Crude oil prices are through the roof today. The black go rose more than $5 on renewed worries that Israel is about to whack Iran’s nuclear facilities.

According to a report in The Jerusalem Post: “Israel Air Force (IAF) war planes are practicing in Iraqi airspace and land on US airbases in the country as a preparation for a potential strike on Iran.”

High oil prices are here to stay, says John Herring in Investor’s Daily Edge. But stay clear of oil majors if you want to profit. The best way to play the situation is the oil service sector…

But don’t expect oil to stay down for long. High prices are here to stay, and I believe we’ve seen the last of double digit oil prices. I could write a book about why this is the case (and many already have). But let me sum it up in three words.

Supply and demand. Currently, the world uses 87 million barrels of oil per day. But we only produce 85 million. The two million barrel per day shortfall comes out of existing inventories. And those inventories are rapidly falling.

The International Energy Agency (IEA) estimates that world demand for oil will be 100 million barrels per day in 2015. That is an additional 13 million barrels of daily production, expected just over six years from today. Let me put that in perspective. That is almost twice the daily production of Saudi Arabia!

In November of last year, Jim Mulva, CEO of ConocoPhillips (COP), addressed this point. He said, “Personally, I don’t think we’re going to see the supply go over 100 million barrels a day. Where is it all going to come from?”

Good question. While profits might be rising due to price, production is falling at almost all the major oil companies. Last year, ExxonMobil’s (XOM) production fell 10%… Shell was down 6%… BP produced 2% less than the year before. And not only is production falling, but so are their reserves.

Among the largest international oil companies, not one of these companies replenished the oil they produced and sold last year. This might give you a hint as to why the major oil company stocks have not enjoyed “major” gains on the recent 100% increase in the price of crude.

Take a look at the chart below, comparing the price appreciation of crude oil to the stock prices of Exxon, Shell and BP:

The stock market is a forward discounting mechanism. No matter how profitable a company is today, if revenues are expected to shrink in the future, so will stock prices. And that is what is happening to the major oil companies.

Imagine a retail store that is extremely profitable. Now imagine every year, that store replaces only 90% of the inventory it sold. It doesn’t take a mathematician to determine that store will be out of business in a few short years. They’ll have nothing left to sell.

The same thing will happen to an oil company that doesn’t replace its reserves. For every barrel a company pumps and sells, there is one less barrel to sell next year. An oil company that does not constantly grow and expand its reserves is marked for death.

The major oil companies have no choice but to ramp up exploration and production. And they will spend TRILLIONS in their quest. The International Energy Agency (IEA) in its World Energy Outlook Report estimates that nearly $10 trillion will be spent on oil and gas exploration in the next 20 years.

I know a “billion dollars” might have lost its meaning in today’s inflationary economy, but a TRILLION dollars is still a hell of lot of money. $10 trillion is nearly unimaginable.

If you want your portfolio to ride this tidal wave of cash, don’t invest in the major oil companies. Their production numbers are falling. They’re already too big to make you huge profits. And most importantly, the oil companies are on the SPENDING end of all this capital.

You want to invest in the companies on the RECEIVING end of this cash… the companies that will help the petro-giants find and produce more oil. That means placing your long-term investments in the drillers and oil services. These companies are going to be swimming in cash for a long time to come.

Source: Is Big Oil Running on Fumes?