Big oil companies are scrambling to keep their reserves up. Land wells are showing signs of depletion. And the recent surge in offshore drilling could be oil's final frontier.

"If you continue on the course you're headed, that's where you'll end up."

-Chinese Proverb

If worldwide consumption of oil continues growing, we'll end up in a global crisis. And there's every indication that's where we're headed.

Peak Profits

Crude oil prices were threatening $60 per barrel yesterday. But whether or not oil falls back a little, one thing is certain-prices have successfully established a floor of $50.

And if $50 dollars a barrel sounds cheap now, just remember that this is nearly double what it cost three years ago.

Oil is predicted to average $65 per barrel in 2007. But this estimate is extremely low. Prices could easily spike to $100 per barrel if it turns out to be a volatile year.

So it's great to be an oil company, right?

Not exactly. Oil companies are in quite a quandary.

Countries like Russia and Venezuela are taking away potentially huge profits by nationalizing their resources.

Also, peak oil is becoming a reality as more of the giant oil fields continue on the path to exhaustion. The oil is there, but the cost of extracting it is growing astronomically.

At the Cantarell field, which holds about 60% of Mexico's proven oil reserves, depletion is causing a loss in production of nearly half a million barrels per day. This reduction puts a serious strain on Mexico's export capability.

And peak oil isn't just Mexico's problem.

Saudi Arabia holds 25% of the world's oil reserves. Half of its production comes from the mammoth Ghawar oilfield. But this field has already hit its peak as well.

No new oil fields that even come close to the size of Ghawar have been found. So meeting rising global demand becomes an even bigger task for oil producers.

Increasing reserves is essential to the success of an oil company. Without doing so, it will be unable to finance future projects. But the depleting wells on land are forcing companies to look elsewhere.

The Final Frontier

Today companies need to look further and drill deeper for oil. But prices need to remain above $50 per barrel in order for offshore oil to be profitable. The current floor price in the mid 50s will allow offshore exploration to skyrocket in 2007.

And the race is on for offshore oil...

This year Norway offered a record 48 exploration licenses covering more than 85 offshore blocks.

But the ocean's vast oil reserves present a major problem for some oil companies. Smaller companies lack the capital needed to finance exploration efforts. This leaves the door wide open for the larger corporations.

Nearly all the major oil companies are moving out to sea. Shell is aggressively pursuing offshore drilling sites. They hope to be drilling at target locations in Alaska by August.

Offshore exploration has its downside. The cost per barrel is considerably higher than with onshore wells. So the costs of developing an offshore block could run into the millions.

For example, establishing a well in the North Sea can cost between $35 and $50 million dollars. The price usually depends on depth. Shallow wells can range from $1 to $15 million dollars, but wells in the deep waters off the Gulf of Mexico can cost more than $100 million dollars.

Change the Course

Believe it or not, higher oil prices will save us from a future energy crisis. And the sooner we reach $100 per barrel, the sooner we'll be free of our addiction.

Think about it.

Lower gas prices encourage people to buy gas-guzzling SUVs. Expensive oil will promote progress. Newer and cleaner technology will gain the spotlight. Look at the latest push by renewable energy. Funding for renewable energy research has soared.

When oil reaches a bottom of $100 per barrel in the next few years, perhaps an alternative energy source will have developed enough to fill the gap.

Until next time,

Keith Kohl