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Positive Effects of Higher Oil Prices

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

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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 1.72%) 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 1.86%), 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.

Fool contributor Matt DiLallo owns shares of ConocoPhillips. The Motley Fool owns shares of Denbury Resources. We Fools don't 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.

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