Adding Fuel to the Fire: Rise in Oil Prices

If you think the high cost of oil is hurting you only at the pump and in the airline stocks in your portfolio, think again.

Oil prices hit a 10-year high of $38 a barrel Wednesday, prompting Vice President Al Gore to urge President Clinton to release emergency stockpiles to ease prices. High oil costs hurt airlines and other transportation companies. But the resulting increase in energy costs is also pinching profits in a host of other industries — from semiconductor-equipment makers who use fuel to make plastic components to energy-intensive industrial concerns such as DuPont (DD) and Alcoa(AA), economists and Wall Street watchers say.

While prices have retreated a bit, the sustained high levels are having a broad impact in many industries, which may result in some unexpected energy-related casualties among your stock holdings.

This doesn’t mean you should rush out and reconfigure your portfolio just yet. The prevailing belief in the oil industry is that the current crisis will abate. And because it’s difficult to predict how the markets will react to economic news in the short term, your options are limited, says David Yeske, a financial planner at Yeske & Co., in San Francisco. “If you reposition yourself, you might find that the markets have already moved on.”

Nonetheless, the broad-based impact of rising oil prices shows that while the U.S. may not be as vulnerable to an energy crisis as it was in the 1970s, energy remains a vital component even for the service and technology companies that fuel the economy.

There are some unlikely victims. On Thursday, Goodyear Tire & Rubber (GT) announced it will break even or report a small loss in net income for the third quarter, with similar results in the fourth quarter, due in part to rising energy costs. Goodyear uses oil-derived products to manufacture its tires.

Indeed, some of those companies feeling the most pain are in the heavy-industry and retail-goods sectors, says James L. Williams, an economist at WTRG Economics, an oil and gas forecasting company in London, Ark. “It’s hard to find a company outside the technology sector that is not affected by the uncertainty.”

Williams says he even received a phone call from a large computer-chip manufacturer asking if the price of crude oil will affect the cost of specialized plastics used to make chips. “I don’t foresee any significant impact on their bottom line, but like everyone else, chip manufacturers will have higher energy costs this winter.”

Crude oil provides about 40% of the energy Americans consume, and 97% of the nation’s transportation fuels, according to the American Petroleum Institute. Demand is greatest for fuels such as kerosene and gasoline, for which 34.9 of the 44 gallons in the average barrel of crude oil are used.

The oil-price crisis will dog the economy through the winter, says Mike Conner, an analyst at the National Energy Information Center in Washington, D.C. “The U.S. energy situation is that inventory is low, and we can function on low levels as long as things go well. But if a pipeline breaks or there is some disruption to the flow of oil, then the crisis will become more pronounced.”

High energy costs will certainly hurt Old Economy companies, especially those that consume large amounts of energy, says Williams. Most at risk are those involved in manufacturing and heavy industry, such as aluminum producers and chemical manufacturers.

Even service companies will be hurt. Increases in the cost of energy of as much as 40% are quite possible, says Conner, and could be more, depending on the severity of the winter. “There will even be feedback into those companies, and it will be due to the increase in the cost of energy.”

The retail sector could experience some fallout, as the increased cost of fuel for transportation erodes margins, says Williams. The cost of transportation is up, and so anything that’s shipped in bulk and drives by you on the highway is going to cost more, he says. “A company like Procter & Gamble(PG) would get hurt. They have lots of products and need to distribute them,” he adds.

But it’s not all doom and gloom when it comes to oil; others are finding value amid the chaos. Certainly many companies in the natural gas and oil-services sectors have reaped the windfalls of rising prices. But other companies and sectors also may be well-positioned.

Stephen Barnes, a portfolio manager at Barnes Investment Advisory in Phoenix, believes the crisis presents some good buying opportunities. His company recently invested in airline stocks, including UAL Corp.(UAL), in the belief that the bad news is already factored into the stock price.

“These stocks couldn’t be further out of favor, but we think the best time to buy is when no one else is buying,” Barnes says. “It’s an opportunity to get into tremendous global brand at a low price.”

Another valuable area is the alternative-fuel sector, but it comes at a price, says Barnes. A number of companies, such as Shell Oil(SC), are buying into it, or developing their own in-house solutions. “Everyone else is looking at these stocks, so they are not cheap,” says Barnes. “There’s an opportunity to buy them at their core value and get the alternative-energy subsidiary for free.”