Taking Stock:


Oil And Troubles

By Tony Crowell

The revolutions breaking out throughout much of the Middle East may well be the most significant events of 2011. Their impact remains unsettled and will probably remain so for quite some time. I am reminded of the comment by Chinese Premier Zhou Enlai, when asked about the impact of the French Revolution of 1789. He said, “It is too soon to say.”

Upside momentum is still powering the stock market, which hardly budged as these events began to develop until riots broke out in Libya, the first impacted major oil exporter. While the ultimate political outcomes remain very much in doubt, the short-term impact on oil prices is of immediate concern to stock investors.

In the all too familiar pattern of the last forty years, oil prices immediately surged through the $100 level, a painful reminder of how much remains to be done in both energy conservation and the development of resources other than politically vulnerable and increasingly environmentally obsolescent oilfields.

With resolution of the political crises so uncertain, upward price pressures are likely to remain. The $100 barrel level may become a floor. Particularly in developed economies with their higher energy usages, their economic recovery may feel a slight loss in momentum. The U.S. is in better relative shape with its economic stimulus measures, even subdued as they have been, and with its farsighted monetary easing policies of its Federal Reserve Bank.

This will still represent an additional burden on consumers and the jobless, with higher pump prices already beginning to pop up. I continue to believe that consumer stocks look more risky than the manufacturing and tech sectors, which are rolling nicely along on increasing global industrial growth, combined with stable labor and financing costs.

With housing prices continuing to drop amid persisting high unemployment, inflation will remain restrained despite this upward pressure from oil prices. This will give the Fed a continuing free rein to keep interest rates low, boosting the business recovery. Chaotic events in troubled areas will keep investor nerves fragile, much as riots in Greece and BP’s oil spill accompanied a pullback in the stock market a year ago.

We might see the market back up 5-10%, which should not interrupt its primary trend. I am easing out of a few positions that are lagging in order to add to our energy stocks. My current favorites remain Occidental Petroleum (OXY-$103) and Apache (APA-$121). Oxy has fields in Libya and Apache in Egypt but these represent only a small fraction of their production.

Exxon (XOM-$87) remains a perennial portfolio candidate for conservative investors. Total (TOT-$59), the large French energy and chemical company, has hardly moved in stock price for a year but its continuing growth, reasonable valuation and 4.6% yield merits consideration for patient investors.

Turmoil on land will promote more offshore exploration. BP’s wretched blunders in the Gulf of Mexico raised drilling standards and Seadrill (SDRL-$37) has the world’s most modern drilling fleet. Based in Stavanger, Norway, it is a relatively young company that listed on the NYSE only a few months ago. Valuation is reasonable, sales are growing over 20% annually and it yields 6%.

Investors would have more reason for concern if revolution came to Saudi Arabia, which pumps several times Libya’s output. The world will easily absorb the loss of Libya’s Qaddafi, who echoes Churchill’s description of Hitler as a “bloodthirsty guttersnipe.” What the world needs badly are more steps toward greater opportunity for everyone, regardless of gender, race or religion, together with vastly improved education and health. Such steps are needed in Libya, Saudi Arabia and, yes, even here.

Tony Crowell manages stock portfolios for individuals and their trust and retirement accounts with CROWELL•ROBERTS Investment Counsel, a registered investment advisor in Laguna Beach since 1993. (949)-494-1376; aic@ cox.net; www.crowellroberts.com

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