Why We May Never See $80 Oil Again

A recent company presentation by that company illustrates my point. From 2002 to 2006, the reserve replacement (not reflecting the company's reported proved reserves) through exploration for the major oil companies like Exxon, Royal Dutch Shell (RDS.A Quote), BP (BP Quote) and the like was less than 100%. Only Chevron exceeded 100%.

Where is all the new oil coming from? Areas like the Canadian oil sands, politically unstable locations like Iraq, and the current hot spot -- Brazil. Brazilian oil giant Petrobras (PBR Quote) has quickly risen to become one of the most valuable companies in the world as a result of a potential new underwater discovery supposedly holding nearly 6 billion barrels of oil.

However, exploring for oil underwater is an exceedingly challenging and very expensive process, which doesn't make economic sense when oil prices are low. Even locations like the tar sands only become economical exploratory options when oil prices are higher, not lower.

So what's the general conclusion? The days of $80-a-barrel oil are history, at least for many years. The cost of finding additional reserves is climbing rapidly and the worldwide demand will continue to rise. If the price to produce a product goes up without a significant decline in demand, prices will rise.

I won't deny that human speculative greed is helping elevate the price oil, but I am reluctant to believe that speculative activities are the primary causes of high oil prices. Market prices are a wonderful proxy. Over time, as airlines cut capacity, more fuel-efficient cars come to market, and alternative fuel sources become readily available, it's reasonable to see $100-a-barrel oil, but the era of cheap oil is likely nothing more than a fond memory.

This column was written by RealMoney contributor Sham Gad. For more information about RealMoney, please click here.