As the world runs out of cheap oil, some companies are set to prosper.
With headlines filled with eurozone debts, US downgrades, French almost downgrades, rioting Greeks, Berlusconi (when isn't that man in the headlines?) and X Factor scandals, you could be forgiven for missing the fact that oil has traded above $100 per barrel since February.
Yes, despite signs that the US is struggling to grow, Europe may be on the precipice and China's awesome growth engine may be straining, oil hasn't dipped below the century mark in nine long months. Some of this could be blamed on the turmoil in the Middle East and specifically Libya, but I think it is more a reflection of supply and demand.
The end is coming… eventually
Even if we are in for another global economic slowdown, the fact remains that the hunger for oil is going to increase as billions of people move up the income ladder and pursue the modern conveniences we in the West take for granted. China overtook America as the largest market for cars last year and still has fewer than 1 vehicle for every 200 people (and the country has more than a billion people).
I'm not saying we are on the verge of running out of oil -- we're just running out of cheap oil. It is becoming more and more difficult (and expensive) to find the stuff, and that's before you pump it out of the ground.
In 2007, Brazil made the largest oil discovery in 30 years -- and it was hailed as proof that God is Brazilian. These vast oil reserves -- estimated at 50 billion barrels -- could very well push Brazil into a new economic realm, but the oil is more than 6km below the surface of the ocean. It is going to take a lot of time and money -- estimates for exploiting these reserves come in trillions of dollars -- to make this oil dream a reality.
In the meantime, global demand continues to grow from today's 32 billion barrels per year. And this is why I'm convinced oil climbing to $200 is our future.
Show me the money
So how can you, the ordinary Fool investor, take advantage?
Sure, you could speculate on small-cap oil drillers. In the past year, some have paid off nicely. But they are a risky way to play it.
For every Regal Petroleum (LSE: RPT) and Lansdowne Oil & Gas (LSE: LOGP), which have seen their share prices jump 194% and 286% respectively in the past year, there are more than a few like Desire Petroleum (LSE: DES) and BowLeven (LSE: BLVN), which have seen their shares drop 65% or more.
The safer bet would seem to be the majors, such as BP (LSE: BP) and Royal Dutch Shell (LSE: RDSA), as rising oil prices should provide higher revenues while their size and diversity should provide some stability. Unfortunately, the relationship between their share prices and the price of oil doesn't seem to hold up well. This is partly due to the cost of replenishing reserves.
When you're as big as BP and Shell, you simply can't afford to waste time on drilling and developing small wells. Instead, you have to acquire proven reserves from other explorers... and when oil prices are high, these don't come cheap.
Where I'm looking
As a co-manager of The Motley Fool's Champion Shares PRO real-money portfolio -- and a stock-picker helping develop The Motley Fool's latest investment service -- I never stop trawling the market for the very best money-making opportunities. In my experience, it always helps to have investments supported by a tailwind, and I'm convinced there's no better tailwind than the world's growing demand for oil.
So here are some possibilities I'm considering... before oil ever climbs to $200.
Equipment suppliers
Drilling for oil is a risky business, but providing the tools the drillers need is a less risky way to play a rising oil price -- invest in the picks and shovels, as they say. Companies such as Weir (LSE: WEIR) and Rotork (LSE: ROR), which provide the pumps and valves used to drill and operate wells, are a good place to start in my book.
You could also look at companies such as Petrofac (LSE: PFC), which provides services to oil drillers throughout the lifecycle of a well -- from designing to building to operating to decommissioning.
With P/Es ranging from 17-21, these three may not look classically cheap, but $200 oil should provide them with solid growth prospects. You may want to start with a small position and take advantage of dips (because the road to $200 won't be a smooth one).
Substitutes
One thing that $200 oil should do is create substitutes. Electric vehicles have fallen out of the headlines recently, but make no mistake -- they are coming. Two-thirds of oil in the US is used for transportation, and $200 oil should seriously impact the auto industry if it doesn't adapt. China is also pushing forward on green vehicles.
But where will you get electricity for these vehicles? Coal and natural gas, most likely. This makes companies such as BHP Billiton (LSE: BLT) and International Power (LSE: IPR) -- or even better, its parent GDF Suez -- interesting candidates.
BHP pulls coal out of the ground in Australia (and elsewhere). China will be using massive amounts of coal to power its economy in the coming years. Australia is close to China. I like this equation.
International Power operates power plants around the globe, including 28 gas-fired plants in the US. Given the greater concern for so-called 'carbon footprints' in Western countries, having cleaner-burning electricity production ought to come in handy down the road.
Starting drilling
Oil, I'm sure, is heading towards $200, but it won't be the end of the world. Looking at the ripples the end of cheap oil should create is a good way for us to prepare our portfolios for the future.
These are a few ideas, but they are just a start. Now you can go out and drill down for some of your own -- and/or await the suggestions I may put forward when The Motley Fool's latest investing platform launches next year.
As a special preview, here's our latest special report for interested investors -- 3 Shares We're Ready to Tip -- it's yours with my compliments.
Happy investing!
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> The Motley Fool owns shares of BHP Billiton.
