(The following article by Conrade de Aenille was posted on the New York Times website on July 9.)
NEW YORK — Oil at $60 a barrel factors in a lot of manufacturing growth in China and India, several spins around the block in the Hummer and a lot of fear.
How much fear? Enough to inspire a spate of new op-ed articles and books warning that Saudi oil production may slow to a trickle.
Those assertions, which Saudi and American authorities vigorously dispute, have the ring of a trial balloon sent aloft near the end of a run in crude prices. They are similar in spirit to books that flourished in the early 1980’s.
They all seemed to have titles like “How to Survive the Coming (fill in the scary word of your choice – Crash, Depression, Apocalypse)” and they talked investors out of buying stocks as a 20-year bull market was starting.
Today’s investors should bear that in mind and think about where their money would be best deployed if oil prices head back down or merely stabilize. The momentum in crude is likely to peter out once the market’s case of nerves abates – as it always does. Easing prices can be forecast on economic grounds, too. China and India are notoriously inefficient energy consumers, but as their rapidly expanding manufacturing industries become more productive, this should change.
Those trends could take years to materialize, but why wait? Tim Guinness, who manages a global energy fund for the London money manager Investec, pointed out that OPEC production levels were running high enough to meet global demand. He made a case for a barrel of crude falling soon to $45. After that, Mr. Guinness said, prices are likely to stabilize at $50 to $60.
How much damage would prices at those levels inflict on stocks? Maybe none at all.
When adjusted for inflation, Mr. Guinness’s range encompasses the average price at which oil traded from 1974 to 1985, he noted, and there were no obvious ill effects on share prices. An investor with a portfolio mimicking the Standard & Poor’s 500-stock index would have made 174 percent, plus dividends, from the end of 1974 through the end of 1985.
ONE sector that did better is among the last you might expect to outperform in a period of expensive oil. Transportation companies are especially sensitive to energy prices, yet during that 11-year stretch, an investor who aligned his portfolio with the Dow Jones transportation average would have experienced a gain of 344 percent, plus dividends.
As for energy stocks, standard indexes do not stretch back that far, but a look at individual names shows that a few stars, like Exxon Mobil and Chevron, beat the market and kept pace with transportation, but many of the rest did not.
With the Dow Transports down about 10 percent since March, is it time to go against the grain and buy?
For Gil Knight, senior fund manager at Gartmore Global Investors near Philadelphia, it depends on the type of conveyance. He called aviation a “terminal industry” and noted that major carriers never seem to make money.
Heading to the high seas, Mr. Knight said he owned Carnival Cruise, and while he thinks that “there is a case to be made to have $50 oil for the next few years,” he said that anyone betting on easing energy prices should consider the Norfolk Southern and Burlington Northern and Santa Fe railroads.
Analysts at Morgan Stanley note that valuations in the American railroad industry have fallen in the last three years to about 13 times estimated earnings for the next 12 months. They advise owning Norfolk Southern, Canadian Pacific and Union Pacific.
Ken Hoexter, a transportation analyst at Merrill Lynch, is not fond of Union Pacific but likes everything else riding the rails.
“They’re experiencing the best pricing in two decades,” thanks to a buoyant economy. That has helped all freight movers, as has the liberal use of surcharges, which allow them to pass along higher fuel costs to customers.
If energy prices slide, so would the surcharges. That would reduce revenues but probably raise profit margins, Mr. Hoexter said. Railroads “should definitely do well in an easing oil environment because we will probably have a stronger economy,” he predicted.
Transportation companies, he said, are better run today than a generation ago, when stable fuel prices allowed their shares to beat the market so handily. If he is right and if crude prices fail to sustain their momentum, transportation may be in an even better position to keep moving while energy issues falter.