Betting on oil stocks right now, some say, is like betting that a 42-point underdog can stay in a football game. For the stocks to climb and stay high, Iraq must put up a much tougher fight than expected in a war with the U.S., some analysts say. Put bluntly, there could be better bets. "In the event of a war with Iraq, I think we're going in there favored by six touchdowns," said Phillip Flynn, senior market analyst at the Alaron Trading brokerage firm in Chicago. "But if it becomes a long, drawn-out situation, there's plenty of good money to be made." To calculate the odds on oil stocks, investors must weigh a number of factors that influence America's overall oil equation. They should understand how much oil America uses, where it gets that oil and what its backup plan is if the rules suddenly change. They can also throw in a little history with their math, looking back at America's first war with Iraq as something of a scrimmage -- a lopsided blowout that, even so, probably taught America a lesson or two about how to fine-tune its game. As a result, some energy-sector investors say that until the course of any conflict with Iraq becomes clear, it's best to steer clear of all but the bluest of the oil industry blue-chips. Others say it might be a good time to look at natural gas stocks. And still others suggest looking at lesser-name overseas oil bets. All of them caution, though, that investors should take a minute to understand the true nature of America's oil dependence and how 2003 might affect it.
"We will never be in a position to not use imported oil," said Mickey Thompson, executive vice president of the Oklahoma Independent Petroleum Association. "To be less dependent
on foreign oil , we need a consistent wellhead price north of $25 a barrel for a year or two -- and Oklahoma's only had one year in the last dozen or so when the average price has stayed above $25 for the entire year." The U.S. now depends on other countries for 58% of its oil, up from roughly 50% the last time it fought Iraq. But it's not particularly dependent on Iraq itself. Venezuela, overshadowed by talks of an Iraqi war, supplies far more oil to the U.S. than Iraq does. And developments in Venezuela -- where oil workers are on strike and a regime change is possible -- could bring much wilder swings in oil prices. "We get 10% to 13% of our imports from Venezuela," Flynn said. "The situation in Venezuela could potentially have more impact on oil prices than anything that happens in Iraq -- at least in the near term." Already, the strike has caused a spike in oil prices, as Venezuelan tankers -- normally shipping half the country's oil production to the U.S. -- sit idle. But a regime change, bringing a new leader who's more friendly to the U.S. than to OPEC, could send oil prices speeding in the opposite direction. No scenario in the Middle East, where countries like Saudi Arabia have already pledged to make up for shortfalls from Iraq, should deliver the same immediate kick.
The real threat for the U.S. comes if a war spreads beyond Iraqi boundaries and injures star players, such as Saudi and Kuwait. Saudi ranks second only to Canada in oil imports to the U.S. And shutting off the faucet in Kuwait, as the U.S. learned more than a decade ago, can trigger huge price spikes and even a recession if something isn't done fast. "Our sense is that we probably learned some lesson from that," said Larry Goldstein, president of the Petroleum Industry Research Foundation in New York. "Oil, hopefully, won't be a major factor if there's a war." Experts like Goldstein doubt the U.S. will wait months -- as it did in the last Iraqi war -- to consider tapping the Strategic Petroleum Reserve if things get too hairy in the Middle East. Some believe the senior Bush's hesitancy caused oil prices to double and, because of the rippling repercussions, probably cost him his job. But the younger Bush has made the reserve a priority, building up a 592 million-barrel stockpile that equals roughly three years' worth of imports from Iraq. That supply would last 51 days if U.S. imports from everywhere -- including Canada -- suddenly stopped. But even with multiple lines of defense, the U.S. isn't bulletproof. "Energy is a critical infrastructure," Goldstein said. "But energy is vulnerable -- and the potential for mischief is large."
The safer bet, industry experts say, is that an Iraqi war will trigger a brief spike in oil prices followed by a lasting plunge. "Assuming there's a quick regime change -- and Iraq floods the market with oil -- that's a long-term negative for oil stocks," said Paul Larson, an oil and energy analyst at Morningstar. "It would be bad for some of the producers." Larson cautioned investors to stick with the strongest of the lot -- integrated giants, such as Royal Dutch ( RD), ExxonMobil ( XOM) and British Petroleum ( BP), that are virtually debt-free -- because of their limited downside potential. But Flynn, looking instead for upside, recommends Russian oil stocks, such as Yukos. "The Russians already have big deals with Iraq -- and Russia's not a member of OPEC," Larson said. "The lure of profits will be enough to inspire them to start pumping. "They're sitting on a gold mine." If successful, a war against Iraq could unleash the world's second-largest oil reserve. But that new flood of supply could soak American energy companies and their stocks. "New supply, anywhere in the world, hurts producers everywhere in the world," Goldstein said. Jon Cartwright, a senior bond analyst at Raymond James, would rather place his bets on natural gas companies, such as Anadarko ( APC), Devon ( DVN), Magnum Hunter ( MHR) and Chesapeake ( CHK). Cartwright thinks oil is overpriced -- and that it may remain that way until after a war -- so he's not even looking at oil companies. "My job here is to buy securities at 50 cents on the dollar," he said. "So I would rather sell some companies benefiting from high oil prices and put that money to work somewhere else." Thompson said the entire sector is difficult to call. "I think there's too much uncertainty in the world," he said. "And I think energy stocks are a crapshoot because of that."