Oil Prices Above $100 Are Good for America

High oil prices make the Mississippian profitable to develop for SandRidge Energy. Photo credit: SandRidge Energy.

Our nation once feared the day oil prices would hit $100 per barrel. Today, however, we've come to find that price to be more than acceptable. In fact, according to Peter Voser, the CEO of Royal Dutch Shell (NYSE: RDS-A  ) , an oil price of $100 is a pretty good value. I'd even go so far as to say it's a good price for America because it's one that is critical to funding our current oil boom.  

Complex production is expensive
In suggesting that $100 oil is a good value for oil to be these days, Voser pointed to one very important fact. He said that, "If you look long term, the oil price in our opinion will rise because it will be technically speaking more complex to develop resources." This resource complexity has been borne out in some of the more recent moves by Royal Dutch Shell as it hasn't been able to make as much money developing America's shale resources as it would like.

For example, the company has announced its intention to exit both the Eagle Ford Shale and the Mississippian Lime. In both cases, the energy giant couldn't earn a sufficient enough return. On the other hand, smaller producers like EOG Resources (NYSE: EOG  ) and SandRidge Energy (NYSE: SD  ) are making a mint from those plays. It's the agility of being a smaller player that has enabled both EOG Resources and SandRidge Energy to make money while Royal Dutch Shell cannot. Still, it is worth noting that a lot of America's newfound oil riches couldn't happen if oil prices were much lower. The following slide shows just how high oil prices need to be just for these resource plays to break even.

Source: Denbury Resources. 

Note that these are just breakeven prices. If a company like Royal Dutch Shell wants to make good money, the price of oil must be higher. As it turns out, the only reason smaller companies like EOG Resources or SandRidge Energy are even able to make money is because these companies are laser-focused on keeping the cost of developing these complex resources as low as possible.

This has helped EOG Resources to literally print money from the Eagle Ford. It has focused on cutting its costs, while at the same time figuring out how to get more out of each new well it drills. The company has also found ways to cut out the middle man with a great example being the fact that it has its own self-sourced supply of frack sand. That being said, a huge drop in oil prices would certainly turn off that printing press and the drilling rigs, which would force America to get more of its oil elsewhere.

Similarly, SandRidge Energy has found the key that has unlocked the oil of the Mississippian by focusing on the best way to dispose of the water that's saturating the oil-bearing rocks. This has kept its costs down so that it can profit by developing the complex play. That being said, oil prices need to stay high in order for SandRidge to make money from the play. As the chart above pointed out, the Mississippian is one of the highest-cost plays in the country. However, high oil prices are delivering the solid economics required for unlocking the oil from this play. This is oil that's now able to supply a local refinery and push out foreign oil. This wouldn't be possible if oil prices were lower.

EOG Resources and SandRidge Energy have the agility to move quicker than a behemoth like Royal Dutch Shell. That has helped both to develop a competitive advantage that works with today's oil prices. However, as good as both companies are at keeping costs down, oil's price can only go so low before either company would be forced to cease drilling. That's why I tend to agree with Shell's CEO: $100 oil is a pretty fair price, especially if America wants to produce more of its own oil instead of importing it from overseas.

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  • Report this Comment On October 17, 2013, at 4:11 PM, Schneidku40 wrote:

    I respectfully disagree. Rising oil prices are terrible for the US economy. As you can see in this chart, every time the oil price has gone up in the last 40 years, the unemployment rate soon follows. http://www.nationalreview.com/articles/288115/how-reduce-oil... (I have no link to the article or author, I just found that chart while google searching).

    I can understand your argument that rising oil prices are good for producers. However, they are bad for the other 99% of america that are the consumers, and bad for any company that has vehicles that need petroleum for fuel (thus an increased cost to them). It's not any different than the wheat price for farmers vs. the cost of bread.

    The good thing about technology is that over time it gets cheaper for the same performance. Drilling in these tight shales is still in its relative infancy, so cost per well should go down over time. Hopefully that will give these companies increased margins, which should lower the price of oil.

  • Report this Comment On October 17, 2013, at 8:16 PM, TMFmd19 wrote:

    You have a point about rising oil prices in isolation, however, there is more to the story here. Most importantly is this time the money is staying in our economy. Its also cutting our trade deficit: http://www.fool.com/investing/general/2013/09/03/how-america...

    Plus, its fueling economic booms in places like Texas and North Dakota.

    So, this time, high oil prices are more of a positive then before.

    Matt

  • Report this Comment On October 18, 2013, at 10:29 AM, ejclason2 wrote:

    The higher oil prices are now, the more will be invested in oil production, the lower oil prices will be in the future.

    In other words the paradox is:

    Higher oil prices now mean lower oil prices in the future.

    And lower oil prices now mean higher oil prices in the future.

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