Americans outraged over the price of gasoline and the sensational profits of oil companies of late should stop a moment and look inward. Not at their souls, but at their homes -- which have appreciated in value at least as much as gasoline, and in many cases much more.

According to U.S. Census data, the price of the average home in Los Angeles is up 112% in the past five years, 106% in Miami and 91% in New York. Meanwhile, unleaded gasoline futures traded at the New York Mercantile Exchange are up only around 85%.

By the logic of consumers calling for the heads of oil company executives, homebuilders and real estate brokers ought to be on the hot seat too. The fact that all wrath is directed toward energy producers shows a bubbling hostility for the boom-and-bust dynamics of capitalism among those who feel left out of the rising tide of economic growth.

The anger also seems to show that energy investing has simply not caught the fancy of the public in the past couple of years in the way that technology investing did back in the 1990s. A lack of widespread jubilation over the terrific escalation in the price of oil company stocks -- as there has been over home prices -- shows that, as I suggested in my column two weeks ago , they probably have a lot farther to go.

Spectacular Rewards

Major companies in both industries have experienced rapid income and price gains of late, but the rewards for homebuilders have been a lot more spectacular than for energy producers. Over the past year, the average earnings growth rate of the three largest oil companies in the world is 40%, and their stocks have advanced an average 22% this year. At the same time, the average earnings growth of the three largest U.S. homebuilders is 44%, and their stocks are also up 22% on average.

But in the longer term, the homebuilders' advantage is striking. The stocks of the country's two largest homebuilders, Pulte Homes ( PHM) and D.R. Horton ( DHI), are up 580% and 460% over the past five years, respectively, while the shares of the two best-performing major international oil companies, Total ( TOT) and BP ( BP), are up 101% and 47%. Both groups, of course, have beaten the broad market, which has lost a fifth of its value since September 2000.

Some Perspective

So why is it that so many consumers and politicians are calling for an investigation of oil and gas companies' "windfall" profits, and yet there has been nary a peep about the record-breaking profits produced in the last few years by homebuilders?

It is a peculiarity of the way we experience the world through the exchange of money that one type of sharp price appreciation can appear wildly unfair, and another can seem so reasonable. It seems the key difference here is that most middle-class Americans have a dog in the hunt when it comes to home prices. Homeowners like to see house values rise, and it makes them feel richer even if they never realize the gain. In contrast, few seem to own shares of oil companies, so there's nothing in the pump-price advance but pain.

Some striking parallels between the two advances may make you feel better about the rise in oil prices, and might even make you a buck.

The main thing to understand about the energy and homebuilding industries is that they are both highly cyclical and capital-intensive. This means that over the course of a decade they will have some very good years when supply is tight (and it's expected to be even tighter in the future) and some very bad years when supply is plentiful.

Because neither industry knows exactly how long the good years will last, they each need to make as much money as they can during the boom years. And during the bust years, they both need to invest as much of their savings as possible in property and equipment to ensure that they're in a position to compete when the next upswing arises.

Most homebuilders are taking their enormous profits of late and plowing them right back into their businesses by buying more land and bulldozers. They might buy smaller homebuilders that have rights to good land, or just buy more land themselves. By the same token, energy companies are taking their sizable profits and purchasing new oil and gas blocks from governments around the world, as well as new equipment to do the drilling.

The End of 'Easy Oil'

As petroleum becomes both harder to find and costlier to extract and transport, energy companies absolutely need the income that higher pump prices bring so that they have the incentive and the funds to explore.

There's a real scarcity of prime oil and gas properties left in the world as the best OPEC, North Sea and U.S. fields reach their capacity peaks -- and the most promising new places to drill are in remote undersea, jungle or desert locations, where discovery costs are high and shipping is problematic. A Royal Dutch Shell executive is credited with the observation that "oil is seldom found where it is most needed, and seldom most needed where it is found."

Jason Kenney, an energy analyst at the Dutch investment bank ING, said in a note to clients last week that the rewards in historically safe regions of the world are dissipating. "The era of easy oil is clearly over," he said, and the energy industry is now faced with growing its reserves from unconventional resources, such as Venezuelan and Canadian tar sands, and in places with less stable fiscal and political regimes, such as Angola, Nigeria and Libya.

All of this exploration is just the sort of investment that actually causes the boom-and-bust cycle. As prices rise, new players arrive, and current players are encouraged to expand. (Last week, the government of Kuwait and maverick British billionaire Richard Branson separately proposed to build new U.S. oil refineries.) Yet at some point, a process that economists call "demand destruction" occurs, as higher prices also cause consumers to pare back their purchases by driving less or buying more fuel-efficient vehicles.

Ultimately, the mismatch between too much new supply and too little demand leads to the next bust. We saw that in technology in 2000, we saw it with energy in 1998, and you can be sure we're going to ultimately see it in both housing and energy. The only question is when.

Considering that supply is still constrained (with OPEC unable or unwilling to provide marginal new oil, and new sources not yet tapped) and that the public has not yet become enamored with energy stocks and that companies' price/earnings multiples are still low, one can only guess that the balance of supply and demand is not yet on the six-month horizon.

So while there will inevitably be ebbs and flows in the price of oil, it's likely to remain at least locked in the current range between $45 and $65 a barrel, with occasional excursions higher in the face of disruptions such as additional Gulf Coast hurricanes, West African labor disputes, Venezuelan fiscal instability and Saudi Arabian political instability.

Oil for iPods

To console themselves, energy users in the West should note that there is at least one very interesting offset to higher prices right in their homes (besides the rising value of their properties).

The real culprit for higher prices in the past few years, after all, has been the explosion of demand from China and India. And these two countries have only become hogs of energy and industrial metals such as copper, zinc and nickel in the wake of a huge ramp in the output of their factories, which are churning out iPods, tennis balls, cell phones, toys and bookcases for sale in American and European discount stores.

In short, in a remarkable twist of globalization and economics, the incredibly low prices we are paying for consumer goods made in Asia are in large part responsible for the high prices we're paying for petroleum pumped from the Middle East. You really can't have one without the other.

So don't curse the oil companies for making hay while the sun shines, any more than you would curse your neighbor for selling his house for top dollar. They're just capitalist animals playing predictable roles in a cyclical game with an outcome we all depend on. If anything, blame your teenager.

And since you can't beat the oil companies, you might as well join them. It's not too late to consider an investment in the best-of-breed international energy conglomerates, which include BP, France's Total and Eni ( E) of Italy.
Jon Markman, writer of Value Investor, is the senior investment strategist and portfolio manager at Greenbook Investment Management, a division of Greenbook Financial Services. Separately, he is publisher of StockTactics Advisor, an independent weekly investment research service. While Markman cannot provide personalized investment advice or recommendations, he appreciates your feedback; click here to send him an email. At the time of publication, Markman had no positions in securities mentioned in this column.

Interested in more writings from Jon Markman? Check out his newsletter, Value Investor. For more information, click here.

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