One month ago, the International Energy Agency stated in its World Energy Outlook that "If, between 2011 and 2015, investment in the [Middle East and North Africa] region runs one-third lower than the $100 billion per year required, consumers could face a near-term rise in the oil price to $150/barrel." Two weeks ago, while America focused on the failure of the supercommittee, you likely missed a hugely important but little reported event. The CEO of Saudi Arabia's state oil company announced it was stopping a $100 billion expansion program of its oil production capacity in an effort to keep supply tight. While Saudi Arabia is not the only oil producer in the region, it is the biggest. Read along and I'll explain why the Saudis need high oil prices, why new unconventional sources aren't going to save you from high prices, and what you can do to protect yourself.

The Saudi expansion
Saudi Aramco's expansion was expected to increase the company's production capacity from 12 million barrels a day to 15 million barrels a day by 2020. However, with new unconventional oil supplies coming online relatively soon, Saudi Aramco does not want to risk a supply glut that would push down prices.

Saudi Arabia and other OPEC countries rely on high oil prices to fund their governments, and this has gotten more expensive recently as the Arab spring led many to increase their public spending. The Carnegie Investment Bank recently showed the oil prices (Brent) Saudi Arabia and other oil-rich countries need to balance their budgets:  

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Source: IMF, FT, Carnegie Investment Bank.

While Saudi Arabia only needs an estimated $80 a barrel to balance its budget, other large oil-producing countries need much higher prices. This is a massive incentive for these countries to work to keep world oil prices high.

At a current price of $110 a barrel for Brent crude, OPEC is sitting pretty. As OPEC Secretary General Abdalla Salem el-Badri said last week, according to The Wall Street Journal, "The market is currently balanced. Prices are comfortable" for both producers and consumers. So with OPEC happy about current prices and not likely to increase supply, where will new supply come from?

Unconventional oil
Unconventional oil supplies such as the U.S. oil shale and the Canadian tar sands will play a role in growing worldwide oil production. However, unconventional supplies will only make a small dent. OPEC expects production from non-conventional oil supplies to rise from 2.3 million to 3.4 million barrels per day by 2015. Also, as fellow Fool Alex Planes showed in October, these sources cost nearly 10 times more to produce than does oil from Saudi Arabia's massive fields. Canadian oil sands such as Suncor's (NYS: SU) or Penn West Petroleum's (NYS: PWE) cost roughly $35-$40 per barrel, while oil shale oil from companies such as Chesapeake Energy (NYS: CHK) costs around $45 per barrel. We are thus adding high-cost sources of oil compared with Saudi Arabia's cheap oil. So what will take up the rest of the slack?

OPEC expects the biggest production gains to come from Brazil's deepwater fields and Iraq. Brazil's deepwater drilling sites are even more expensive than shale, costing an estimated $50 per barrel to produce, thus still locking us into more high-priced oil.

While Iraq has cheap, plentiful oil, it also needs high prices to support its domestic programs. Also, as I and fellow Fool David Lee Smith have written about before, Iraq's future security situation is worrisome and will become more perilous as the U.S. pulls out in 2012. With all that said, what can you do?

Take action
A good way to protect yourself from rising oil prices is to invest in oil, so you make money as prices rise. There are numerous opportunities to invest in. ConocoPhillips (NYS: COP) is a large player in the space, pays a 3.6% dividend, and also plans on spinning off its refining business later this year, which should unlock value for shareholders. I continue to like SandRidge Energy (NYS: SD) , which I've called the next home run energy stock, and ATP Oil and Gas (NAS: ATPG) since investors punish the stock for its high debt load and ignore its assets.

If you're looking for more ideas, The Motley Fool has created a new special oil report titled "3 Stocks for $100 Oil," which you can download today, absolutely free. In this report, Fool analysts cover three outstanding oil companies. To get instant access to the names of the three oil stocks, click here -- it's free.    

At the time this article was published Dan Dzombak owns shares of ATP Oil & Gas, but he holds no other position in any company mentioned. Click here to see his holdings and a short bio. Motley Fool newsletter services have recommended buying shares of Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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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