If you're an investor in the energy sector right now, you might be feeling an unpleasant sense of d¿j¿ vu. The last oil price war sent many of these stocks reeling, and with OPEC now abandoning its supportive stance on prices, there's little reason to believe things will be any different this time around.

The Organization of Petroleum Exporting Countries agreed this week to cut production by as many as 1.5 million barrels a day effective Jan. 1, but only on the condition that other non-OPEC producers cut 500,000 barrels from their own output.

The problem is, Russia doesn't seem willing to go along with the plan, and with the cartel hesitant to cut output alone for fear of losing market share, analysts say a price war may be in the cards. That could have disastrous consequences for the energy sector.

Oil "stocks massively underperformed the last time this happened," noted David Wheeler, an analyst at Deutsche Banc Alex. Brown.

Back in 1997, Saudi Arabia increased production quotas, perhaps in an attempt to punish Venezuela for its overproduction. The strategy backfired as demand slumped following a downturn in Asian economies and an exceptionally mild winter in the Northern Hemisphere. Between November 1997 and December 1998, oil prices fell to under $11 from $21. Over the same period, the Amex oil index fell 8% while the CBOE oil index slid 7%.

Meanwhile, the much more volatile oil service index plunged 63% as major oil companies slashed capital spending, which cut in half the number of rigs drilling for oil.

Splitsville

With a consensus dissipating between OPEC and non-OPEC countries and demand for oil unlikely to pick up any time soon, analysts say the energy sector could suffer a similar fate this time.

"We're at the absolute beginning of the down cycle," noted Michael Young, analyst at Gerard Klauer Mattison & Co.

The companies with "the greatest relative sensitivity to crude prices," according to UBS Warburg, include

Amerada Hess

(AHC) - Get Report

,

Murphy Oil

(MUR) - Get Report

,

Occidental Petroleum

(OXY) - Get Report

and, among the super-majors,

ChevronTexaco

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.

"But it's negative across the board," Young said. "There's no question that some smaller companies will have to merge as a result of the destruction to earnings power."

Young estimates that the average oil company will cut capital spending by 20% to 30% next year.

But other analysts note that most oil stocks have fallen more than 12% since Sept. 11, suggesting that they may have already factored in weak energy costs. In addition, some pundits argue that integrated oil companies have hedged against future oil prices and that their profits could be protected through merger cost savings and earnings diversity.

In addition, while oil prices fell sharply in the last price war, they also rebounded dramatically afterwards, although it took about 15 months for that to happen. Oil prices went from about $12 per barrel at the end of 1998 to $35 by Sept. 15, 2000. Meanwhile, the oil service index zoomed 176% from the end of 1998 until its peak on Sept. 15, 2000. The Amex oil index rose 26% and the CBOE oil index gained 30%.

"Over the short term, lower prices will scare some people and put a crimp in earnings, but people realize that $15 oil isn't sustainable and that crude oil prices averaged $25 per barrel over the last decade," said Dan Pickering, director of research at Simmons & Co.

ABN Amro told clients Friday to underweight the group for the near term, but said investors should add to or establish positions on any major pullbacks. "We advise a market weighting long term," the firm said.

Ripple Effect for Transports?

And despite the damage to the oil patch, analysts say other sectors of the market could reap the benefits of lower oil prices, particularly transportation and utility stocks.

"The airlines need all the help they can get, and this will certainly help them in this time of trouble," said Raymond Neidl, analyst at ABN Amro. "But they have a lot of other problems, too."

A $1 drop in oil prices translates into a 3- to 3.5-cent reduction in the cost of a gallon of fuel, according to economist David Swierenga of the Air Transport Association. Crude oil has fallen about $4 this week alone, which translates into a 13-cent decline and savings of about $2.6 billion to the airline industry.

In addition, analysts say the overall impact on the consumer should be positive since lower energy costs generally act as a tax break. The consumer price index revealed that gasoline prices fell 10.7% in October while natural gas prices slid a record 6.8%.

"Lower energy prices will be a stimulus to growth, saving consumers at least $70 billion over the next year," said Merrill Lynch economist Gerald Cohen.