Updated from 10:57 a.m. EDT

Oil prices were back above $74 a barrel Thursday on concerns that Israel will expand its offensive against Hezbollah. Also, Shell said it could miss production goals this year.

The Israeli prime minister and his security council met to discuss increased air strikes a day after nine Israeli soldiers were killed. The discussions were prompted by Hezbollah's refusal to accept an international peacekeeping force along the border with Israel and the breakdown of a Rome conference to broker a peace deal.

The two-week-old conflict, sparked by the abduction of two Israeli soldiers, has killed up to 500 people.

Light, sweet crude rose 60 cents to $74.54 a barrel, while heating oil inched up 1 cents to $1.97 a gallon. Wholesale gasoline was down 1 cent at $2.29 a gallon.

The fighting in the Middle East, production cuts in Nigeria, saber-rattling in Iran and soaring demand for crude have raised oil prices 21% this year. While the world consumes around 85 million barrels of crude per day, there is only 2 million barrels of excess capacity to cover any short-term spikes in demand.

Record-high oil prices have boosted second-quarter profits at energy companies ranging from drillers to oil-field service providers. The world's largest public company, ExxonMobil ( XOM), clocked a 35% increase in net income to $10.36 billion, or $1.72 a share, in its second quarter, surpassing analysts' expectations of $1.64 a share.

The results just missed the oil giant's previous record of $10.71 billion in the fourth quarter. Sales rose 12% to $99.03 billion.

"We're selling everything we can make," Henry Hubble, Exxon Mobil's vice president of investor relations, said in a conference call this morning. Exxon's executives typically do not participate in the oil giant's earnings calls.

Aside from high oil prices, profits were boosted on an earnings-per-share basis, thanks to Exxon's intensive share repurchase program. During the quarter, Exxon spent $7.9 billion on share buybacks and dividends, with $6 billion earmarked for shares. It intends to spend $7 billion on share repurchases in the third quarter.

Royal Dutch Shell ( RDS-A) posted a 40% increase in second-quarter profits despite production cuts in Nigeria. Net income soared to $7.32 billion or $1.13 a share. Excluding inventory charges, net income was $6.5 billion.

Shell has been battling output losses in Nigeria, where rebels have attacked its oil installations and shaved production by 653,000 barrels per day. In its quarterly filing, the oil giant said it was attempting to restart operations, but could not give a set date for the return to full production. In its outlook for 2006, Shell expects to pump 3.4 million barrels of oil equivalent per day this year given downed production in Nigeria.

In the second quarter, production fell 7.7% to 3.25 million barrels per day versus the same period last year.

The latest round of sky-high profits will likely stoke more anger against energy companies and bring calls from Congress for a windfall profits tax or requirements oil companies spend more to expand production. The oil giants maintain they are doing what they can to increase output.

"We look at windfall profit and other things as things that will basically reduce funds available to supplies," said Exxon's Hubble.

For its part, Exxon invested $4.9 billion in capital and exploration expenses during the quarter, an increase of 8% over the year earlier quarter. Spending should come in at $20 billion this year, up 13% from the previous year.

Oil and natural gas production rose 6% from the second quarter of 2005, with oil alone climbing 9%.

Increased production and high oil prices offset lower natural gas prices and drove profits at independent driller Apache ( APA) up by 23% to $722 million, or $2.17 per share. Revenues advanced 17% to $2 billion. Output advanced from 469,617 barrels of oil equivalent to 500,888 barrels of oil equivalent and is expected to climb the rest of 2006.

"We're on track to deliver 10% to 15% production growth this year," said Steven Farris, Apache's chief executive officer said in a conference call Thursday.

Natural gas for August delivery added 15 cents to $7.04 per million British thermal units after domestic supplies fell by 7 billion cubic feet last week. Trading of the front-month contract is likely to be rocky, because it expires today.

Record high temperatures across the country have hiked air conditioning use and forced utilities to use more of the fuel. Natural gas is used to generate electricity.

However, at 2.7 trillion cubic feet, inventories are now 16% above last year and 22% above the five-year average. Mild winter temperatures boosted supply levels above average.

More from Markets

Stocks Trade Mixed, Energy Shares Fall on Sharp Drop in Oil Prices

Stocks Trade Mixed, Energy Shares Fall on Sharp Drop in Oil Prices

Best Buy's Billionaire Founder: We Were 'Late to the Game' in Online Shopping

Best Buy's Billionaire Founder: We Were 'Late to the Game' in Online Shopping

Jim Cramer: Intuit Had a Fantastic Quarter

Jim Cramer: Intuit Had a Fantastic Quarter

Jim Cramer on Foot Locker's Earnings: Nike Is a Buy

Jim Cramer on Foot Locker's Earnings: Nike Is a Buy

Jim Cramer: The 10-Year Yield Could Go to 2.75%

Jim Cramer: The 10-Year Yield Could Go to 2.75%