Rising oil prices aren’t all bad


Oil has hit a nine-month high and unleaded is approaching (or already over) $1.50 per litre in some parts of the country. That news has some people worried that high petrol prices will curb consumer spending and put a halt on our fledgling economic recovery.

It’s true that high petrol prices force consumers to cut back on spending that could help the economy. But high oil and petrol prices aren’t all bad for the economy. Another spike in oil prices may lead to even more drilling and increased economic activity in some parts of the country.

More production

High oil prices help make domestic production more economical and should further our production boom. Hydraulic fracturing costs have fallen significantly (not withstanding considerable community disquiet) 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 more than $500,000 a day, so explorers need high prices to absorb the risk associated with this expensive drilling. All of this economic activity is made possible by the high price of oil.

If course, it’s a double-edged sword. On one side, drillers which are profiting from expanded 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 petrol 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 natural gas exploration or solar and wind farms, 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.

Some consolation at the pump

This may not be a consolation for everyone struggling with higher petrol prices, but there are significant portions of the economy that improve when the price of oil rises. There are also plenty of investing opportunities.

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The Motley Fool’s purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Click here to be enlightened by The Motley Fool’s disclosure policy.

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