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Matthew DiLallo: Hold your
lower oil prices celebrations


Read This Before You Celebrate Lower Oil Prices

Oil prices have plummeted to the lowest point in nearly four years. This has taken gas prices down to a more than three and a half year low. That is saving American drivers $230 million per day at the pump alone, making them a big winner as prices plummet .

That's not the only reason to cheer. The drop in oil prices could end up costing OPEC more than $200 billion in profits over the next year. It's also pushing Russia toward a recession and cutting into the money ISIS is getting for oil on the black market.

That being said, we shouldn't cheer too loudly for oil prices to keep plunging. If oil prices keep falling or stay lower for an extended period of time it could actually have a detrimental impact on our future here in America. Here is why higher oil prices aren't as bad as we might think.

High oil prices fuel investments in alternatives

One of the driving forces fueling the development of alternative energy has been high oil prices. High oil prices act as an incentive to fuel investments into the research and development of renewable energy as well as energy efficiency. On the other side, lower oil prices impact the breakeven costs of many forms of alternative energy.

Electric vehicles and hybrids, for example, need higher gas prices in order to offset the higher prices for these technologies as the payback period convinces buyers that the switch will pay off in the long run. At $3.50 per gallon of gas it took the average hybrid 125,000 miles to hit the break even point according to an analysis by MojoMotors. However, with gas prices now closer to $3 per gallon it pushes the payback period of a hybrid car out so that it could put the brakes on sales of new hybrid vehicles in the future.

Another example where lower oil prices will hurt renewables is found across the pond in the UK. In 2011, The Guardian published an article noting that the breakeven price for a low-carbon economy required oil over $100 a barrel in 2020. That was the price point noted in the article that the UK's ambitious low-carbon energy plans needed in order to save consumers money by the end of the decade. However, if oil prices were down to $80 by the end of the decade, consumers in that country would be paying an extra 1% on their utility bills for cleaner energy.

 

Shale boom requires high oil prices to fuel growth

From 2007 to 2012 the U.S. economy created just over a million jobs. However, 162,000 of those jobs were created by the oil and gas industry according to the U.S. Bureau of Labor Statistics. Overall, the energy industry saw its employment skyrocket 40%. Because of this the energy industry has really helped fuel job growth in America.

Over the next decade the industry is expected to add another five million new jobs, both directly and indirectly, according to research group IHS. However, those jobs are dependent on oil prices staying higher than the cost of production, which in most cases is $80 oil. In fact, the higher the price of oil goes the more oil and gas companies will drill, which will create more jobs.

Under the high resource case scenario, U.S. oil prices would need to remain robust to provide oil companies with the cash flow needed to fund new development, especially for exploration drilling. For example, in the Permian Basin of Texas, Pioneer Natural Resources ( NYSE: PXD )  has projections that show that oil production could grow by 2.2 million barrels of oil equivalent per day in 10 years if oil prices steadily declined from $100 this year to $87 by 2019. However, if oil prices stayed flat at $95 per barrel oil production would increase by another million barrels per day over that same time frame. Needless to say with oil prices currently less than $85 per barrel these forecasts are already in doubt.

This is why Scott Sheffield, CEO of Pioneer Natural Resources, recently said that at $80 oil producers would begin to cut back production a little bit. However, he warned that there would be a "significant cutback" in oil drilling in America if oil prices hit $70 per barrel and that we'd start to lose energy jobs if oil prices fell to $60 per barrel. 

High oil prices are no longer the enemy

It wasn't that long ago that oil prices over $100 per barrel were seen as the enemy. That's no longer the case as higher oil prices have been used to fuel an unimaginable oil boom here in America. It's creating jobs and wealth that we never expected. Meanwhile, higher oil prices are a necessity to continue to fuel investments into renewable energy. So, while our wallets might prefer to pay less at the pump, just remember that if the U.S. oil boom ends it could make our country far more dependent on foreign oil in the future as we'll have underinvested in our energy sources, including renewables, putting us at greater risk for a future oil shock. 

 

Matthew DiLallo is a contributor for Fool.com and Fool.ca. of The Motley Fool. Petroleumworld reprint this article in the interest of our readers.

Editor's Note: This commentary was originally published by The Motley Fool on October 26, 2014. Petroleumworld reprint this article in the interest of our readers.

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Petroleumworld News 11/02/2014

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