Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

Positive Effects of Higher Oil Prices

By Matthew DiLallo - May 5, 2013 at 8:03AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

While lower oil prices help to lessen your pain at the pump, what they really do is shift that pain to the oil producers. Next time oil prices head higher, consider how high oil prices positively affect producers.

Oil prices have moved around quite a bit of late, and the price of U.S. benchmark crude oil has even dipped below $90 a barrel. Lower oil prices are great for consumers, and they're one reason we might actually be able to afford gas this summer. However, not everyone likes to see the price of oil move lower, and it's pretty obvious that oil producers prefer higher prices. Next time oil prices spike higher, think about the following positive effects of higher oil prices.

1. New discoveries are possible because funding allows for increased exploration in previously uneconomic geographies.

If the price of oil had stayed really low, producers would have never been able to justify the investment required to tap our vast Bakken oil reserves. Further, places such as the oil sands of Canada or deepwater reserves in the Gulf of Mexico would never have been explored. One of the biggest benefits of high oil prices is that it becomes profitable to extract oil from more sources. 

It costs upwards of $10 million for a small oil and gas producer to drill one Bakken well -- something that Kodiak Oil and Gas (NYSE: KOG) knows well. One of the major risks Kodiak faces is that oil prices slip below $70 a barrel, which is the an estimated level where wells become uneconomical. Meanwhile companies operating in the Canadian oil sands need oil prices to be in the $45-$70 range to break even. If oil had remained below those levels, ExxonMobil ( XOM -0.64% ) would never have sanctioned its Kearl oil sands project, which, after cost overuns, will end up costing the company $12.9 billion to complete.

Finally, last year was the best ever for deepwater discoveries, as producers smashed the previous record by 40%. However, those discoveries never would have happened if crude oil prices hadn't been hovering around $100 a barrel the past three years. Higher oil prices are encouraging companies to invest in exploration of the deepwater in the Gulf of Mexico, a move that's just starting to pay off. ConocoPhillips ( COP -0.21% ), for one, has already announced two major discoveries in the Gulf this year, discoveries that might not have happened if the price of oil was lower.

2. Production from high-priced reservoirs becomes more viable; thus, production can be enhanced.

Not only do high oil prices affect producers' decisions to pursue exploration projects, but they also encourage companies to squeeze more oil out of current resource basins. Denbury Resources ( DNR ) is just one example of a company using "enhanced oil recovery" procedures to revive aging oil fields. Because of the initial capital investments required to source carbon dioxide and build pipelines, these projects wouldn't be as economical and therefore unlikely to be a viable option if oil prices were lower.

3. Exporting nations have more money to invest into other businesses, while importing nations face the risk of higher debts, slowdowns, and recessions.

For years, higher oil prices were the bane of our economy. They meant that more of our money was going overseas while our economy remained at risk to price shocks. However, as we produce more oil, we can begin to turn that tide. The only problem is that oil prices need to remain sustainably high to justify the investments required to bring more production online.

As a nation, we could get to the point where we choose to reinvest some of our oil profits into renewable energy, so as to wean ourselves off our dependence on oil. If we could ever produce more than we need, it would open up the possibility for lucrative oil exports. I know it's a stretch to think about, but it would be nice it see our nation get to the point where we didn't need oil and instead could sell it to those that do.

Foolish bottom line
Right now, oil priced in a range from $90 to $100 a barrel is proving to be fairly a happy medium, as consumers are now used to paying more than $3 for a gallon of gas and producers can make a pretty penny producing oil from most sources. Oil is also at a high enough price point to make investing in renewable energy more economically viable. And perhaps most importantly if you're an investor in the energy sector, high oil prices can have a very positive effect on your portfolio, as higher prices offer multiple opportunities to profit.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Exxon Mobil Corporation Stock Quote
Exxon Mobil Corporation
XOM
$60.89 (-0.64%) $0.39
ConocoPhillips Stock Quote
ConocoPhillips
COP
$71.11 (-0.21%) $0.15
Denbury Resources Inc. Stock Quote
Denbury Resources Inc.
DNR

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
624%
 
S&P 500 Returns
140%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/05/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Our Most Popular Articles

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.