The recent outbreak of major conflict in Israel has shone the spotlight on the Middle East yet again. That region has been a hotbed of geopolitical tension, as well as a quagmire of war for America, for many years.

One major reason why the Middle East is a region of keen interest for the world’s major powers is that it’s rich in oil, the lifeblood of the global economy. Petroleum products are not only used for fuel, but they are an integral part of everyday life. In fact, nearly everything you use contains something derived from petroleum.

Oil’s Demise Greatly Exaggerated

Because of the advances in the electric-vehicle industry and the global drive toward decarbonization, some on Wall Street thought that oil was on a path to obsolescence. The oil market crash that began nearly ten years ago firmed their belief that thanks to the jump in oil production from fracking, an era of oversupply was upon us.

It is now clear that fracking is no energy panacea. Fracking has poor economics, combining high expenditures with low yields and short well life. Frackers were able to keep chugging along when oil prices were high and banks were willing to lend billions of dollars to them, but things changed abruptly when oil prices fell. More than 200 oil producers ended up filing for bankruptcy in the years following the crash.

WATCH THIS VIDEO: Navigating Treacherous Financial Waters

But those companies that survived, such as Big Oil, the largest and most well-capitalized international oil and gas companies such as Exxon (NYSE: XOM) and Chevron (NYSE: CVX) are thriving, with their share prices near record highs.

In 2022, Brent Crude (international oil benchmark) averaged $100 per barrel. The WTI (domestic oil benchmark) averaged $95. Sanctions against Russia and low global inventory largely contributed to the jump. More recently, production cuts by Russia and OPEC are have caused prices to rise again.

Clearly, it’s a mistake to be complacent about cheap oil. Prices can easily spike when geopolitical issues flare up and they can also be greatly impacted by the actions of the major producers, some of whom are our political adversaries (such as Russia and Iran). Thus, anyone who tells you oil will be permanently cheap is simply being too optimistic about how the real world works.

Unsustainable Level of Low Spending

Even when oil prices had crashed, it was clear that cheap oil was not sustainable. Oil producers deeply cut spending and went into defense mode. This meant fewer developmental projects.

Without adequate new reserves to replenish the reserves depleted through production, this was simply not a sustainable situation. Sooner or later the then oversupply would become undersupply and prices would rebound and potentially spike depending on how bad the supply constraint is.

Indeed, with fracking likely having peaked and serious geopolitical tensions unlikely to dissipate anytime soon, oil companies have begun to spend money on growth projects again.

According to the International Energy Forum (IEF), oil and gas upstream expenditures grew by 39% in 2022, the largest year-over-year jump in history. This year, estimates call for another increase of around 10%. The IEF believes capex must jump from $499 billion in 2022 to $640 billion by 2030 to ensure adequate oil supply to meet global demand.

Oil Companies Speak With Their Wallets

The boost in spending is evident in the improving financial results of the leading oil services companies, such as Schlumberger (NYSE: SLB). These companies do not benefit directly from higher oil prices. Their revenues grow when their clients, the Exxons and Chevrons of the world, spend more.

In the latest-reported quarter, Schlumberger experienced a 20% year-over-year increase in revenue and a 44% jump in adjusted earnings per share. On a trailing-twelve-month basis, operating margins have hovered around 16% for the past year, which is the best it has been since 2015. Healthier margins is a sign of improving demand and shows that indeed, oil companies are demanding more services to help them produce more oil and find more oil.

The aforementioned oil crash made oil execs very cautious. The fact that they are willing to make big budget commitments now is an excellent sign for the oil market’s outlook.

Editor’s Note: If you’re looking for market-thumping gains amid this frustrating investment climate, consider the advice of our colleague Jim Pearce, chief investment strategist of Personal Finance.

Case in point: If you had taken the initial recommendation of Personal Finance to buy Chevron (NYSE: CVX), and held on, you’d be sitting on a whopping return of nearly 3,200% (that’s not a typo).

Jim Pearce just found “The Next Chevron” and it’s poised to soar. Want to get in on the action? Click here for details.

Subscribe to the Investing Daily video channel by clicking this icon: