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Rising Oil Prices Aren't All Bad

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Oil has hit a nine-month high and gasoline is screaming past $4 per gallon in some parts of the country. That news has some people worried that high gas prices will curb consumer spending and put a halt on our fledgling economic recovery.

It's true that high gas prices force consumers to cut back on spending that could help the economy. But high oil and gas prices aren't all bad for the economy. Since oil hit $140 per barrel in 2008, the oil dynamic in the U.S. has changed by leaps and bounds. We send much less of our oil money overseas and another spike in oil prices may lead to even more drilling and increased economic activity in some parts of the country.

More domestic production
High oil prices help make domestic production more economical and should further our production boom. Hydraulic fracturing costs have fallen to around $55 per barrel in some places, and oil priced at more than $100 per barrel makes it more economical to drill using fracking. Ultra-deepwater rigs alone can cost rig owners such as Seadrill (NYSE: SDRL  ) more than $500,000 a day, so explorers need high prices to absorb the risk associated with this expensive drilling. And as production increases, pipelines need to be built, so Enbridge Energy (NYSE: EEP  ) and its subsidiaries are expanding with more drilling in North Dakota. All of this economic activity is made possible by the high price of oil.

If course, it's a double-edged sword for Americans. On one side, drillers such as Kodiak Oil & Gas (NYSE: KOG  ) and Statoil (NYSE: STO  ) , which are profiting from expanded shale production, will expand drilling, hire more workers, and generate more profits as the price of oil rises. If you're one of those workers, or investors, you're happy the price of oil is going up.

On the flip side, consumers don't have extra money to throw at the gas pump each month with the economy recovering slowly.

In the end, there are positives and negatives to high oil prices depending on where you're sitting. Just don't think it's all bad.

A new focus on alternatives
Whether you're a fan of natural gas, biofuels, wind, solar, or any other alternative energy source, you should be happy about the rising price of oil. When oil is cheap, alternatives are the last thing consumers and politicians have on their minds. When oil goes up, suddenly the urgency to find alternatives increases.

Whether it's Clean Energy Fuels' (Nasdaq: CLNE  ) natural gas highway, First Solar's solar farms in California, or the offshore wind developments that will connect to a Google-backed transmission system, the alternative energy industry likes high oil prices.

These alternative energy sources are still relatively young in their development, and rising oil prices will help them get more funding and be more competitive with oil-based alternatives.

Our dwindling reliance on foreign oil
As I pointed out above, there are a number of companies that will expand drilling on and offshore if oil prices remain high. That is making our reliance on foreign oil smaller and smaller by the day. Recent Energy Information Administration numbers show that in 2011 net oil imports fell nearly 1 million barrels per day to their lowest level since 1996. This was due mostly to expanded U.S. production, driven by growth in the Bakken shale play.

The U.S. now imports just 45% of the oil used here, down from 60% in 2005. Import levels haven't been that low since 1995.

What this means is that more and more of the money being spent on gas at the pump is actually swimming through the U.S. economy. Oil accounts for about 72% of the price of a gallon of gas, so considering our import levels, the overwhelming majority of each dollar spent at the pump ends up somewhere in the U.S. economy, a number that will keep growing as domestic oil production grows.

Some consolation at the pump
This may not be a consolation for everyone struggling with higher gas prices, but there are significant portions of the economy that improve when the price of oil rises. There are also plenty of investing opportunities, and our team of analysts has found three stocks that will benefit from high oil prices. Find out what they are in our free report here.

Fool contributor Travis Hoium owns shares of First Solar and manages an account that owns shares of Seadrill. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

The Motley Fool owns shares of First Solar and Google. Motley Fool newsletter services have recommended buying shares of Statoil A, Seadrill, Google, and First Solar. 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 (8) | Recommend This Article (5)

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 February 28, 2012, at 5:39 PM, xetn wrote:

    High prices for oil are more a reflection of government policies than the true market price. This is so, because of things like our "Jobs President" stopping the construction of a much needed new pipeline that would supply oil to the Gulf Coast oil refineries. As it is, there is a huge bottle neck of oil waiting for refineries in the Cushing Ok. area, which lacks capacity. Plus Canada does not have refinery capacity either. It is also putting a stop to the Bakkan region in the Dakotas.

    If you want lower prices, you need to increase supplies and production of the raw material (crude). If you want higher prices, you just restrict supplies. That is what government is good at with all of their restrictions.

  • Report this Comment On February 28, 2012, at 5:43 PM, ejclason2 wrote:

    Because high oil prices spur energy exploration, development, and conservation, it may be that the best way to prevent high oil prices in the future is to have high oil prices now.

  • Report this Comment On February 28, 2012, at 5:57 PM, DJDynamicNC wrote:

    "This was due mostly to expanded U.S. production, driven by growth in the Bakken shale play."

    I was going to make a joke about how this all doesn't count as actual domestic production because OBAMA RAWR OBAMA, but I guess you have to be fast on the trigger to beat them at their own jokes.

    I hope we invent cold fusion under a Democratic President so we can see how endless free energy suddenly becomes a liberal plot to destroy free enterprise and must be stopped.

  • Report this Comment On February 28, 2012, at 5:57 PM, DJDynamicNC wrote:

    "endless free energy suddenly becomes a liberal plot to destroy free enterprise"

    Oh crap, pretend I didn't say that. I didn't mean to let our secret plot slip out like that.

  • Report this Comment On February 28, 2012, at 9:55 PM, CaptainWidget wrote:

    This article highlighted a key economic fallacy, that somehow US dollars leaving the country is a bad thing. Those dollars eventually make their way back into the US economy. The Forex industry moves $14 TRILLION dollars of currency daily back and forth between countries. With that kind of massive velocity of cash, it's hard to imagine dollar bills not making it back to the US quickly.

    And what if they don't come back here? You mean we traded our infinitely valuable pieces of green paper for stupid, useless barrels of crude oil. What an awful trade (end sarcasm).

    If people are willing to trade us real goods to consume in exchange for greenbacks which they consume (consume as in hoard/destroy, not transfer) then who's come out ahead. It costs us fractions of a penny to make a $1000 dollar billion. If they really want to trade us barrels of oil for greenbacks...well there's nothing in the world that we can make cheaper than paper money. I can think of a lot worse things that other countries giving us real goods and services in exchange for worthless paper, which they then burn, and make my worthless paper in my bank account more valuable.

  • Report this Comment On February 28, 2012, at 9:56 PM, CaptainWidget wrote:

    Meant to type

    *...$1000 dollar bill...*

    that makes more sense

  • Report this Comment On February 28, 2012, at 11:58 PM, rfaramir wrote:

    "endless free energy" wouldn't be free or endless, but a huge supply of cheap energy would be a boon to the whole world.

    It would cause massive changes to the structure of production, but the free market is expert at doing that with a minimum of pain. The end result would be a better life for all of us and our children.

    Now if government tried to stop or slow it down, then we'd have a problem indeed. Nothing to do with 'liberality', only the with the control that statists are hooked on. More energy for the masses would tend to free them from control. The State hates that.

  • Report this Comment On March 23, 2012, at 12:41 AM, thidmark wrote:

    "I hope we invent cold fusion under a Democratic President so we can see how endless free energy suddenly becomes a liberal plot to destroy free enterprise and must be stopped."

    Keep your chin up ... after all, a future Democratic vice president invented the Internet.

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