This week, crude oil hit a 31-month high, going over $112 a barrel. So far in
April, it is up nearly 6%. There are many drivers for the surge. Of course,
the instability in the Middle East is a big factor, as countries look to find
alternative sources of crude oil. Another key is the decline in the dollar,
which is at the lowest price since July 2008. Keep in mind that global trading
in crude oil is denominated in the U.S. currency. However, since oil is a big
part of the cost structure of the global economy, there is the threat of
so-called "demand destruction." In other words, high oil prices could mean
another recession. Despite all this, major oil companies are racking-up huge
gains. For example, Exxon Mobil (NYSE: XOM ) saw its profit soar 69% in the
latest quarter, to $10.7 billion. So far this year, the shares are up about
20%. Exxon has been one of the best-performing stocks in the Dow Jones
Industrial Average. And what about the stock now? Here's a look at the pros
and cons: Pros Integrated model. Exxon has a massive platform, which
stretches across the globe. The company engages in exploration, the
manufacture of petroleum products and refining. There is also a large
footprint of retail outlets. Natural gas. It is becoming tougher to find
new sources of crude oil. What's more, new discoveries are usually in
politically unstable countries. To help deal with this problem, Exxon
purchased XTO Energy in June 2010. The deal provided the company with enormous
reserves of natural gas. XTO is also one of the leaders in unconventional
sources, such as finding natural gas in shale. Management. Exxon has a
top-notch management system. They have strong processes for exploring for oil,
such as with using sophisticated technologies and best-of-breed project
management practices. The company also knows how to efficiently allocate
capital throughout its organization, in terms of new efforts, R&D and
acquisitions. Cons Liability exposure. The oil business is getting more
complex. This is especially the case with deep-water drilling. As seen with
the BP (NYSE: BP ) oil spill last year, the consequences of failure can be
devastating. Of course, back in the 1980s, Exxon was responsible for the
Valdez disaster, which released 11 million barrels of oil. Long-term bets.
Exxon focuses mostly on massive oil projects. And this makes sense. It's
the only way to move the needle for the company. But such projects are
diminishing. Part of this is the difficulty in finding new sources of oil.
Also, countries would prefer to handle their own oil exploration and production.
Politics. As millions of Americans remain unemployed and economic growth
continues to be muted, large oil companies like Exxon continue to generate huge
profits. No doubt, this causes resentment, especially as people are spending
more of their wages at the gas pump. It should be more surprise that politicians
are putting the heat on the oil industry. Consider that Congress is looking at
terminating subsidies and tax breaks. Verdict For an investor looking to get
exposure to oil, it has been hard to go wrong with Exxon. It's well-managed,
has a diverse business and is highly profitable. The company is also
forward-looking, as seen by its XTO acquisition. More importantly, oil prices
seem likely to remain high for the long haul. After all, China, India and
other emerging economies are growing at rapid rates, which means higher oil
consumption. Given these trends, the pros outweigh the cons on Exxon's
stock. Tom Taulli's latest book is " All About Short Selling " and his
Twitter account is @ttaulli . He does not own a position in any of the stocks
named here.
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