a day by 2020. However, with new unconventional oil supplies coming online relatively soon, Saudi Aramco does not want to risk a supply glut that would push down prices.

Saudi Arabia and other OPEC countries rely on high oil prices to fund their governments, and this has gotten more expensive recently as the Arab spring led many to increase their public spending. The Carnegie Investment Bank recently showed the oil prices (Brent) Saudi Arabia and other oil-rich countries need to balance their budgets:  

Source: IMF, FT, Carnegie Investment Bank.

While Saudi Arabia only needs an estimated $80 a barrel to balance its budget, other large oil-producing countries need much higher prices. This is a massive incentive for these countries to work to keep world oil prices high.

At a current price of $110 a barrel for Brent crude, OPEC is sitting pretty. As OPEC Secretary General Abdalla Salem el-Badri said last week, according to The Wall Street Journal, "The market is currently balanced. Prices are comfortable" for both producers and consumers. So with OPEC happy about current prices and not likely to increase supply, where will new supply come from?

Unconventional oil
Unconventional oil supplies such as the U.S. oil shale and the Canadian tar sands will play a role in growing worldwide oil production. However, unconventional supplies will only make a small dent. OPEC expects production from non-conventional oil supplies to rise from 2.3 million to 3.4 million barrels per day by 2015. Also, as fellow Fool Alex Planes showed in October, these sources cost nearly 10 times more to produce than does oil from Saudi Arabia's massive fields. Canadian oil sands such as Suncor's (NYSE: SU  ) or Penn West Petroleum's (NYSE: PWE  ) cost roughly $35-$40 per barrel, while oil shale oil from companies such as Chesapeake Energy (NYSE: CHK  ) costs around $45 per barrel. We are thus adding high-cost sources of oil compared with Saudi Arabia's cheap oil. So what will take up the rest of the slack?

OPEC expects the biggest production gains to come from Brazil's deepwater fields and Iraq. Brazil's deepwater drilling sites are even more expensive than shale, costing an estimated $50 per barrel to produce, thus still locking us into more high-priced oil.

While Iraq has cheap, plentiful oil, it also needs high prices to support its domestic programs. Also, as I and fellow Fool David Lee Smith have written about before, Iraq's future security situation is worrisome and will become more perilous as the U.S. pulls out in 2012. With all that said, what can you do?

Take action
A good way to protect yourself from rising oil prices is to invest in oil, so you make money as prices rise. There are numerous opportunities to invest in. ConocoPhillips (NYSE: COP  ) is a large player in the space, pays a 3.6% dividend, and also plans on spinning off its refining business later this year, which should unlock value for shareholders. I continue to like SandRidge Energy (NYSE: SD  ) , which I've called the next home run energy stock, and ATP Oil and Gas (Nasdaq: ATPG  ) since investors punish the stock for its high debt load and ignore its assets.

If you're looking for more ideas, The Motley Fool has created a new special oil report titled "3 Stocks for $100 Oil," which you can download today, absolutely free. In this report, Fool analysts cover three outstanding oil companies. To get instant access to the names of the three oil stocks, click here -- it's free.    

Dan Dzombak owns shares of ATP Oil & Gas, but he holds no other position in any company mentioned. Click here to see his holdings and a short bio. Motley Fool newsletter services have recommended buying shares of Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (22) | Recommend This Article (53)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 06, 2011, at 10:47 AM, TicoHombre wrote:

    If the U.S. adopts the abundant, cheap and cleaner burning natural gas that is sitting in it's own front yard, that would help to lessen demand, lessen energy costs and lessen pollution all at the same time.

    I am flabbergasted at the snail-pace adoption of NG.

    What am I not seeing here???

  • Report this Comment On December 06, 2011, at 12:50 PM, DJDynamicNC wrote:

    I'd be interested in seeing what the price of a barrel of oil would be when the externalized costs were all accounted for, and whether people would actually be willing to pay it.

  • Report this Comment On December 06, 2011, at 1:55 PM, Melaschasm wrote:

    TicoHombre, I too am a fan of NG.

    However, the large up front cost of converting to natural gas is risky when you consider that the US government is dedicated to electric.

    What happens if the $6k electric car subsidy becomes a $20k subsidy?

