It's Inevitable: Crude Oil Prices Will Rise

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It's Inevitable: Crude Oil Prices Will Rise

Written by Miranda Marquit

Photo:poorfish, Creative Commons, Flickr

Big Oil stocks are still rising, but will $80-a-barrel oil ruin the party? How close is $80-a-barrel oil? That's the question that seems to be on the minds of oil traders and stock investors alike. Just four years ago, crude oil was going for around $20-a-barrel. Now it's up over $70 and continues to rise. CNN Money reports on the inevitability of rising crude oil prices:

Nearly everyone agrees that the tight market combined with a big event like a hurricane knocking out Texas refineries or bombs falling over Tehran would push prices soaring above $80. ...

"I see us getting to $75 or $77 without much problem," said Peter Beutel, an oil analyst at Cameron Hanover, a consulting firm. But to go any higher "we would need something to happen." ...

But whether crude sets a record this summer or not is beside the point, said Edward Morse, chief energy economist at Lehman Brothers. "It's the macro picture that's important," he said. "It looks like average prices are on track to be higher this year, and higher still the year after."

So, while we may not reach $80-a-barrel this year, it is generally acknowledged that until something happens in the U.S. (way of life becomes seriously affected or alternative fuels take off) there is little likelihood that crude oil prices will come down. And that means rising gas prices are just another part of the economic landscape.

There are a few different ways to look at this in terms of investment. Some take the view that rising crude oil prices will cut into Big Oil profits. However, Big Oil has proven staunch in passing on the price hikes, even taking a little bit more in order to keep its stock prices moving up (Exxon--XOM--is heading up as I write). And there are other things to keep in mind. Exxon and ConocoPhillips (COP) are leaving Venezuela's Orinoco Belt. And while this might hurt COP a little, Dave Neubert maintains that the company has great valuation. COP will probably recover from its investment losses in Venezuela after presenting a great buying opportunity for investors.

Another way to look at this is in terms of rising gas prices driving a demand for alternative energy. Right now, many alternative energies and new biotech fuels are somewhat expensive to consumers and risky to investors. However, if rising gas prices mean that gasoline costs just as much as alternative energy, an outcry for them may result in more widespread use, investment in technology, and ultimately, lower energy costs. Getting into alternative energy now, while risky, could pay off down the road (or not -- a crisis or a threat of less oil dependence may prompt OPEC to do what it can for oil prices).

Bottom line: Short term, Big Oil still looks like a good investment, as long as the stock you choose is not overvalued. Long term things look a little hazier. But alternative energy may not be a bad bet.

Disclosure: I do not own any stock in the companies listed above, although I am considering adding COP to my portfolio.

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