Baltimore, MD--Oil prices today reached as high as $81.90 before settling back down, but the time to mourn the death of cheap oil has already passed. The real question is, "Where do we go from here?"

If you haven't noticed yet, oil is really on the move. But what's the problem? Shouldn't we be running around like crazy?

Don't hold your breath just yet.

The Oil Crunch

For starters, oil is still very cheap.

I know we're at record prices now, but I've said this before: "If you think $80 a barrel is expensive, wait until it breaks $100 or more."

The truth is that we can't predict how expensive oil will get once the peak global production sets in. But we can say one thing for certain: It's going higher.

I couldn't stop laughing recently after reading one oil exec predicting that prices would hit $150 a barrel within 20 years. Well, at least he narrowed it down to two decades. It made me want to send him my own ridiculous prediction that it would rain at least one day over the next three years.

Seriously, though, what's going on here?

Every meteorologist I've spoken to over the last year has been adamant that this hurricane season would be catastrophic. Even FEMA released a statement saying the 2007 hurricane season could be "nearly as destructive as 2005."

Okay, we should have known this season would be weak if FEMA said that, but then again, we still have more than two months left in the 2007 season.

At least we haven't bombed Iran yet. I can only imagine the price jump from that. Oil would go past $150 a barrel in a heartbeat.

So shouldn't oil prices should be decreasing because of the shortage of monster hurricanes and bombs over the last few weeks?

Here's what's happening . . .

The oil market is still tight. Over the last three months, US crude oil supplies dropped 10 out of 11 weeks.

Don't think it's all rainbows and sunshine from here on out, though.

This week, the EIA is expected to announce that stocks of crude will fall by about 1.75 million barrels. Last week, they dropped by 2.25 million barrels.

Now take into account that our demand (not just in the US, but the world as well) is going to keep growing. Global demand is expected to reach well over 88 million barrels of oil per day. My Energy and Capital readers know exactly how I feel about conventional oil.

But where does this leave us? Sitting on the sidelines, watching the oil prices go haywire, is hardly my idea of fun.

Our Oil-Stained Future

Let me show you where our future oil demand will be satisfied.

Numbers don't lie, unless, of course, we're referring to the dubious oil reserves that OPEC claims they have. Does anyone else remember this chart from my article last May?

When these OPEC members dramatically increase (and in some cases double) their reserves in just seven years, I can't help being skeptical.

But I don't want to focus on reserves. The truth is that we'll never know how much the OPEC oil fields are struggling until they release the data.

However, I know EXACTLY where the US will get its oil.

We know that US oil production is spiraling down the drain. That's no secret. As the world's largest oil consumer, we'll have to look elsewhere. And don't let people fool you, our savior will NOT be Middle Eastern oil.

According to the EIA, our petroleum imports have been rising steadily. From 2001 to 2006, they rose from 11.8 million barrels per day to 13.6 million barrels a day. That means our imports grew roughly 14.6% in that time.

If I asked you where we got most of our oil, I'd bet a number of you would immediately think of the Middle East. I mean, even Greenspan recently said our presence in Iraq is motivated by oil.

But you might be surprised to learn that our addiction to Middle Eastern oil is decreasing.

Consider the following from the EIA . . .

Between 2001 and 2006, our imports from OPEC countries dropped approximately 6%. Since the 1960s, OPEC's total share in our petroleum imports has dropped by about 30%.

In fact, three of the top five exporters increased their petroleum exports to us between 2001 and 2006--Mexico, Nigeria and Canada.

I won't get into the geopolitical mess that is Nigeria. And if we take into account the serious troubles at Cantarell, there seems to be no chance for Mexico to keep up production.

Canada, however, is a different story. During the last five years, petroleum imports from Canada have increased 25%. With the kind of growth the oil sands are experiencing (especially in light of $81.51 for a barrel of oil), there's no doubt in my mind where we'll meet our future demand.

More importantly, oil companies are realizing this too. There'll be trillions of investment dollars pouring into these unconventional sources. The problem for us, however, is finding the companies that are going to benefit from this surge of investment. On Thursday, I'm going to show you some of the things to look for, and (more importantly) some of the pitfalls to be wary of.

Until next time,

Keith Kohl

"Energy stocks... The only way a human is going to make any money."

-- Matt Simmons, Peak Oil's first and most vocal proponent,
and founder of the country's last pure play energy investment banking firm.

Follow the money trail. Sign up for Energy and Capital now.

Enter Your E-mail Address Below:

By signing up, you'll also get our latest report, The Truth About Oil.

While Yr. macro analysis regarding both demand projection and mid-east supply decline is both accurate and useful, the notion that NAFTA will continue unabridged under a Democratic Administration is problematic.
Notwithstanding our current mini- neo's Minority you may find soon that Canuks prefer Kyoto to Hummers.
Now that the U.S, who never tire of misquoting Lombardi, have made unilateral exceptionalism the "....only thing," watch for others to assert a more robust soverignty, particularly over energy and water.

I just read Keith's essay and I agree to a certain degree with what he says. However, this counters to a recent article in Barrons (last week) and analyst was quite bearish regarding oil prices. In addition, there is a real technical challenge in removing oil fromt this tar sands. For one, it takes a great deal of energy and water to pump the oil out of these sands. As a consequence, the water becomes so polluted and turns this into a real environmental disaster. I think Keith does a real disservice in not noting the "other side" to this issue and is creating inappropriate expectations.

excellent 5 *

is not a former oil executive. He is the former chief executive officer of Royal Dutch Shell, who lost his position by overstating reserves to his shareholders. He is currently employed by a bio-diesel producer listed on Aim.

Secondly, Tillerson, van der Veer and Desmarest just had lunch to complain about national oil companies. You should know who they are, but Google them anyway.

Good article and facts

Good Morning Keith;
Enjoy the comments on these articles. We are very dependant on our oil sources. Of course are the produces really making money.They do have productions costs. Wages, equipment etc., and it goes on and on....However who are really rubbing their hands together. You have it.THE GOVERNMENTS. don Herd

Your telling us all about the Canadian oil sands are going to save the us oil needs. But on the other hand the Cancdians are saying they are going to be short on water to porduce the oil and that the water they use can't be cleaned after they use it for the oil proccesing.

So whats' the trulth?

Tim

Considering how much natural gas and fresh water is required to produce a barrel of "oil" from the tar sands, it will be an interesting race to see which one is depleted first. Even the nuclear solution will require plenty of water. The Alberta govt better start sending a bonus barrel of toxic wastewater with each one of oil that goes south - those holding ponds are getting mighty big.