When turmoil roils the Middle East, oil supplies may be disrupted. After the Shah of Iran was deposed in 1978, oil supplies fell by 5.6 million barrels per day. During the crisis leading up to the Gulf War in 1990-91, supplies fell by 4.3 million barrels per day. Falling supplies tend to drive up energy prices, boosting oil and gas stocks.
Will similar oil production shortfalls result if the U.S. initiates a preemptive war against Iraq? Perhaps. Iraq now produces 2.45 million barrels a day, which probably would not be the case during a war. Moreover, supplies from neighboring Saudi Arabia, Kuwait, and the United Arab Emirates also might be affected.
Indeed, any possible oil price increases may already be built into the market. In late 2002, oil was trading at more than $27 a barrel, up from $19 a year earlier. This 40 percent+ price jump occurred in a year when worldwide economic activity lagged so it’s likely that geopolitical factors, rather than heightened demand, have pushed up energy prices.
Generally, so-called “E&P” companies see their stock prices move up and down with energy prices, so higher prices likely will help these companies. That’s not as true of the major oil companies, which have more exposure to refining and marketing operations rather than commodity prices. Among E&P companies worth considering: Apache Corp., Anadarko Petroleum, Chesapeake Energy, Pogo Producing, and Devon Energy.