  • Report this Comment On December 06, 2011, at 5:19 PM, xetn wrote:

    All good points listed above. Two problems: there should be NO government subsidies for anything because it distorts demand and wastes taxpayer's money. The other issue is that while energy production in the US is down, we have a government that limits drilling in places where there are proven reserves. Is it any wonder why prices keep going up? Think supply (dwindling) and demand (constant or increasing).

    Of course these reasons completely overlook the evaporating US dollar (oil purchases are denominated in them). Thanks to a lack of control on creating money out of thin air, the US dollar continues it steady decline in purchasing power.

  • Report this Comment On December 06, 2011, at 5:33 PM, CaptainWidget wrote:

    The two absolute key points you missed

    1) We buy more oil from CANADA than any other source

    2) We get more oil from NON-OPEC sources than otherwise

    Over half of our oil supply comes from people who are more than willing to sell us as much oil as we'll buy at whatever price the market is dictating at the moment.

    That being said I'm sure oil prices will continue to rise, mostly due to inflation however.

  • Report this Comment On December 06, 2011, at 5:40 PM, JeanDavid wrote:

    I switched to natural gas to heat my house. But soon thereafter, the development of fraquing techniques became more commercialized. So we get cheaper natural gas, but pollute our water systems. Is this really the way we want to go? Furthremore burning gas puts out about the same amount of CO2 as burning liquid fuels. It may put out less soot, and less sulfur. So it may be a little less polluting of the air, but and increase of polution of the water supply.

    If we are really concerned about increased fuel supply costs, why is this kind of thing allowed?

    http://money.cnn.com/2011/12/05/news/economy/gasoline_export...

  • Report this Comment On December 06, 2011, at 5:47 PM, TMFBreakerRob wrote:

    I would be extremely careful (ie, reluctant) to buy ATPG at this time. While at one time, it was a very attractive (and profitable) turnaround situation, the increased debt load, poor oilfield performance (late completions, disappointing well yield) and a management propensity to push the risk limits (starting a new venture in Israel) in both finding oil and paying for the new efforts.... make this a very, very risky play. I got out a long time ago.

    Beyond that, yes... there are many other attractive oil companies for investment, ranging from dividend-paying Big Oil to small E&Ps.

    Personally, I find a number of MLPs to occupy quite a sweet spot with increasing production and solid, tax advantaged yields.

    As always, do your "due diligence".... and YMMV. ;)

  • Report this Comment On December 06, 2011, at 6:00 PM, TicoHombre wrote:

    I can see where it would make sense for the government to subsidize NG infrastructure. That would create jobs and pave the way to less dependance on foreign oil.

    I don't believe that fracking is responsible for all the polluted water. Maybe in a few cases where greed or carelessness existed. However, I've seen the industries clips of how they seal the well. Once properly packed and encased, there's little difference between a fracked well and any other vertical well. The fracking occurs between 1/2 to one mile below ground. WELL below the water tables. No way it penetrates and seeps up to the surface to contaminate the fresh water supplies. I believe that danger to be blown way out of proportion.

    I think we'll simply have to be patient, but the NG build-out will come over the next 3-5 years.

  • Report this Comment On December 06, 2011, at 6:16 PM, Chontichajim wrote:

    Chevron was a gift at $94 when they spilled oil in Brazil, and Norweigan Seadrill is profitable and recently at $31 with a high dividend. Also have BP, TOT, and BPT for dividends, and Solazyme (biofuel) for speculation.

    Oil sands: It may take more energy to separate the oil from the sand and subsequently refine it than the resulting oil will yield in energy which may even force us to look for other fuel sources.

  • Report this Comment On December 06, 2011, at 7:48 PM, Dembob wrote:

    Near as I can tell the cost of oil is largely a result of deregulated commodities trading and not one of supply and demand. Not long ago the CEO of Exxon said the legitimate price of a barrel of oil should be closer to $60. But when Bush I unleashed the commodities traders in 1991 at the behest of Goldman Sachs oil prices began to climb.

