Pump up Your Portfolio With Oil Stocks

Watching the price of oil go up and up this spring, you probably wondered what it would take to really disrupt the U.S. economy -- or at the very least, disrupt the driving and spending habits of the American population. Maybe now we know.

Gasoline at $4 a gallon seems to be the tipping point. Americans, who consume nearly 40% of the world's gasoline, are finally curbing their driving habits. Consumers and investors are worried about gushing oil prices, as they should be.

So we think high oil prices are here to stay. In this environment, in which the politicians and political parties are unwilling to face realities, what's an investor to do? One thing you can do is hedge the rising cost of driving your car by making smart energy-related investments. To generate some ideas along those lines, we asked one of the hottest growth managers and one of the best value managers in the business to name some favorite stocks.

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Jerry Jordan, manager of Jordan Opportunity (symbol JORDX), is indeed hot. His aggressive, large-company growth fund has returned 21% in the 12 months to June 12 -- an astounding 30 percentage points more than Standard & Poor's 500-stock index. Jordan favors oil services firms like Schlumberger (SLB) and Weatherford International (WFT) over oil producers, saying that even ExxonMobil, the ultimate big-oil villain in the eyes of Congress, is showing no growth in output. Both Schlumberger and Weatherford have strong overseas businesses, even in inhospitable nations that are off-limits to exploration by oil majors. Jordan says high oil prices will lead to accelerating demand for drilling.

Jordan is also predicting massive power outages across the globe this year due to shortages of electricity capacity. So he likes independent power producers including Calpine (CPN) and Reliant Energy (RRI), which have pricing power with customers. Calpine's base is on the West Coast and Reliant is strong in the Midwest.

Steve Romick is one of the best value investors in the game. His FPA Crescent (FPACX), a balanced fund, has returned an annualized 13% over 15 years and 4% over the last year, a treacherous period in which to invest.

Romick's investing style is diametrically opposed to Jordan's (Romick's annual stock turnover is 20%, compared with Jordan's 300%), but he, too, likes energy stocks. "We're using more oil than we're finding," he says. His largest holding is ConocoPhillips (COP), which he calculates would generate strong profits even if oil prices tumble. Romick also likes drillers such as Ensco International (ESV).

Whether the economy has also tipped into recession, we still don't know. But the damage done by $4-a-gallon gasoline is simply enormous. Consider the numbers: Americans now spend about $1.5 billion a day on imported oil. At that rate, the country sends abroad $550 billion a year to feed our oil fix. David Rosenberg, economist at Merrill Lynch, says that recent inflation in energy and food (closely linked to energy inflation, thanks to our ethanol policies) is draining $300 billion from consumer spending, which is double the value of the income-tax rebate.

Congress seems to focus more on allegations of windfall profits by Big Oil and on market speculation than on the fundamental problems in energy. Let's face it: We've known about the oil supply-demand imbalance for many years now. Yet this country has failed to embrace any coherent energy policy, whether the fellow in the White House is named Clinton or Bush.

"The U.S. tends to live for the moment," says Jordan. Says Manny Weintraub, head of money manager Integre Advisors: "Americans are stuck with decisions made in the past. There's a lot of opportunity for improvement in energy policies after the election."

BP just published its annual Statistical Review of World Energy, which doesn't make cheerful reading. For instance, oil output by Mexico, one of the largest suppliers to the U.S., is dropping fast, and our southern neighbor's proven oil reserves have plummeted by a frightening 75% in a decade. Populous Indonesia, a member of OPEC, is now a net importer of oil due to falling production (down by a third in a decade) and rising domestic demand. That's right, a member of the OPEC cartel is now importing oil.

BP chief executive Tony Hayward writes: "Maturing basins in the OECD, limited access elsewhere, constrained capacity, higher costs and rising resource nationalism challenge consumers and producers alike." Hayward says that growth in oil consumption is now concentrated in countries that subsidize consumer prices of oil products, primarily oil exporters like Iran and Malaysia and rapidly growing importers such as India and China, whose citizens are paying less than half the world price of oil today. China alone accounted for more than 50% of global energy consumption growth in 2007, according to BP. Economic policies that favor massive budget subsidies for oil are cockeyed and ultimately unsustainable, but the U.S. government has little or no leverage over those governments to reform their politically tinted policies.