Dear Mr. Berko:

What do you think will happen to energy prices over the next couple of years, and what do you think about investing in oil stocks? I’ve got about $30,000 that I’d like to put into various oil issues, and I would appreciate your thoughts on the timeliness of investing in oil issues now and what you think the best investments would be. My brother-in-law, who is an analyst for Merrill Lynch, believes that oil prices could break below the $50 level this year. That would be great, but it would also be bad for oil stocks.

N.W., Kankakee, Ill.  Dear N.W.:

The price of a barrel of crude oil resembles the speeding path of a giant roller coaster. In mid-July 2006, oil nearly rose to $80 a barrel, and pundits, seers, gurus and the suits on the Street thought that the crude stuff was going to poke through $100.

The price of oil will always do what it’s supposed to do but never when it’s expected to. As the momentum began to slow, world sentiment became moderately bearish, and people could purchase all the crude they wanted at $50 a barrel. In fact, some of the suits were certain crude was headed to the high $30s and low $40s. They were wrong again. Oil reversed its downward plunge and moved from $50 a barrel to more than $60 by February/March of this year.

The suits tell us that oil plunged from nearly $80 to $50 due to an unusually warm November, December and January. They’re partially correct. Some say that the price of crude fell 25 percent (to $60) because the Saudis, for political reasons, want to reduce Iran’s petrol profits. I think that’s tommyrot, but it sounds politically correct to American ears. The International Energy Agency tells us, “Oil used by industrialized nations fell 0.6 percent last year, most likely a response to higher prices.” Though that’s true, I strongly doubt that a 0.6 percent drop in demand would cause prices to crash by 25 percent.

I’m convinced that the real reason for the rise and subsequent crash in crude prices is not political, not warm weather nor reduced demand. Rather I believe it may be the ruthless traders at Lehman Bros., Credit Suisse, Merrill Lynch, Goldman Sachs, UBS, Citigroup and hedge funds who covertly and possibly in concert, create and thrive on price volatility. Their mastery at dissimulation, chimera, illusion and guile has generated record profits for Goldman, Lehman, Merrill, etc. The process of making money knows no loyalty, no country, no rules and is without conscience.

I believe oil prices will remain at this level for a good part of 2007, and we might even see oil at $50 once again this year. However, I think $50 may be a floor price. I believe that we may become accustomed to oil at $70 to $75 a barrel for the next couple of years and perhaps watch the price head higher from there.

It’s acknowledged that the Mideast oil reserves are nearly half-empty. Companies searching for oil in Brazil, the Caspian Sea, Mexico, West Africa, the North Sea and even Russia are having enormous problems getting oil out of the ground. Though the number of drilling platforms has tripled in the past eight years, production still remains at the same levels.

Now as prices fall, the suits reduced their earnings projections for Chevron Corp., Exxon Mobil Corp., BP and ConocoPhillips.

So I wouldn’t buy individual energy stocks. I think it’s a safer bet to purchase the no-load Vanguard Specialized Energy Fund (VGENX-$70.54), a five-star, $6.7 billion fund with low turnover and a low expense ratio. In the past five years it has gained an annualized 26 percent versus 21 percent for the typical energy fund.

Please address your financial questions  to Malcolm Berko, P.O. Box  1416, Boca Raton, Fla. 33429 or  e-mail him at malber@adelphia.net.  © Copley News Service