proper tire inflation, switching to more efficient light bulbs) it reduces the need for demand to be destroyed painfully (people freezing to death in New England this winter, starvation in the third world). However, one way or another demand will be destroyed. Honestly, I do not know which direction the next $10 in oil prices will go. However, I am extremely confident that the next $50 move in oil will be to the upside.
Demand for a given commodity like oil can also be destroyed by substitution. There needs to be more of that, and high oil prices will help drive that process. As that happens, those alternatives will do very well. For the more speculatively inclined the solar companies look like very interesting bets. Some of the ones we like include Energy Conversion Devices (ENER), Evergreen Solar (ESLR), Sunpower (SPWR), First Solar (FSLR) and JA Solar (JASO). However, these stocks have high P/E's and represent more the potential of huge future earnings than the current reality of big earnings in the here and now. Going with a package approach, buying small positions in several of them or using an ETF that specializes in the area might be a good way to invest in these.
Also don't forget the old fashioned alternative to oil -- coal. One thing that China is likely to seriously ramp up its imports of is coal. Arch Coal (ACI) and Peabody (BTU) look very attractive to us.
Those that own big pools of oil (and natural gas) in the ground will also be big winners, as will those who provide the expertise to find and extract that energy. These firms have the advantage of being extraordinarily cheap, especially as many of them have sold off in response to the recent decline in oil prices.
If one were to treat the entire energy sector of the S&P 500 as a single stock, its P/E is far lower than that of any other sector. The total market capitalization of the Energy sector is only 9X the total expected earnings for the sector in 2008, and only 8x the total expected earnings for 2009. Note that the P/E is lower for 2009 than 2008. That means that 2008 IS NOT the earnings peak for the Energy sector. A few of our favorites include Baker Hughes (BHI), Core Labs (CLB), ConocoPhillips (COP), Diamond Offshore (DO), EOG Resources (EOG), Grey Wolf (GW), Transocean (RIG) and XTO Energy (XTO).