  • Report this Comment On December 06, 2011, at 9:05 PM, PeakOilBill wrote:

    The problem we will soon face is that the super giant oil fields are starting to decline in output. Most were developed over 20 years ago, some 50. About 45 of them produce nearly half the oil we use. All these much touted unconventional oil sources are a drop in the bucket, compared to the oil production of these old, giant oil fields. Most are in the Middle East, near the Persian Gulf.

    A couple of years ago, the CEO of the French oil giant Total, said that he doubted that world oil production could ever exceed 90 million barrels a day for very long. That is peak oil. It is an inescapable fact. Horizontal drilling can flatten the graph of the peak for a few years, but not prevent eventually going down the right half of the total oil production curve.

    Today we are at about 85 million barrels a day of production, with Asian demand growing rapidly. Only the timing of peak oil is in dispute. Some petroleum geologists say it will begin to be felt as soon as 2015. Others say as late as 2030. I will be surprised, but pleased, if we don't begin to see it before 2020. As we past the peak and the decline becomes obvious to all, the oil price will begin to go up very fast. Only then, will natural gas take off as a transportation fuel, because gasoline and diesel is still too cheap and convenient. That will probably continue for another 5 to 10 years.

    Now if Venezuela was a Western democracy with the rule of law, like Canada, we could put off an oil shortage for another 20 years. Google Orinoco oil deposit. It is heavy, but it is still oil. And worth trillions. Enough investment could get it out of the ground. But it won't happen with Hugo nationalizing more and more private property.

    So you may want to pick up some Conoco, Chevron, Exxon, Total, Shell, and BP and collect the dividends. They are in both oil and gas, because they plan their investments 20 years into the future.

  • Report this Comment On December 06, 2011, at 9:45 PM, explorationist wrote:

    Two things to remember:

    1) Unconventional plays are laboratories in the efficient exploitation of engineering practices. A lifting cost that was posted 6 months ago will be out of date as new technologies (for example,the move to open hole completions in horizontal unconventionals) become preferred operational practices. The trend for exploitation costs is downward, not static.

    2) Unconventionals have been vigorously exploited in the US, the most mature petroleum province in the world [10x the wells compared to the rest of the world]. The rest of the world is coming to the US to figure it out (for example, Statoil buys Brigham). There is no doubt in my mind that there are massive unconventional opportunitities waiting in every major basin in the world. Wait 5 years and you'll see unconventional adds to oil production across the globe when technology AND risk capital marry up in lightly explored, relatively stable non-OPEC producing countries.

  • Report this Comment On December 06, 2011, at 10:06 PM, RGysbertse wrote:

    Here another view point about the Saudi Aramco's plan for expansion according to CEO Khalid Al-Falih.

    Saudi Manifa Oil Project to Cost $17 Billion, Aramco Says

    December 06, 2011, 10:18 AM EST

    inShare2Business Exchange E-mail Print More From Businessweek

    Saudi Arabia Crude Production Rises to Highest in Three Decades

    Saudi Arabia Crude Output Rose to 31-Year High, Naimi Says

    Iran’s Oil Minister Doubts EU Will Stop Buying Iranian Crude

    Saudis Won’t Immediately Start Pumping Oil From New Fields

    Oman’s Oil Minister Says Middle East Needs Own Energy Market

    By Anthony DiPaola

    (Updates with comments from CEO in third paragraph.)

    Dec. 6 (Bloomberg) -- Saudi Arabia will spend about $17 billion developing the Manifa oil field as the national crude producer shifts focus to developing natural gas deposits and refining and petrochemical plants, the company’s head said.

    State-run Saudi Arabian Oil Co. will spend $90 billion expanding its refining and petrochemical assets, Chief Executive Officer Khalid Al-Falih said in Doha, Qatar today. The company, known as Saudi Aramco aims to be a “top-tier” producer of petrochemicals within the next decade, al-Falih said. The Manifa field is set to begin producing crude in 2013, he said.

    “Saudi Aramco is going to grow in our downstream and our gas production,” al-Falih told reporters at the World Energy Congress taking place in the Qatari capital today. Aramco generally outlines its spending in five-year plans.

    Saudi Arabia holds the world’s largest oil reserves and the fifth-largest gas deposits, according to BP Plc’s Statistical Review of World Energy. The country is seeking to produce more gas to run power plants and save more valuable crude for exports, with local electricity demand growing by about 8 percent, according to government figures. The kingdom used 8.1 billion cubic feet of gas a day last year, BP data show.

