October 2005
 

Oil prices have doubled in the past two years, a fact that is evident at any gas station. But while the pain at the pump has grown, companies of all stripes have had to adjust as oil prices have stayed above $60 per barrel.

Will high-priced oil become black gold or a market hazard? The answer depends on the type of company.

The winners
High oil prices create a significant opportunity for multinational energy companies to raise prices and expand their margins. Their good fortune may also be a windfall for companies that provide services, materials or engineering expertise to the oil majors.

Offshore drillers, rig construction companies and a broad range of energy-services firms are set to benefit as the big oil producers rush to expand their reserves. Big Oil has underinvested in new exploration and production capacity. It will need these firms to help it catch up.

The situation could also be a boon to alternative energy firms. With oil and gas prices rising, alternatives such as fuel cells and wind energy become more cost-effective and attractive to large customers.

Companies that offer products that reduce individual fuel costs, such as hybrid cars, could also be in line for better profits.

The worriers
For most sectors of the market, rising oil and gas prices mean higher operating costs, which can undercut the bottom line. The transportation industry is typically first in line to feel the effects. (Already a number of major U.S. airlines have declared or threatened bankruptcy.)

Basic materials producers outside the energy industry may also struggle. Metals producers, for example, need increasingly expensive oil and gas in their production processes. Yet demand for their products may decline if clients curb their spending to manage energy costs.

The consumer sector will face headwinds as their customers struggle to fill up their cars and pay home heating bills, says Brett Varchetto, Northern Trust’s consumer stock analyst. “More discretionary areas of spending might be reined in, and we think we’re beginning to see that,” he adds.

Down the road
Over the longer term, the market impact of high oil prices will depend on the overall U.S. economy. To date, the economy has largely shrugged off higher oil, which should bode well for stocks. If a more recessionary environment develops, stocks may take a back seat to bonds.

The difference between those out-comes could rest with the consumer, because consumer spending and confi-dence are critical to the current economy. Varchetto feels oil prices will eventually recede from their recent highs.

Nonetheless, he says, “we’re closely monitoring how this period of rising prices will pressure consumers.”