Intensifying civil war in Libya has already cut that nation's oil exports to about 25% of capacity, pushing crude prices above $105 per barrel -- triggering a quick 40-cent increase in the average U.S. price for regular unleaded to $3.50 per gallon.
However, that price may look low for the rest of 2011, for two reasons: 1) the risk premium that institutional investors are paying on oil futures because of concern that the unrest could spread to Saudi Arabia or Iran; 2) the U.S. summer driving season, during which gasoline demand rises, enabling both oil companies and local gas stations to raise prices without risking a decline in customer traffic.
So, until political stability returns to the Middle East, this summer's average U.S. gas price will likely exceed the record near $4.15 per gallon set in the summer of 2008. And in higher-cost metropolitan areas such as Los Angeles, San Francisco, New York and Boston, gasoline could approach $5 per gallon for super unleaded by the Fourth of July.
If popular uprisings seeking regime change hit the major oil exporters of Saudi Arabia or Iran, let's just say U.S. gasoline prices are going to hit truly head-spinning levels.
If You Can't Beat 'em, Profit From Them
How can U.S. motorists cope? You can wait for Congress to pass an energy policy that encourages fuel efficiency and that weans the nation off oil. But don't hold your breath: Any such bill is a nonstarter with the Republican Party controlling the House. (The GOP may, however, favor a temporary suspension of the 18.4-cent federal gas tax -- a modest money-saver, but every reduction helps.)
Here's another way: Consider investing in an oil play.
If you can't tolerate the higher risk associated with owning individual stocks, go for an oil-industry-related mutual fund or exchange-traded fund, as DailyFinance's Matthew Scott has outlined. However, if you can tolerate such risk, you may fare better with some individual stocks.
For example If you use 10 gallons of gasoline per week, or about 500 gallons per year, a $1 rise in gasoline prices means you'll need to offset that with about $500 in oil/oil services stock capital gains, excluding tax treatment.
If you're not a very experienced investor, it's probably not prudent to dabble in oil futures, which are influenced by many fundamental and technical variables. Unless you're prepared to lose up to $300 to $500 a day, you're probably going to be at a trading disadvantage. Ditto for gasoline futures.
While hardly safe, oil-related individual stocks are far more straightforward. Here are five, from least to most risk.
ConocoPhillips (COP). Recent price: $78. P/E 11.4. An integrated oil giant, COP looks cheap based on Thomson Reuters First Call fiscal 2011-2012 forecast earnings per share of $6.78 to $7.84, which are likely to be revised higher due to substantially higher oil and gasoline prices. Assuming an $89 share price by the end of 2011, you'll need to buy about 50 shares to offset a $1 gas price increase.
Chevron (CVX). Recent price: $103.51. P/E 9.5. It seems unlikely that a stock over $100 could be undervalued, but Chevron is, based on Thomson Reuters First Call fiscal 2011-2012 forecast earnings per share of $10.67 to $11.64. Chevron will likely trade at or near $115 by the end of 2011, and again 50 shares should ease the pain at the pump.
Valero Energy (VLO). Recent price: $27.30. P/E 9.4. Valero, the largest oil refiner in North America, has made it through the gasoline market's recession in decent shape, and it's likely to benefit from larger refining margins in 2011. The bulk of Valero's operation involves refining the more profitable heavy/sour crude oil, and margins will likely rise in 2011 as U.S. gasoline demand continues to recover. That should push Valero to about $35 a share by the end of 2011. A 75-share purchase would likely offset a $1 rise in gasoline prices.
Core Laboratories (CLB). Recent price: $101.90. P/E 27.7. Core Labs is a leading reservoir optimizer, providing an impressive array of proprietary products and services for the energy sector. And in an oil-hungry world, Core's products and services are likely to continue being in demand. What's more, as oil fields age and conventional fields become harder to find, oil firms will look to CLB to extract more out of existing fields. Thomson Reuters First Call fiscal 2011-2012 forecast earnings per share for CLB of $3.65 to $4.46 looks low. A 50-share purchase would likely offset a $1 rise in gasoline prices.
Suncor Energy (SU). Recent price: $45.30 per share. P/E 17.4. Oil priced above $90 per barrel means there's unlikely to be an interruption of Suncor's high-cost oil sands operations, and a double-digit production increase is likely in 2011. Suncor should approach $60 a share by the end of 2011. So, a 75-share purchase would likely compensate for a $1 increase in gasoline prices.
Safest Pick: ConocoPhillips.
Preferred Pick (highest risk): Suncor.
Of course, if oil plummets to $70 per barrel or lower, these shares will probably fall as well, most likely canceling out any money you would save from declining pump prices. Also, you could end up losing money on a net basis, if the stock falls more than 20%. But you get pretty old waiting for oil prices to plunge to $70 again.