    Unconventional gas will help meet domestic demand, said Al- Falih, adding that Aramco is boosting investment in gas exploration and will look for deposits in the Red Sea and for shale oil.

    ‘Massive Exploration’

    “We are undertaking a massive exploration campaign,” he said. The company plans to start drilling for gas in the Red Sea “very soon” next year and may expand exploration to deeper water areas in late 2012, al-Falih said. Aramco made a conventional gas discovery in the northwest of the kingdom that it is still evaluating, he said.

    Aramco is developing the Manifa oil field to raise output of heavy crude, which is thicker and more difficult to refine. The company is planning three refineries to process the blend, which generally fetches lower prices on international markets compared with lighter grades. It is producing “well above” 9 million barrels a day, Falih said.

    Saudi Arabia will invest $125 billion on upstream and downstream oil projects over five years to enhance its production capacity, Oil Minister Ali Al-Naimi said June 2. The company in 2009 completed the previous capital spending program of more than $100 billion, which was then the biggest in its history, the minister said in a speech in November 2010.

    The company sees a “new golden age of petroleum” with adequate supply and technology, while noting that the pace of progress on alternatives to crude, including renewable energy and nuclear projects, is “faltering,” he said.

    Saudi Arabia produced 10 percent more oil in the first half of 2011 compared with a year earlier, according to an Oct. 24 report from Riyadh-based Jadwa Investment Co. Higher crude prices this year contributed to a 26 percent increase in the kingdom’s nominal gross domestic product, it said.

    --With assistance from Nayla Razzouk in Dubai. Editors: Raj Rajendran, Rachel Graham.

    To contact the reporter on this story: Anthony DiPaola in Dubai at adipaola@bloomberg.net

    To contact the editor responsible for this story: Stephen Voss at sev@bloomberg.net

  • Report this Comment On December 07, 2011, at 1:24 AM, inmocean wrote:

    Permanent damage is going on now to the formerly pristine environment in Alberta to monetize their oil sands. It's the largest CO2 emitter on the planet. In order to extract one barrel of oil from the oil sands, as the National Geographic described it: the industry must first cut down the forest, then remove an average of two tons of peat and dirt that lie above the oil sands layer, then two tons of the sand itself. It must heat several barrels of water to strip the bitumen from the sand and upgrade it, and afterward it discharges contaminated water into tailings ponds like the one near Mildred Lake. They now cover around 50 square miles.

  • Report this Comment On December 07, 2011, at 11:59 AM, kickbishopbrenna wrote:

    The US may be limiting extraction licenses to prevent whats happening, for example in Alberta, and in the watercourses aroud fiekds, when nature is destroye, it may be irreversible..there is plenty of oil, only the monoplies want to keep it highly priced. Nat Gas can be use in a much cleaner way..ceramic fuel cells, producing eelectricity..and HOT WATER as a byproduct! See CFU australia or Blue Gen electricity generators for example..Fuel cells and Nat gas could turn any home into a power generator, then we would really be changing the game. They may not produce enough for heavy industry but boy are they attractive to householders..

  • Report this Comment On December 07, 2011, at 12:46 PM, jm7700229 wrote:

    What is being ignored is the effect of price on production. The US has huge reserves that can be tapped at above $150 a barrel. So does the rest of the world. Really high prices could do for oil production what fracking did for natural gas.

    While the cost of Canadian oil sands production is a lot higher than middle east oil, it is still far below the market price, and is thus a practical source. It's also close to us and owned by a rational population.

    I'm personally in favor of a gradual but large increase in the cost of petroleum, from taxation if the market doesn't provide it. I'd like to add 5 or 10 cents per gallon to our gas tax every 6 months or so until we've increased it by at least a dollar. That will encourage the shift to more fuel efficient vehicles, provide the money for our desperately needed infrastructure maintenance and the ability to manipulate the tax amount would give us a cushion against future oil shocks.

