Oil Prices: A War Casualty?

Finding someone who worries about America's oil supplies today is as hard as finding Osama bin Laden. We keep pumping gasoline into our SUVs as if oil and war, like oil and water, never mix. Yet we're fighting in a part of the world where a misstep or assassination could shock the oil market and suddenly jack prices up. I don't even want to think about how much economic damage that could do.

So far, investors have barely batted an eye. Average prices for energy stocks plunged earlier this year--forecasting less demand as business slowed. Now, however, there's hope for a recovery by mid-2002. Starting in late September, average prices turned and rose.

Consumers, too, have put away their worry beads. Just last May, drivers screamed when gasoline reached an average of $1.72 a gallon at the pump. Now it's $1.25 and could drop by an additional 10 cents, says Fred Rozell, retail-pricing director at the Oil Price Information Service in Lakewood, N.J.

You see the same story in natural gas. Prices to residential consumers dropped about 23 percent over the first nine months of 2001, according to the Bureau of Labor Statistics. Since October 2000, the cost of home-heating oil has gone down 17 percent.

I don't mean to imply that the oil markets brushed bin Laden off. Crude prices spiked in London right after the terror attacks. Businesses dependent on oil built higher inventories. But the hijacked planes crashed into a world economy that was already weak. Oil demand slumped. OPEC prices plunged by almost one third, to less than $19 a barrel.

Together, the OPEC countries pump 40 percent of the world's oil. Last week they let it be known that they would cut production--hoping to push up the price to $22 a barrel or higher. (Oil producers still have bad dreams about 1998, when prices fell to $10 and their economies slipped.)

Whether higher prices can be enforced, however, remains to be seen. Non-OPEC countries, such as Mexico and Russia, might pump more oil to fill the gap. Or the global recession might turn out to be worse than business now expects.

This war's economic risks seem to me to be extraordinarily high. Take Saudi Arabia alone. The entire world needs Saudi oil. That's the only country able to mobilize huge amounts of extra capacity, quickly, in case--say--Iraq cuts off supplies and oil prices spike.

Looking just at America, imports account for about half the oil we consume. Two thirds of that goes for transportation--cars, trucks, buses, trains, planes. Forget SUVs; we're talking about basic business infrastructure. It doesn't run on green energy.

Our Devil's deal with the Saudis is: you pump oil, we defend your corrupt regime against threats (and zip our mouths, even when you let your schools and mosques preach jihad against Americans in the Middle East).

We keep some 5,000 U.S. military people on Saudi soil. What we don't know is how far their power can actually reach. Bin Laden is making their presence a tinderbox issue for the radicals. Just four weeks ago two people (one American) died in a bombing in the Al Khobar neighborhood, where 19 U.S. airmen were bombed in 1996.

Francis Perrin, editorial manager of the Paris-based journal Arab Oil & Gas, thinks the Saudi ruling family can hang on for a few more years, at least. If not, even hostile regimes pump oil--witness Iran.

Any oil produced, anywhere, goes into the general global pool, says Michael Toman, a senior fellow at Resources for the Future in Washington, D.C. One angry producer can't stop shipments just to the United States.

But one angry, big producer willing to pump less oil could hurt all users equally. And a new Saudi regime could pump less, if it has fewer princes to support. Prices might have to top $35 a barrel before Americans start to conserve, says Charlie Ober, head of T. Rowe Price's New Era Fund.

So much for my fears. The stock market doesn't seem to share them. "Energy stocks start to perform when the economy reaches bottom," says J. C. Waller, a portfolio manager for the ICON Energy Fund. The gains since September suggest that investors see better business six to nine months out. A stronger economy by late 2002 would raise oil demand, raise prices and encourage drilling. That's why drilling and drilling-equipment stocks have been so strong.

As usual, buyers of individual stocks are walking into a minefield. OK--the oil-drilling group has been one of the top 10 performers over the past three months. But among them, you got everything from Nabors Industries (up 63 percent since late September) to Parker Drilling (down 55 percent since May).

And take Enron, the hottie energy trader that soared to $89 last year. The Securities and Exchange Commission is digging into its accounting. In just three weeks it slid 69 percent, to as low as $11.30.

Energy investors tend to rotate from sector to sector, making it tough for amateurs to keep up. That's where mutual funds come in.

But each "energy" fund takes a different tack. ICON, for example, built its own computer model to root out what it hopes are undervalued stocks. (Its mathematics, however, don't include political risk.)

Fidelity Select Energy Service buys large drillers and servicers. That made it one of the worst funds this year because those stocks took such a beating during the first nine months, says Dan McNeela at Morningstar. As drillers gain, Fidelity will turn around.

For more diversification, look at Vanguard's Energy Fund. It invests in all sectors of oil and gas, so it's much less volatile than its competitors. "We don't think people should have an energy port-folio all the time," says manager Ernst von Metzsch. But given the price drops in 2001, he calls this the right time.

Still, you have to ask, "what if?" Low stock prices (and energy prices) look interesting. But invest gradually over several months. Recovery could be slow. It's not clear how risky this war will be.