by Tom Klein

Created on: September 08, 2008   Last Updated: September 15, 2008

The recent collapse in the price of oil from a high of $147 per barrel of oil to the current price of approximately $108 per barrel has caused a similar decline in the prices of most oil company stocks. Some companies in the oil patch are not dependent on the price of oil for their profits, while others have profits directly tied to the price of oil. For instance, the companies transporting oil depend mainly on transport volumes; whereas, companies dependent directly on oil production will see a decline in profits because their output of oil is worth less at lower oil market prices (unless those companies have hedged against a decline in price). Accordingly, understanding the different sectors of the oil market is important.

The oil industry is composed of three general types of companies: major integrated oil companies such ExxonMobil (XOM), ConocoPhillips (COP), BP Plc (BP), Chevron (CVX), and Royal Dutch Shell (RDS.A) that explore, transport, and refine petroleum and market refined products such as gasoline; oil transportation companies that own pipelines and transport facilities such as Buckeye Partners (BPL), El Paso Pipeline (EPB), Enbridge Partners (EEP), Energy Transfer Partners (ETP), Enterprise Product Partners (EPD), Magellan Midstream Partners (MMP), and ONEOK Partners (OKS), and pure exploration and production companies, such as Anadarko Petroleum (APC), Apache Corporation (APA), Chesapeake Energy (CHK), Occidental Petroleum (OXY), and Rowan Companies (RDC). It is also worth mentioning two major oil service companies that provide services to drillers worldwide: Halliburton Company (HAL) and Schlumberger Corporation (SLB).

In the short term, most of the integrated oil companies, the exploration and production companies, and the oil service sector will be under some price pressure as the "price bubble" in the oil market slowly deflates as oil demand declines. However, this decline in demand is temporary and will end when the major world economies again move into growth phase probably sometime in 2010. Thus, if one has a long-term investment horizon, some of the major oil companies can be good long-term investments. Chevron (CVX) and ConocoPhillips (COP) are well-diversified internationally and have a strong U.S. domestic market presence. BP Plc (BP) on the other hand is very weighted toward its Russia joint venture, and disruptions in that relationship which is a frayed relationship already could impact BP's results.

Also, the exploration and production

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