  • Report this Comment On December 07, 2011, at 4:25 PM, Hawmps wrote:

    ^

    The idea of adding to the gas tax to encourage more efficient cars and fund maintenance has merit, but only in theory. You would be relying on or trusting Congress to use those funds for only that purpose when in practice you might see a nickel go into road maintenance coffers and ninty-five cents go into various other pet projects.

  • Report this Comment On December 07, 2011, at 5:08 PM, devoish wrote:

    But someone told me not to worry, hard work or free market entrepeneurs would solve things.

    Of course, I didn't trust that because I think the business of American business has become lying.

    But more importantly, the most important story you missed is this one; http://www.nytimes.com/2011/12/05/science/earth/record-jump-...

    And a Libertarian told me it was wrong to use Government policy to prepare for this eventuality.

    And a devout Christian told me Jesus will save him.

    I live on top of a glacial aquifer on Long island.

    My kale looks good, my friends keep chickens.

    I do everything I can to get my Government to subsidise renewable energy rather than allow a move from a dependency on oil to a dependency on nat gas while destroying farmland, water and air.

    Despite my Libertarian friend, Government helped me switch to geothermal heat and ac.

    Despite my Libertarian friend, government helped some of my friends buy electric cars and solar panels.

    Despite my Libertarian friend, Government has spent my tax dollars on wind energy.

    Sadly, instead of taxing fossil fuels and spending even more on renewable energy, that help took the form of a tax deduction, and only helped people rich enough to take it.

    Lucky for me I'm not recently graduated with debt.

    Sadly instead of taxing fossil fuels and spending on renewable energy, my Government helped the financial industry to insert itself between the producers and consumers and take what could have been that tax money for themselves.

    The financial industry added the value of "price discovery".

    Through banking consolidation and computerised financial records the financial industry was able to "discover" Americans were saving money, and how much they could raise commodity and oil "prices" until we couldn't.

    Too bad we're not getting an investment in clean renewable energy in exchange.

    Best wishes,

    Steven

  • Report this Comment On December 08, 2011, at 9:04 PM, Sunny7039 wrote:

    Of course, "high" prices are always relative. I can think of a scenario where oil prices, along with the prices of all commodities, would drop -- a deflationary spiral, which would signal the start of a great depression. In that event, I agree that oil would still be costly relative to other commodities. Or, if it also collapsed, that it would recover sooner and more strongly, as compared with other commodities. A lot of people live in high latitudes, and a lot of people drive cars. A lot of food has to be produced and harvested and transported to feed all of those people.

    So, I guess you could say that no matter what happens, "high" oil prices are here to stay. Inflation or deflation, recovery or a second, more serious crash -- this stuff is going to cost a lot of money, relatively speaking, unless and until a new technology supplants the current technology. I think that will happen eventually, but maybe not soon enough to avoid serious dislocations in our lifetime.

    This hand will have to be played out before a new hand is dealt.

    This is also why it's a shame so many people have been studying "financial engineering," instead of chemical or electrical or mechanical engineering.

    Oh well.

  • Report this Comment On December 12, 2011, at 7:59 AM, saunafool wrote:

    Oil prices are likely to remain high for the next several years. However I agree with several other posters that we do not know the long-term result for several reasons:

    1. High prices will bring new sources of oil to market

    2. High prices will reduced demand--we've already seen this in the U.S.

    3. The developed world will have flat or declining demand over the next 20-30 years for demographic reasons (minimal population growth) combined with increased efficiency.

    4. The cost of producing what are now considered "non-conventional" resources will go down. The non-conventional will become the conventional.

    sf

  • Report this Comment On December 15, 2011, at 2:57 AM, MichaelDSimms wrote:

    Oil prices in dramatic slide

    Published: 10:10AM Thursday December 15, 2011 Source: Reuters

    It's all relative.

  • Report this Comment On January 07, 2012, at 11:07 AM, gimponthego wrote:

    There isn't a day goes by that some US attorney from Austin, Boston, wherever isn't flying to Kiev to oversee an energy contract and then fly home within 24 hours. Think tanks are concentrating on one thing: U.S./Ukraine energy contracts with such notables as Ambassador Morningstar (there really is a human behind the name!) actively involved.

    http://www.state.gov/r/pa/prs/ps/2009/oct/131024.htm

    Energy is everything. Johnny / San Antonio

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