Oil Surge an Investment Boon

April 17, 2006 — -- As gasoline and crude oil prices make a new run at record levels, there are a lot of people cheering them on.

Investors -- both individuals and major funds -- have been riding the recent wave of record oil profits all the way to the bank.

If you had smartly invested $10,000 in the oil industry two years ago, you'd have more than $18,000 today, according to figures from the AMEX Oil Index.

And that's not counting the generous dividends most of the major integrated oil companies pay. According to industry data, the five major oil companies (ExxonMobil, Shell, BP, Chevron and ConocoPhillips) gave their shareholders almost $26 billion of their profits during 2005, almost twice what they paid just a decade ago.

However, the big investment windfall wasn't easy money.

Oil Stocks Rebound From Lackluster Years

Before the recent run-up in crude and gasoline prices led to unheard of profits, the oil industry was languishing with fairly mediocre results.

Between January 2000 and January 2003, the value of major oil company stock declined, with stocks shedding almost 9 percent of their value.

Why? The oil companies had a tough time growing profits when crude prices averaged just $27.46 a barrel. The market was well supplied, and they had relatively inefficient operations.

But growing global demand and slowing growth in supplies have pushed prices to levels where the companies can make money.

During 2005, crude averaged $56.70 a barrel, and the major oil companies made $111 billion. That is more than $300 million a day to put in the bank.

Boon for Investors

Investors have scrambled to join the industry's improving fortunes, snapping up the shares of the big and little players.

ExxonMobil investors have seen the value of its shares increase 51 percent since April 2003. Newfield Exploration, a relatively small oil and natural gas exploration and development company, has seen its share price go up more than 143 percent over the past three years.

And the profit party is likely to continue during 2006.

Thomson Financial tracks analyst predictions for earnings, and it expects that during the first quarter of this year the oil industry will see profits go up by 39 percent from a year ago.

Even with the relatively bullish picture, some analysts believe buying in now might be too late.

Searching for Alternatives

If you're looking for a way to hedge your rising gasoline bill, one place to look might be alternative energy companies exploring ways to power American cars and homes with something other than oil.

If gasoline prices stay near $3 a gallon for the next several months, some people believe American drivers might start looking for ways to stay away from the pump. That could mean a big sell-off in traditional oil company stocks.

That might seem unlikely today, given the current record profits big oil is enjoying, but just three years ago, $70 a barrel oil seemed a far-fetched idea. Now it's a reality.