High Oil Prices Spur Oil Companies to Explore and Produce

Oil is like any other commodity: if price go up, people will produce more of it to sell. Despite the bleatings of peak oil sheep, oil companies are responding to recently elevated oil prices. Many are in fact scrambling to find and produce more oil.

From giants Saudi Aramco and Exxon Mobil Corp. to five-person wildcat outfits, the industry plans to spend nearly a half-trillion dollars next year to find and extract oil and natural gas, according to a new survey by investment bank Barclays Capital.

For the first time in several years, large Western oil companies are leading the industry's charge, increasing their budgets faster than the state-run national oil companies that have dominated spending in recent years.

"This is being driven by the appetite to find more oil, comfort that today's oil prices will be sustained and companies getting out of a hunker-down, recession mode," said James West, an energy analyst with Barclays, who co-authored the survey, which has been produced every year since 1982. _Rigzone

The key question oil executives as themselves is, "Will the high prices of oil stay high?" During the speculative runup in oil prices from 2007-2008, it was clear to most wise analysts that the high prices could not last. And indeed oil prices crashed to relatively low levels in 2009.

Oil has always been a boom and bust industry, with multiple price elevations followed inevitably by price crashes, and so on. That is one reason for the formation of OPEC -- the perceived need to maintain a stable price level for oil.

More on the investing side from Phil McPherson:

With the economy recovering, and as more people feel that the double-dip recession is not going to happen, oil prices are tending to stay stronger. However, it seems to me the tail is wagging the dog right now, with the U.S. dollar going down and the price of bonds being up, and the yield being extremely low. To me, it has more to do with the price of oil than necessarily the pure supply and demand fundamentals, because we still have excess supply of oil via OPEC. If you're bullish on oil or bullish on the economy, then you use those dips as opportunities to gain more exposure.

...But as with any business, when the demand is there and the visibility is there, entrepreneurs rise up to the challenge because they know they can make money. I think you're going to be surprised that in 2011 the likes of Halliburton Co. (NYSE:HAL) and Schlumberger Ltd. (NYSE:SLB), as well as lot of other smaller companies, are going to have more crews out working. There's going to be enough demand there. It's all a function of oil prices, and as long as they are in this relative range, people are going to continue to drill these wells. I don't think margin makes as much of an impact as the NAV that you can grow with these companies via drilling these wells and growing reserves. _IBTimes

The world is floating in hydrocarbons. North American shale gas has barely gotten started, and the technology for repeating that miracle is in high demand worldwide -- from Israel to China to South America.

As long as current oil prices remain above $70 (2010 dollars), exploration and production will continue to accelerate for both oil and wet gas. Higher prices -- above US $80, will spur even greater investment and faster development.

The next time someone tells you there is no flexibility in oil production, and that demand for hydrocarbons absolutely must continue to rise exponentially, you would be wise to bid the person a good day, and seek other companionship.