I've been watching my June 2003 Motley FoolHidden Gems pick Valero (NYSE:VLO) surge ever higher, as the oil refining company's stock responds to the perfect storm of too little refining capacity, relatively massive refining margins, and rising demand for its products.

What's happened in refining has happened elsewhere up and down the oil value chain, from exploration and production to tankers to retail sales. But while refining -- with the statutory near-impossibility for additional capacity to be built in the United States -- has a pretty good ceiling on its supply levels, other areas in the production chain are feeling extreme tightness as well. For example, oil drillers and equipment providers.

In a January presentation, ExxonMobil (NYSE:XOM) said it predicted that the level of new oil production in 2020 necessary to meet International Energy Agency demand projections would be the equivalent of replacing all of the production currently deployed in the world. It estimated that a further $200 billion would need to be spent each year, substantially higher than what is now being spent.

This trend bodes particularly well for the oil services sector, another bottleneck. Companies like Baker Hughes (NYSE:BHI), Weatherford (NYSE:WFT), Ensco (NYSE:ESV), GlobalSantaFe (NYSE:GSF), and Rowan (NYSE:RDC) provide oil-drilling rigs and services to production companies and they have seen their day rates (essentially, what companies rent their rigs for, per day) rocket. Though the total worldwide rig count grew more than 8% in 2004 to 2,665, that's less than half of the number of rigs that were in service in the early 1980s. Most rigs in service today are more than 20 years old, a testament to the length of time during which it made no sense to build more capacity.

Of course, we've seen this before. In the 1970s, it seemed as if the demand for oil would never slow down -- and then, suddenly, it did just that, with supply exceeding demand for the better part of 20 years. (Notice a pattern?) The difference between the 1970s and today was that back then, supplies were being artificially constrained. Today, that's not so much the case. During that time, high-cost producing fields, like those in the North Sea, weren't economical to operate.

The market has certainly rewarded these companies for the improvement of their underlying businesses, but it doesn't look like the oil services cycle, now in its fourth year, is anywhere near maturity.

Bill Mann owns none of the companies mentioned in this story. His selection of Valero for Hidden Gems was at a split-adjusted price of $18.93, so that's pretty good. A free trial to see what the Hidden Gems folks have cooking next is yours for the asking.